Exam 10: Reporting and Analyzing Long-Term Liabilities

Identify the advantages and disadvantages of bond financing.

Premium on Bonds Payable is an adjunct liability account.

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of the interest payment on June 30 is $25,000. Interest Expense = Cash Paid + Discount Amortization Interest Expense = ($500,000 * 10% * 6/12) = $25,000

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and a carrying value of $475,000. The company calls the bonds at $482,000. Calculate the gain or loss on the retirement of these bonds.

An ________________________________ is an obligation requiring a series of payments to the lender.

A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

Explain the amortization of a bond discount. Identify and describe the two amortization methods available.

A bondholder that owns a $1,000, 10%, 10-year bond has:

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest on $70,000 at 9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428. Explain.

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

On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest semiannually each June 30 and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

A company issued 9%, 10-year bonds with a par value of $1,000,000 on September 1, Year 1 when the market rate was 9%. The bonds were dated June 30, Year 1. The bond issue price included accrued interest. Interest is paid semiannually on December 31 and June 30. (a) Prepare the issuer's journal entry to record the issuance of the bonds on September 1. (b) Prepare the issuer's journal entry to record the semiannual interest payment on December 31, Year 1.

Return on equity increases when the expected rate of return from new assets is higher than the rate of interest expense on the debt financing.

On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be: