Deck 14: Long-Term Liabilities

Question 1

On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $15,000. It is payable over a 3-year term in $5,000 annual principal payments on March 1 of each year plus interest, beginning March 1, 2016. Each yearly installment will include both principal repayment of $5,000 and interest payment for the preceding one-year period. On March 1, 2016:

A) Vinnie must accrue $5,000 of Interest Expense.
B) Vinnie must accrue for the coming $5,000 as current portion of principal payment.
C) Vinnie must pay out $750 of Interest Expense to the note holder.
D) Vinnie will receive $5,000 as an installment payment.

Answer 1

C

Question 2

Trek Company signed a 9%, 10-year note for $150,000. The company paid $1,900 as the installment for the first month. What portion of the first monthly payment is interest expense?

A) $4,800
B) $16,000
C) $14,400
D) $1,125

Answer 2

D

Question 3

The amount of interest paid each period on long-term liabilities remains the same, as well as the principal payments and the total payments.

Answer 3

False

Question 4

On December 1, 2013, Fine Products borrowed $80,000 on a 4%, 8-year note with annual installment payments of $10,000 plus interest due on December 1 of each succeeding year. On December 1, the principal amount was initially recorded as long-term notes payable. What amount of the note payable will be shown as current portion of Long-Term Note Payable on the balance sheet as of December 31, 2013?

A) $10,000
B) $13,200
C) $3,200
D) $20,000

Question 5

On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $15,000. It is payable over a 3-year term in $5,000 annual principal payments on March 1 of each year plus interest, beginning March 1, 2016. How will this information be shown on the balance sheet dated December 31, 2015?

A) $15,000 shown as current liability only
B) $5,000 shown as current liability; $15,000 shown as long-term liability
C) $5,000 shown as current liability; $10,000 shown as long-term liability
D) the entire $15,000 shown as long-term liability

Question 6

A mortgage payable is a long-term debt that is backed with a security interest in specific property.

Question 7

On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $20,000. It is payable over a 10-year term in $2,000 principal installments on March 1 of each year, beginning March 1, 2016. Each yearly installment will include both principal repayment of $2,000 and interest payment for the preceding one-year period. The journal entry to pay the first installment will include a debit to the Interest Expense account for $1,000.

Question 8

The current portion of notes payable is the principal amount that will be paid within two years of the balance sheet date and the remaining portion is long term.

Question 9

Trek Company signed a 9%, 10-year note for $150,000. The company paid $1,900 as the installment for the first month. After the first payment, what is the updated principal balance?

A) $147,625
B) $159,430
C) $149,225
D) $159,100

Question 10

On November 1, 2015, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment payments of $4,800 plus interest due on November 1 of each succeeding year. On November 1, 2016, what will the balance be in the Long-Term Notes Payable account?

A) $38,400
B) $48,000
C) $43,200
D) $4,800

Question 11

An amortization schedule details each loan payment's allocation between principal and interest and also the beginning and ending balances of the loan.

Question 12

A note payable can either be classified as a long-term liability or a short-term liability depending on the discretion of the accountant.

Question 13

On December 1, 2015, Fine Products borrowed $80,000 on a 4%, 8-year note with annual installment payments of $10,000 plus interest due on December 1 of each succeeding year. Which of the following describes the first installment payment made on December 1, 2016?

A) $10,000 principal plus $3,200 interest
B) $10,000 principal plus $400 interest
C) $10,000 principal plus $10,000 interest
D) $3,200 interest only

Question 14

The current portion of notes payable must be reported on the balance sheet under current liabilities and the long-term portion under long-term liabilities.

Question 15

Installment payments for mortgages typically contain both an amount for principal repayment and an amount for interest.

Question 16

Issuance of a note by the issuer is recorded by crediting the Cash account and debiting the Note Receivable account.

Question 17

On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $15,000. It is payable over a 3-year term in $5,000 principal installments on March 1 of each year, beginning March 1, 2016. Each yearly installment will include both principal repayment of $5,000 and interest payment for the preceding one-year period. What is the amount of total cash payment that the Vinnie will make on March 1, 2016?

A) $5,000
B) $5,750
C) $15,000
D) $5,375

Question 18

On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $15,000. It is payable over a 3-year term in $5,000 principal installments on March 1 of each year, beginning March 1, 2016. Which of the following entries needs to be made at March 1, 2015?

A) $$\begin{array} { | c | r | r | } \hline \text { Long-Term Notes Payable } & 5,000 & \\\hline \text { Cash } & & 5,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Current Portion of Long-Term Notes Payable } & 15,000 & \\\hline \text { Long-Term Notes Payable } & & 15,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Long-Term Notes Payable } & 15,000 & \\\hline \text { Accounts Payable } & & 15,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 15,000 & \\\hline \text { Long-Term Notes Payable } & & 15,000 \\\hline\end{array}$$

Question 19

The difference between a mortgage payable and a note payable is that notes payable are always secured by specific assets.

Question 20

Trek Company signed a 9%, 10-year note for $150,000. The company paid $1,900 as the installment for the first month. What portion of the first monthly payment is principal?

A) $775
B) $2,375
C) $1,800
D) $14,400

Question 21

On April 1, 2015, Ardoos Products borrowed $100,000 on a 15%, 10-year note with annual installment payments of $10,000 plus interest due on April 1 of each succeeding year. Provide the first journal entry for the issuance of the note.

Question 22

On January 1, 2015, Paramount Inc. issued long-term notes payable for $50,000. The note will be paid over ten years with payments of $5,000 plus 12% interest due each January 1, beginning January 1, 2016. Prepare the amortization schedule for the first three payments.

Question 23

Bonds are short-term debt issued to multiple lenders called bondholders, usually in increments of $1,000.

Question 24

Garotia Company buys a building on a plot of land for $115,000, paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%. The payment will be made in equal monthly installments of $809. Provide the journal entry for the first monthly payment. (Round your answers to nearest whole dollar number).

Question 25

On January 1, 2015, Anderson Company purchases property of $300,000 by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance. The amortization schedule shows that Anderson Company will pay $46,072 per year. Journalize the first yearly payment on January 1, 2016.

Question 26

In order to expand business, the management of Vereos Inc. decided to issue Long-term notes payable for $50,000. The note will be paid over ten years with payments of $5,000 plus 12% interest. Provide the journal entry needed after 1 year for the first installment payment.

Question 27

On the maturity date, the bondholder is paid the face amount of the bond plus the last interest payment.

Question 28

On April 1, 2015, Ardoos Products borrowed $100,000 on a 15%, 10-year note with annual installment payments of $10,000 plus interest due on April 1 of each succeeding year. Provide the journal entry for the first installment payment made on April 1, 2016.

Question 29

On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. Calculate the portion of interest expense paid on the third installment.

A) $21,139
B) $9,053
C) $12,000
D) $70,861

Question 30

On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. Calculate the portion of principal amount paid on the third installment.

A) $12,086
B) $12,000
C) $21,139
D) $9,503

Question 31

On January 1, 2015, Bratios Company purchased equipment and signed a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. On January 1, 2016, the journal entry to record the first installment payment will include a:

A) debit to Mortgage Payable for $21,139.
B) debit to Interest Expense for $12,000.
C) credit to Cash for $9,139.
D) credit to Mortgage Payable for $80,000.

Question 32

On January 1, 2013, Anderson Company purchases machinery with a fair value of $300,000 by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance. On January 1, 2013, what will be the journal entry?

Question 33

On April 1, 2015, Nurix Manufacturers purchases equipment for $100,000, paying $30,000 in cash and signing a 10-year mortgage for $70,000 taken out at 8%. Prepare the journal entry to record the acquisition of the equipment.

Question 34

On May 1, 2015, Vinnie Services issued a long-term notes payable for $35,000. It is payable over a 5-year term in $7,000 annual principal payments plus interest, on May 1 of each year beginning on May 1, 2016. Provide the initial journal entry for the issuance of the note.

Question 35

On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. Calculate the balance of the Mortgage Payable account after the payment of the first installment.

A) $12,000
B) $58,861
C) $70,861
D) $60,351

Question 36

If a bond is issued at a discount, it will sell for more than face value.

Question 37

If a bond is issued at a premium, it will sell for more than face value.

Question 38

In order to expand business, the management of Vereos Inc. decided to issue long-term notes payable for $50,000. The instrument carries interest at the rate of 12% with 10 equal yearly installments, beginning in one year. What will be the journal entry at the inception?

Question 39

Garotia Company buys a building on a plot of land for $115,000, paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%. Provide the journal entry for the purchase.

Question 40

On January 1, 2015, Anderson Company purchases property of $300,000 by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance. Anderson will make yearly payments of $46,072. Prepare the amortization schedule for the first five payments. (Round your answers to the nearest dollar.)

Question 41

The interest rate that determines the amount of cash interest the borrower pays and the investor receives each year is called:

A) amortization rate.
B) market interest rate.
C) stated interest rate.
D) discounting rate.

Question 42

The market rate is the rate used to calculate the actual cash payments made to bondholders.

Question 43

An instrument that matures at one specified time is known as a:

A) preferred share.
B) common share.
C) bond.
D) letter of credit.

Question 44

Which of the following statements is true of a bond that is issued at a discount?

A) It will be sold at par.
B) Its stated interest rate is higher than the prevailing market rate.
C) It will repay a lesser amount than the face value at maturity.
D) It will be sold for less than the face value.

Question 45

If bonds with a face value of $200,000 are sold at 105, the amount of cash proceeds is:

A) $209,523.
B) $200,000.
C) $190,476.
D) $210,000.

Question 46

Which of the following describes a secured bond?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay principal or interest
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets

Question 47

Which of the following describes a serial bond?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets

Question 48

A bond is issued at discount:

A) when a bond's stated interest rate is equal to the market interest rate.
B) when a bond's stated interest rate is more than the effective interest rate.
C) when a bond's stated interest rate is less than the market interest rate.
D) when a bond's stated interest rate is higher than the market interest rate.

Question 49

The issue price of a bond-whether it is sold at par, premium, or discount-has a considerable effect on the required principal repayment at maturity.

Question 50

A bond is issued at premium :

A) when a bond's stated interest rate is equal to the market interest rate.
B) when a bond's stated interest rate is less than the effective interest rate.
C) when a bond's stated interest rate is less than the market interest rate.
D) when a bond's stated interest rate is higher than the market interest rate.

Question 51

When a bond is sold, the selling price is generally equivalent to the present value of the bond payments.

Question 52

Which of the following describes a debenture?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay principal or interest
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets

Question 53

Which of the following statements is true of a bond that is issued at a premium?

A) It will be sold above par.
B) Its stated interest rate is lower than the prevailing market rate.
C) It will repay a greater amount than the face value at maturity.
D) It will be sold at par.

Question 54

The interest rate on which cash payments to bondholders are based is the:

A) market rate.
B) discount rate.
C) stated rate.
D) amortization rate.

Question 55

Which of the following is the amount the borrower must pay back to the bondholders on maturity?

A) market value
B) present value
C) stated interest value
D) principal amount

Question 56

The date on which the principal amount is repaid to the bondholder is known as:

A) issuing date.
B) interest date.
C) maturity date.
D) installment date.

Question 57

The reason investors buy bonds is to:

A) earn interest.
B) own controlling interest in the company.
C) exercise voting rights in a company.
D) receive dividend payments.

Question 58

If bonds with a face value of $200,000 are sold at 98, the amount of cash proceeds is:

A) $202,000.
B) $200,000.
C) $196,000.
D) $192,157.

Question 59

A bond once sold to a bondholder, can be resold to another investor on the bonds market.

Question 60

If bonds with a face value of $200,000 are sold at par, the amount of cash proceeds is:

A) $202,000.
B) $200,000.
C) $196,000.
D) $192,157.

Question 61

A bond is sold for an amount higher than face value. Which of the following statements is true?

A) The bond's stated rate is lower than the prevailing market rate at time of sale.
B) The bond's stated rate is the same as the prevailing market rate at time of sale.
C) The bond's stated rate is higher than the prevailing market rate at time of sale.
D) The bond is not secured by specific assets of the issuer.

Question 62

The interest rate that investors demand in order to loan their money is known as the:

A) yield to maturity.
B) coupon rate.
C) differential rate.
D) market interest rate.

Question 63

Campbell Inc. has net income of $500,000 and 200,000 shares of common stock. The company is considering a project which requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised can be used to increase income before interest and taxes by $300,000 each year. The company estimates income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in higher earnings per share.

Question 64

The balance in the Bonds Payable is a credit of $16,500. The balance in the Premium on Bonds Payable is a credit of $800. The balance sheet will report the bond balance as $15,700.

Question 65

Which of the following concepts represents time value of money?

A) the concept that money becomes obsolete over time
B) the concept that money earns income over time
C) the concept that money loses its purchasing power over time
D) the concept that money can be converted into other currencies over time

Question 66

Premium on Bonds Payable is considered to be an additional Interest Expense of the company that issues the bond.

Question 67

A bond is sold for an amount equal to its face value. Which of the following statements is true?

A) The bond's stated rate is lower than the prevailing market rate at time of sale.
B) The bond's stated rate is the same as the prevailing market rate at time of sale.
C) The bond's stated rate is higher than the prevailing market rate at time of sale.
D) The bond is not secured by specific assets of the issuer.

Question 68

If a bond's stated interest rate is lower than the market rate, which of the following is true?

A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount higher than the maturity value.

Question 69

The balance in the Bonds Payable account is a credit of $65,000. The balance in the Discount on Bonds Payable account is a debit of $2,250. The bond's carrying amount is $62,750.

Question 70

The balance in the Bonds Payable account is a credit of $89,000. The balance in the Premium on Bonds Payable account is a credit of $990. The bond's carrying amount is $89,990.

Question 71

Earning more income on borrowed money than the related interest expense is called:

A) premium.
B) leverage.
C) annuity.
D) amortization.

Question 72

The face value of a bond payable minus the current balance of the discount account plus the current balance of the premium account is the bond's carrying amount.

Question 73

Discount on Bonds Payable is considered to be an additional Interest Expense of the company that issues the bond.

Question 74

Why would a corporation issue bonds payable instead of issuing stock?

A) Debt is a less expensive source of capital than stock.
B) Borrowing by issuing bonds payable carries no risk to the company.
C) Debts affect the percentage of ownership of the corporation by the stockholders.
D) Debts don't carry any cost.

Question 75

A bond is sold for an amount less than its face value. Which of the following statements is true?

A) The bond's stated rate is lower than the prevailing market rate at the time of sale.
B) The bond's stated rate is the same as the prevailing market rate at the time of sale.
C) The bond's stated rate is higher than the prevailing market rate at the time of sale.
D) The bond is not secured by specific assets of the issuer.

Question 76

The amortization of bond premium increases interest expense over the life of the bonds.

Question 77

If a bond's stated interest rate is the same as the market rate, which of the following is true?

A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount lower than the maturity value.

Question 78

The balance in the Bonds Payable account is a credit of $72,000. The balance in the Discount on Bonds Payable is a debit of $3,500. The balance sheet will report the bond balance as $75,500.

Question 79

When a bond is sold at a price higher than the face value, the difference is known as a:

A) premium.
B) discount.
C) maturity value.
D) face value.

Question 80

If a bond's stated interest rate is higher than the market rate, which of the following is true?

A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount lower than the maturity value.