Exam 14: Financing Liabilities: Bonds and Notes Payable

Companies can raise additional capital either by issuing bonds or by selling common stock. And investors can buy either bonds or common stock as a way to earn additional revenue. Both alternatives have ramifications for both the issuing company and the investor. Required: Discuss the advantages and disadvantages of bonds versus common stock from both the issuing company's and the investor's perspective.

Which of the following may not be equal to the contract rate of interest?

Debt financing typically has a higher cost of capital than equity.

In the event of a debt restructuring the required disclosures are only for the related income tax effects associated with the debt.

Which of the following is always equal to the face rate of interest?

Bond issue costs

When the conversion of bonds payable to common stock is recorded under the market value method and the market value of the common stock exceeds the book value of the bonds at date of conversion, the difference is recorded as a

Interest expense recognized each period on zero-coupon bonds sold at a discount is equal to the

Exhibit 14-3 Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2013, at face value plus accrued interest on May 1, 2013. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods. -Refer to Exhibit 14-3. The amount of bond interest expense reported on the year-end 2013 income statement would be

Notes payable can be structured in various ways, but GAAP recognizes the underlying economics therefore requiring the borrowers to record the note at its present value and to record interest based upon the straight line method of amortization.

What dilemma do serial bonds cause for accountants?

What are some advantages and disadvantages of issuing long term debt?

Which of the following is not a reason for the issuance of long-term liabilities?

Related to long-term liabilities, reading the notes to the financial statements is important because they contain

Exhibit 14-1 A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: -Refer to Exhibit 14-1. The discount at the date of bond issuance would be

When a company issues a long-term non-interest-bearing note payable in exchange for cash and special rights, the difference between the cash proceeds and the present value of the note is recorded as

Sand Castle Co. borrowed $40,000 by issuing a four-year non-interest-bearing note to a customer. In addition, Sand Castle agreed to sell inventory to the same customer at reduced prices over the four-year period. Sand Castle's incremental borrowing rate was 8%, so the present value of the note was $29,400. The customer agreed to purchase an equal amount of inventory each year over the four-year period. Required: Prepare journal entries to: a.Issue the note b.Adjust at the end of the first year c.Adjust at the end of the second year

If a company sells its bonds at face value, the effective interest rate is

Bond issue costs are reported on the financial statements as

As a requirement of GAAP the interest expense associated with a note payable is recorded in the operating activities of the cash flow statement.