Deck 12: Long-Term Liabilities

Question 1

In order to expand its business,the management of Carroll,Inc.issued a long-term notes payable for $50,000 on January 1,2016.The note will be paid over a 10-year period with equal annual principal payments,December 31 of each year.The annual interest rate is 12%.Prepare the journal entry for the first installment payment.

Answer 1

$$\begin{array} { | l | r | r | } \hline \text { Interest Expense } ( \$ 50,000 \times 12 \% ) & 6,000 & \\\hline \text { Long-Term Notes Payable } ( \$ 50,000 / 10 ) & 5,000 & \\\hline \text { Cash } & & 11,000 \\\hline\end{array}$$

Question 2

On March 1,2016,Hughes Services issued a 6% long-term notes payable for $18,000.It is payable over a 3-year term in $6,000 principal installments on March 1 of each year,beginning March 1,2017.Which of the following entries needs to be made on March 1,2016?

A) $$\begin{array} { | l | r | r | } \hline \text { Long-Term Notes Payable } & 6,000 & \\\hline \text { Cash } & & 6,000 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Current Portion of Long-Term Notes Payable } & 18,000 & \\\hline \text { Long-Term Notes Payable } & & 18,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Long-Term Notes Payable } & 18,000 & \\\hline \text { Accounts Payable } & & 18,000 \\\hline\end{array}$$
D) $$\begin{array} { | l| r | r | } \hline \text { Cash } & 18,000 & \\\hline \text { Long-Term Notes Payable } & & 18,000 \\\hline\end{array}$$

Answer 2

D

Question 3

On March 1,2016,Emerson Services issued a 4% long-term notes payable for $16,000.It is payable over a 4-year term in $4,000 annual principal payments on March 1 of each year plus interest,beginning March 1,2017.Each yearly installment will include both principal repayment of $4,000 and interest payment for the preceding one-year period.On March 1,2017,________.The accounting period ends on December 31.

A)Emerson must accrue $4,000 of Interest Expense
B)Emerson must accrue the coming $4,000 as the current portion of principal payment
C)Emerson must pay $640 of interest to the note holder
D)Emerson will receive $4,000 as an installment payment

Answer 3

Emerson must pay $640 of interest to the note holder

Question 4

On December 1,2016,Gardner Products borrowed $92,000 on a 5%,10-year note with annual installment payments of $9,200 plus interest due on December 1 of each subsequent year.Which of the following describes the first installment payment made on December 1,2017? (Round your answer to the nearest whole number. )

A)$9,200 principal plus $4,600 interest
B)$9,200 principal plus $460 interest
C)$9,200 principal plus $9,200 interest
D)$4,600 interest only

Question 5

The issuance of a note is recorded,on the books of the borrower,by crediting Cash and debiting Notes Receivable.

Question 6

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

Question 7

On May 1,2016,Butler Services issued a long-term note payable for $35,000.The note will be paid over five-years with annual principal payments of $7,000,plus interest,on May 1 of each year beginning on May 1,2017.Prepare the journal entry for the issuance of the note.

Question 8

On December 1,2016,Fine Dining Products borrowed $84,000 on a 12%,5-year note with annual installment payments of $16,800 plus interest due on December 1 of each succeeding year.On December 1,the principal amount was recorded as a long-term note 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 31,2016? (Round your answer to nearest whole number. )

A)$16,800
B)$26,880
C)$10,080
D)$33,600

Question 9

Going Places Adventure Travel signed a 14%,10-year note for $152,000.The company paid an installment of $2,200 for the first month.After the first payment,what is the principal balance? (Round your answer to the nearest whole number. )

A)$149,800
B)$150,227
C)$151,573
D)$154,200

Question 10

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 11

Get Out of Town Vacations signed a 14%,10-year note for $157,000.The company paid an installment of $2,100 for the first month.What portion of the first monthly payment is interest expense? (Round your answer to the nearest whole number. )

A)$268
B)$35,063
C)$15,183
D)$1,832

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

Trek Holidays Company signed a 9%,10-year note for $154,000.The company paid an installment of $2,900 for the first month.What portion of the first monthly payment is principal? (Round your answer to the nearest whole number. )

A)$1,745
B)$4,645
C)$1,540
D)$15,733

Question 14

The current portion of notes payable is reported on the balance sheet under current liabilities.

Question 15

In order to expand its business,the management of Vereos,Inc.issued a long-term notes payable for $50,000.The note will be paid over a 10-year period with equal annual principal payments,beginning in one year.The annual interest rate is 12%.Prepare the journal entry for the issuance of the note.

Question 16

On March 1,2016,Mandau Services issued a 3% 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 1,2017.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 Mandau will make on March 1,2017?

A)$5,000
B)$5,450
C)$15,000
D)$5,225

Question 17

On March 1,2016,Baker Services issued a 5% long-term notes payable for $21,000.It is payable over a 3-year term in $7,000 annual principal payments on March 1 of each year plus interest,beginning March 1,2017.How will the notes payable be shown on the balance sheet dated December 31,2016?

A)$21,000 shown as current liability only
B)$7,000 shown as current liability and $21,000 shown as long-term liability
C)$7,000 shown as current liability and $14,000 shown as long-term liability
D)the entire $21,000 shown as long-term liability

Question 18

On March 1,2016,Vantage Services issued a 8% long-term notes payable for $22,000.It is payable over a 16-year term in $1,375 principal installments on March 1 of each year,beginning March 1,2017.Each yearly installment will include both principal repayment of $1,375 and interest payment for the preceding one-year period.The journal entry to pay the first installment will include a debit to Interest Expense for $1,760.

Question 19

Long-term liabilities can be structured with equal principal payments or with an equal total payment amount.

Question 20

On November 1,2016,EZ Products borrowed $64,000 on a 5%,5-year note with annual installment payments of $12,800 plus interest due on November 1 of each succeeding year.On November 1,2018,what is the balance of the Long-Term Notes Payable account? (Round your answer to nearest whole number. )

A)$38,400
B)$64,000
C)$51,200
D)$12,800

Question 21

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

Question 22

On January 1,2016,Brubeck Company purchased equipment and signed a six-year mortgage note for $160,000 at 15%.The note will be paid in equal annual installments of $42,278,beginning January 1,2017.Calculate the balance of Mortgage Payable after the payment of the first installment.(Round your answer to the nearest whole number. )

A)$24,000
B)$117,722
C)$141,722
D)$120,702

Question 23

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

Question 24

On April 1,2017,Ardos Gardening 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 subsequent year.Prepare the journal entry for the issuance of the note.

Question 25

The difference between mortgages payable and notes payable is that notes payable are always secured by specific assets.

Question 26

On January 1,2016,Belden,Inc.issued long-term notes payable for $50,000.The note will be paid over 10 years with payments of $5,000 plus 12% interest due each January 1,beginning January 1,2017.Prepare the amortization schedule for the first three payments.

Question 27

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

Question 28

On April 1,2017,Nurix Manufacturers purchases equipment for $100,000,paying $30,000 in cash and signing a 10-year mortgage for $70,000 at 8% annual interest.Prepare the journal entry to record the acquisition of the equipment.

Question 29

On January 1,2017,Sullivan Cabinetry Company purchases $300,000 of property by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance.Sullivan will make yearly payments of $46,072.Prepare the amortization schedule for the first five payments.(Round your answers to the nearest dollar. )

Question 30

Hernandez Carpets Company buys a building for $115,000,paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%.Prepare the journal entry for the purchase.

Question 31

On January 1,2016,Belden,Inc.issued long-term notes payable for $50,000.The note will be paid over 10 years with payments of $5,000 plus 12% interest due each January 1,beginning January 1,2017.The amortization schedule for the first three payments is provided.Prepare the journal entry for the issuance of the note and for the January 1,2018 note payment.
$$\begin{array} { | l | r | r | r | r | r | } \hline & \begin{array} { c } \text { Beginning } \\\text { Balance }\end{array} & \begin{array} { c } \text { Principal } \\\text { Payment }\end{array} & \begin{array} { c } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { c } \text { Total } \\\text { Payment }\end{array} & \begin{array} { c } \text { Ending } \\\text { Balance }\end{array} \\\hline 01 / 01 / 2016 & & & & & \$ 50,000 \\\hline 01 / 01 / 2017 & \$ 50,000 & \$ 5,000 & \$ 6,000 & \$ 11,000 & 45,000 \\\hline01 / 01 / 2018 & 45,000 & 5,000 & 5,400 & 10,400 & 40,000 \\\hline 01 / 01 / 2019 & 40,000 & 5,000 & 4,800 & 9,800 & 35,000 \\\hline\end{array}$$

Question 32

On January 1,2017,Gaskin Cabinetry Company purchases $300,000 of equipment by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance.Gaskin will make yearly payments of $46,072.The amortization schedule for the first five payments is provided.
$$\begin{array} { | l | r | r | r | r | r | } \hline & \begin{array} { c } \text { Beginning } \\\text { Balance }\end{array} & \begin{array} { c } \text { Principal } \\\text { Payment }\end{array} & \begin{array} { c } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { c } \text { Total } \\\text { Payment }\end{array} & \begin{array} { c } \text { Ending } \\\text { Balance }\end{array} \\\hline 01 / 01 / 2017 & & & & & \$ 250,000 \\\hline 01 / 01 / 2018 & \$ 250,000 & \$ 13,572 & \$ 32,500 & \$ 46,072 & 236,428 \\\hline 01 / 01 / 2019 & 236,428 & 15,336 & 30,736 & 46,072 & 221,092 \\\hline0 1 / 01 / 2020 & 221,092 & 17,330 & 28,742 & 46,072 & 203,762 \\\hline 01 / 01 / 2021 & 203,762 & 19,583 & 26,489 & 46,072 & 184,179 \\\hline 01 / 01 / 2022 & 184,179 & 22,129 & 23,943 & 46,072 & 162,050 \\\hline\end{array}$$ Prepare the journal entry for the purchase of the equipment and for the January 1,2018 mortgage payment.

Question 33

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

Question 34

On January 1,2016,Alldredge Company purchased equipment and signed a six-year mortgage note for $186,000 at 15%.The note will be paid in equal annual installments of $49,148,beginning January 1,2017.Calculate the portion of interest expense paid on the third installment.(Round your answer to the nearest whole number. )

A)$49,148
B)$21,048
C)$27,900
D)$164,752

Question 35

On January 1,2017,Shea Landscaping borrowed $100,000 on a 15%,10-year note with annual installment payments of $10,000 plus interest due on December 31 of each year.Prepare the journal entry for the first installment payment made on December 31,2017.

Question 36

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

Question 37

On January 1,2016,Bratios Company purchased equipment and signed a six-year mortgage note for $97,000 at 15%.The note will be paid in equal annual installments of $25,631,beginning January 1,2017.On January 1,2017,the journal entry to record the first installment payment will include a ________.(Round your answer to the nearest whole number. )

A)debit to Mortgage Payable for $25,631
B)debit to Interest Expense for $14,550
C)credit to Cash for $11,081
D)credit to Mortgage Payable for $97,000

Question 38

On January 1,2016,Demarest Company purchased equipment and signed a six-year mortgage note for$80,000 at 15%.The note will be paid in equal annual installments of $21,139,beginning January 1,2017.Calculate the portion of principal amount paid on the third installment.(Round your answer to the nearest whole number. )

A)$12,086
B)$12,000
C)$21,139
D)$9,053

Question 39

On December 31,2016,Thompson Hardware Company purchases $300,000 of property by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance.The amortization schedule shows that the company will pay $46,072 per year.Journalize the first yearly payment on December 31,2017.

Question 40

On January 1,2017,Anderson Tools 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.Prepare the journal entry for January 1,2017.

Question 41

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 42

If bonds with a face value of $209,000 are issued at 93,the amount of cash proceeds is ________.

A)$208,907
B)$209,000
C)$194,370
D)$179,740

Question 43

Which of the following describes a secured bond?

A)a bond that matures in installments at regular intervals
B)a bond that is backed by issuer's specific assets
C)a bond that matures at one specified time
D)a bond that is not backed by specific assets

Question 44

If a bond is issued at a premium,the issue price is greater than face value.

Question 45

Provide a definition of each of the following types of bonds.
$$\begin{array} { | l | l | } \hline \text { Bond Type } & \text { Definition } \\\hline \text { Term } & \\\hline \text { Serial } & \\\hline \text { Secured } & \\\hline \text { Debenture } & \\\hline\end{array}$$

Question 46

After a bond is issued,investors may buy and sell it through the bond market.

Question 47

Which of the following describes a debenture?

A)a bond that matures in installments at regular intervals
B)a bond that gives the bondholder a claim for specific assets
C)a bond that matures at one specified time
D)a bond that is not backed by specific assets

Question 48

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

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

Question 49

If a bond is issued at a discount,the issue price is greater than face value.

Question 50

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

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

Question 51

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

Question 52

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

A)The bond will be issued at an amount above face value.
B)The stated interest rate is lower than the prevailing market interest rate.
C)At maturity,the bond will repay an amount that is greater than the face value.
D)The bond will be issued at par.

Question 53

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

A)The bond will be issued at par.
B)The stated interest rate is higher than the prevailing market interest rate.
C)At maturity,the bond will repay an amount that is less than the face value.
D)The bond will be issued for an amount less than the face value.

Question 54

If bonds with a face value of $204,000 are issued at par,the amount of cash proceeds is ________.

A)$203,890
B)$204,000
C)$224,400
D)$244,800

Question 55

The amount of cash interest the borrower pays each year is based on the ________.

A)market conditions on the day of payment
B)market interest rate
C)stated interest rate
D)effective interest rate

Question 56

Term bonds all mature at the same specified time.

Question 57

Debentures are backed only by the goodwill of the bond issuer.

Question 58

Which of the following describes a serial bond?

A)a bond that matures in installments at regular intervals
B)a bond that gives the bondholder a claim for specific assets
C)a bond that matures at one specified time
D)a bond that is not backed by specific assets

Question 59

Secured bonds give bondholders the right to take specified assets of the issuer if the issuer fails to pay principal or interest.

Question 60

Debentures are bonds that mature in installments at regular intervals.

Question 61

The future value is the bond's market price.

Question 62

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 63

Which of the following statements is true if a bond's stated interest rate is higher than the market rate?

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 64

When a bond is issued,the issue price is the present value of the interest payments the bondholder will receive while holding the bond plus the present value of the bond principal that will be received at maturity.

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 interest 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

Which of the following statements is true if a bond is issued for an amount equal to its face value?

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

Question 67

A bond is issued at discount when a bond's stated interest rate is ________.

A)equal to the market interest rate
B)more than the effective interest rate
C)less than the market interest rate
D)more than the market interest rate

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

Present value is the amount a person would invest now to receive a greater amount in the future.

Question 70

Which of the following statements is true if a bond's stated interest rate is the same as the market rate?

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 71

Money earns income over time,a fact called the time value of money.

Question 72

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

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

Question 73

Which of the following statements is true if a bond is issued for an amount higher than face value?

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

Question 74

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

Question 75

When a bond is issued 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 76

If bonds with a face value of $205,000 are issued at 110,the amount of cash proceeds is ________.

A)$225,390
B)$205,000
C)$186,364
D)$225,500

Question 77

Which of the following statements is true if a bond is issued at an amount less than its face value?

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 78

Complete the following table:
$$\begin{array} { | l | l | l | } \hline \begin{array} { l } \text { Bond's Stated } \\\text { Interest Rate }\end{array} & \begin{array} { l } \text { Market } \\\text { Interest Rate }\end{array} & \begin{array} { l } \text { Will the issue price of Bonds Payable be at } \\\text { a discount, premium, or face value? }\end{array} \\\hline 6 \% & 8 \% & \\\hline 10 \% & 9 \% & \\\hline 6 \% & 6 \% & \\\hline\end{array}$$

Question 79

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 80

The interest rate that investors demand to earn for loaning their money is known as the ________.

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