Question 1

An installment note is an obligation to the issuing company that requires a series of periodic payments to the holder.

Accepted Answer

A) True 
 B)False  True

Question 2

Bonds may only be issued on an interest payment date.

Accepted Answer

A) True 
 B)False  False

Question 3

On January 1,a company issues bonds with a par value of $300,000.The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31.On the issue date,the market rate of interest is 6%.Compute the price of the bonds on their issue date.The following information is taken from present value tables:
 $\begin{array}{|l|l|}
\hline \text { Present value of an annuity for } 10 \text { periods at } 3 \% & 8.5302 \
\hline \text { Present value of an annuity for } 10 \text { periods at } 4 \% & 8.1109 \
\hline \text { Present value of } 1 \text { due in } 10 \text { periods at } 3 \% & 0.7441 \
\hline \text { Present value of } 1 \text { due in } 10 \text { periods at } 4 \% & 0.6756\
\hline
\end{array}$

Accepted Answer

$\begin{array}{llr}
\text { Present value of principal } & \$ 300,000 \times 0.7441= & \$ 223,230 \
\text { Present value of interest } & \$ 300,000 \times .04 \times 8.5302= & 102,362\
\text { Price of Bonds }&&\$325,592
\end{array}$

Question 4

On January 1,2010,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2016,Jacob retires 20% of these bonds by buying them on the open market at 105½.All interest is accounted for and paid through December 31,2015,the day before the purchase.The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the issuance of the bonds on January 1,2010?

Accepted Answer

A) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Bonds Payable } & & \mathbf { 8 0 0 , 0 0 0 } \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | r | r | } 
\hline \text { Bonds Payable } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Cash } & & \mathbf { 8 0 0 , 0 0 0 } \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Bonds Payable } & & 772,000 \
\hline \text { Discount on Bonds Payable } & & \mathbf { 2 8 , 0 0 0 } \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Premium on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & & 8 0 0 , 000 \
\hline
\end{array}$$ 
E) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Discount on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & &8 0 0, 000 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Bonds Payable } & & \mathbf { 8 0 0 , 0 0 0 } \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | r | r | } 
\hline \text { Bonds Payable } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Cash } & & \mathbf { 8 0 0 , 0 0 0 } \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & \mathbf { 8 0 0 , 0 0 0 } & \
\hline \text { Bonds Payable } & & 772,000 \
\hline \text { Discount on Bonds Payable } & & \mathbf { 2 8 , 0 0 0 } \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Premium on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & & 8 0 0 , 000 \
\hline
\end{array}$$ 
E) 
$$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Discount on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & &8 0 0, 000 \
\hline
\end{array}$$

Question 5

A company has $200,000 par value,10% bonds outstanding.Prepare the company's journal entry to retire the bonds at the date of maturity.

Accepted Answer

None

Question 6

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Accepted Answer

A) True 
 B)False

Question 7

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,bonds with a contract rate of interest of 6% would be issued.Under Plan #2,additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below:
 $\begin{array}{|l|r|r|}
\hline&\text { Plan \#1 }& \text { Plan \#2 }\
\hline \text { Earnings before bond interest and taxes } & \$ 700,000 & \$ 700,000 \
\hline \text { Bond interest expense } & (60,000) & \
\hline \text { Income before taxes } & \$ 640,000 & \$ 700,000 \
\hline \text { Income taxes } & \underline{(224,000} & (245,000) \
\hline \text { Net income } & \$ 416,000 & \$ 455,000 \
\hline\
\hline \text { Equity } & \$ 8,000,000 & \$ 9,000,000 \
\hline \text { Return on Equity } & 5.2 \% & 5.06 \%\
\hline
\end{array}$ 
Comment on the relative effects of each alternative,including when one form of financing is preferred to another.

Accepted Answer

Plan #1 provides a slightly higher retur

Question 8

Operating leases are long-term or non-cancelable leases in which the lessor transfers all the risks and rewards of ownership to the lessee.

Accepted Answer

A) True 
 B)False

Question 9

____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds at maturity.

Accepted Answer

The answer of ____________________ bonds reduce a bondholder's risk by...

Question 10

On January 1,2010,a company issued and sold a $400,000,7%,10-year bond payable and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

Accepted Answer

A) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Expense } & 14,000 & \
\hline \text { Cash } & & 14,000 \
\hline
\end{array}$$ 
B) 
$\begin{array}{|l|r|r|}
\hline \text { Bond Interest Expense } & 28,000 & \
\hline \text { Cash } & & 28,000 \
\hline
\end{array}$ 
C) 
$\begin{array}{|l|r|r|}
\hline\text { Bond Interest Expense } & 14,200 & \
\hline \text { Cash } & & 14,000 \
\hline \text { Discount on Bonds Payable } & & 200\
\hline
\end{array}$ 
D) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Expense } & 13,800 & \
\hline \text { Discount on Bonds Payable } & 200 & \
\hline \text { Cash } & & 14,000 \
\hline
\end{array}$$ 
E) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Experise } & 14,000 & \
\hline \text { Discount on Bonds Payable } & 200 & \
\hline \text { Cash } & & 14,200 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Expense } & 14,000 & \
\hline \text { Cash } & & 14,000 \
\hline
\end{array}$$ 
B) 
$\begin{array}{|l|r|r|}
\hline \text { Bond Interest Expense } & 28,000 & \
\hline \text { Cash } & & 28,000 \
\hline
\end{array}$ 
C) 
$\begin{array}{|l|r|r|}
\hline\text { Bond Interest Expense } & 14,200 & \
\hline \text { Cash } & & 14,000 \
\hline \text { Discount on Bonds Payable } & & 200\
\hline
\end{array}$ 
D) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Expense } & 13,800 & \
\hline \text { Discount on Bonds Payable } & 200 & \
\hline \text { Cash } & & 14,000 \
\hline
\end{array}$$ 
E) 
$$\begin{array} { | l | r | r | } 
\hline \text { Bond Interest Experise } & 14,000 & \
\hline \text { Discount on Bonds Payable } & 200 & \
\hline \text { Cash } & & 14,200 \
\hline
\end{array}$$

Question 11

The present value of an annuity can be computed as the sum of the individual future values for each payment.

Accepted Answer

A) True 
 B)False

Question 12

A company has 10%,20-year bonds outstanding with a par value of $500,000.The company calls the bonds at 96 when the unamortized discount is $24,500.Calculate the gain or loss on the retirement of these bonds.

Accepted Answer

None

Question 13

On October 1,a $30,000,6%,3-year installment note payable is issued by a company.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30.The issuer's journal entry to record the second annual interest payment would include:

Accepted Answer

A) A debit to Interest Expense for $1,800 
B) A debit to Interest Expense for $1,200 
C) A credit to Cash for $11,800 
D) A credit to Cash for $10,000 
E) A debit to Notes Payable for $1,200 
A) A debit to Interest Expense for $1,800 
B) A debit to Interest Expense for $1,200 
C) A credit to Cash for $11,800 
D) A credit to Cash for $10,000 
E) A debit to Notes Payable for $1,200

Question 14

A company retires its bonds at 105.The carrying value of the bonds at the date of is $103,745.The issuer's journal entry to record the retirement will include a:

Accepted Answer

A) Debit to Premium on Bonds 
B) Credit to Premium on Bonds 
C) Debit to Discount on Bonds 
D) Credit to Gain on Bond Retirement 
E) Credit to Bonds Payable 
A) Debit to Premium on Bonds 
B) Credit to Premium on Bonds 
C) Debit to Discount on Bonds 
D) Credit to Gain on Bond Retirement 
E) Credit to Bonds Payable

Question 15

On January 1,2010,a company issued 10%,10-year bonds payable with a par value of $720,000.The bonds pay interest on July 1 and January 1.The bonds were issued for $817,860 cash,which provided the holders an annual yield of 8%.Prepare the general journal entry to record the first semiannual interest payment,assuming the company uses the straight-line method of amortization.

Accepted Answer

Cash payment: $720,000 x 10% x

Question 16

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Accepted Answer

A) True 
 B)False

Question 17

A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been written off,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:

Accepted Answer

A) $0 
B) $10,000 gain 
C) $10,000 loss 
D) $22,000 gain 
E) $22,000 loss 
A) $0 
B) $10,000 gain 
C) $10,000 loss 
D) $22,000 gain 
E) $22,000 loss

Question 18

If the borrower fails to pay a mortgage,most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Accepted Answer

A) True 
 B)False

Question 19

Assume that the Rap Snacks company has a loan agreement that provides it with cash today and the company must pay $25,000 one year from today,$15,000 two years from today and $5,000 three years from today.Rap Snacks agrees to pay 10% interest.The following factors are from the present value of $1 table:
 $$\begin{array} { | c | c | } 
\hline \text { Periods } & \text { Interestrate } 10 \% \
\hline 1 & 0.9091 \
\hline 2 & 0.8264 \
\hline 3 & 0.7513 \
\hline
\end{array}$$ 
What is the amount of cash that Rap Snacks receives today?

Accepted Answer

\[\begin{array} { | c | c | c | c | } 
\

Question 20

Mark and Holly Melton,the owners of Melton Franchise Systems,say the key to their success is planning the financing for each individual franchise owner.Using the debt to equity ratio,which of the following franchises would be assessed as having the riskiest financing structure?
$$\begin{array} { | l | c | c | c | c | c | } 
\hline & \text { Franchise } & \text { Franchise } & \text { Franchise } & \text { Franchise } & \text { Franchise } \
& \text { A } & \text { B } & \text { C } & \text { D } & \text { E } \
\hline \text { Total Lubilities } & \$ 240,000 & \$ 120,000 & \$ 300,000 & \$ 500,000 & \$ 270,000 \
\hline \text { Total Equity } & \$ 60,000 & \$ 20,000 & \$ 150,000 & \$ 100,000 & \mathbf { \$ 9 0 , 0 0 0 } \
\hline
\end{array}$$

Accepted Answer

A) Franchise A 
B) Franchise B 
C) Franchise C 
D) Franchise D 
E) Franchise E 
A) Franchise A 
B) Franchise B 
C) Franchise C 
D) Franchise D 
E) Franchise E

An installment note is an obligation to the issuing company that requires a series of periodic payments to the holder.

Bonds may only be issued on an interest payment date.

A company has $200,000 par value,10% bonds outstanding.Prepare the company's journal entry to retire the bonds at the date of maturity.

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Operating leases are long-term or non-cancelable leases in which the lessor transfers all the risks and rewards of ownership to the lessee.

____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds at maturity.

On January 1,2010,a company issued and sold a $400,000,7%,10-year bond payable and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

The present value of an annuity can be computed as the sum of the individual future values for each payment.

A company has 10%,20-year bonds outstanding with a par value of $500,000.The company calls the bonds at 96 when the unamortized discount is $24,500.Calculate the gain or loss on the retirement of these bonds.

On October 1,a $30,000,6%,3-year installment note payable is issued by a company.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30.The issuer's journal entry to record the second annual interest payment would include:

A company retires its bonds at 105.The carrying value of the bonds at the date of is $103,745.The issuer's journal entry to record the retirement will include a:

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

If the borrower fails to pay a mortgage,most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Introducing Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Reporting and Analyzing Merchandising Operations

Reporting and Analyzing Inventories

Reporting and Analyzing Cash and Internal Controls

Reporting and Analyzing Receivables

Reporting and Analyzing Long-Term Assets

Reporting and Analyzing Current Liabilities

Reporting and Analyzing Equity

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Investments and International Operations

Reporting and Analyzing Partnerships

Reporting and Preparing Special Journals

Filters

Exam 10: Reporting and Analyzing Long-Term Liabilities

An installment note is an obligation to the issuing company that requires a series of periodic payments to the holder.

Bonds may only be issued on an interest payment date.

A company has $200,000 par value,10% bonds outstanding.Prepare the company's journal entry to retire the bonds at the date of maturity.

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Operating leases are long-term or non-cancelable leases in which the lessor transfers all the risks and rewards of ownership to the lessee.

____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds at maturity.

On January 1,2010,a company issued and sold a $400,000,7%,10-year bond payable and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

The present value of an annuity can be computed as the sum of the individual future values for each payment.

A company has 10%,20-year bonds outstanding with a par value of $500,000.The company calls the bonds at 96 when the unamortized discount is $24,500.Calculate the gain or loss on the retirement of these bonds.

On October 1,a $30,000,6%,3-year installment note payable is issued by a company.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30.The issuer's journal entry to record the second annual interest payment would include:

A company retires its bonds at 105.The carrying value of the bonds at the date of is $103,745.The issuer's journal entry to record the retirement will include a:

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

If the borrower fails to pay a mortgage,most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Introducing Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Reporting and Analyzing Merchandising Operations

Reporting and Analyzing Inventories

Reporting and Analyzing Cash and Internal Controls

Reporting and Analyzing Receivables

Reporting and Analyzing Long-Term Assets

Reporting and Analyzing Current Liabilities

Reporting and Analyzing Equity

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Investments and International Operations

Reporting and Analyzing Partnerships

Reporting and Preparing Special Journals

Filters