Deck 10: Accounting for Long-Term Debt

Question 1

On January 1, 2013, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. These bonds were issued at a discount.

Answer 1

True
Explanation: If bonds are issued for less than their face value, they are issued at a discount.

Question 2

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

Answer 2

True
Explanation: Loan amortization describes repaying the principal of a loan, along with interest, over the life of the loan.

Question 3

Amortization of a discount on bonds payable is an asset use transaction.

Answer 3

False
Explanation: Amortizing a discount increases liabilities (decreases the contra-asset discount on bonds payable) and decreases equity (increases interest expense).

Question 4

If a company has issued bonds at a premium, the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

Question 5

Park Enterprises issued bonds with a face value of $500,000, receiving cash of $508,000. To record this event, Bonds Payable should be credited for $500,000.

Question 6

Bonds sold as separate components of a single issue may have different maturity dates.

Question 7

Park Enterprises issued bonds with a term of 5 years and a face value of $500,000, receiving cash of $508,000. The bonds pay interest once a year, with an annual rate of 7%. Assuming straight-line amortization, the amount of interest expense for the first year would be $31,600.

Question 8

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

Question 9

If a company chooses to call some of its callable bonds before their maturity, generally it will have to pay an amount that is greater than the carrying value of the bonds.

Question 10

On January 1, 2013, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. When the bonds mature, Daniels will have to pay the face value of the bonds to the bondholders.

Question 11

Ditech Corporation borrowed $50,000 on January 1, 2013. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Ditech will make a payment of $7,791, which includes both principal and interest. With this loan, the amount of interest expense that Ditech reports on its income statement will be the same for each year of the loan.

Question 12

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

Question 13

If a bond issuer's bond ratings drop, the company probably will have to pay higher interest rates on bonds that have already been issued.

Question 14

If the stated interest rate for bonds is the same as the effective interest rate, the bonds will be issued at their face value.

Question 15

Serial bonds are issued based on the overall strength of the borrower's credit.

Question 16

A line of credit typically has an interest rate that is fixed (constant) for the length of the agreement.

Question 17

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

Question 18

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

Question 19

Ditech Corporation borrowed $50,000 on January 1, 2013. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Ditech will make a payment of $7,791, which includes both principal and interest. The amount of the payment for 2013 that is interest expense is $4,500.

Question 20

Ditech Corporation borrowed $50,000 on January 1, 2013. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Ditech will make a payment of $7,791, which includes both principal and interest. The amount of the payment for 2013 that is reduction of principal is $3,587.

Question 21

The effective interest rate method of amortizing bond premium or discount gives a constant amount of interest expense every period.

Question 22

Canton Company borrowed $50,000 on a four-year, 8% installment note. Canton will record the issuance of this note with the following entry:

A)
B)
C)
D)

Question 23

Grove begins his loan transactions with Commerce Bank by borrowing $1,000 on January 1, 2013. Which of the following answers shows the effect of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 24

The amount of principal repayment included in the December 31, 2013 payment is:

A)$12,960.
B)$27,615.
C)$37,329.
D)$40,575.

Question 25

Which of the following shows the effect of the December 31, 2013 payment? (Figures rounded to nearest dollar)

A)Option A
B)Option B
C)Option C
D)Option D

Question 26

If bonds are issued at a premium, the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

Question 27

Long-term debt would likely be used for which of the following?

A)acquisition of inventory
B)paying premiums for insurance
C)purchasing machinery
D)paying salaries

Question 28

Which choice reflects the financial statement effects of the cash payment on December 31, 2013?

A)Option A
B)Option B
C)Option C
D)Option D

Question 29

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

A)Has no effect on interest expense each year
B)Increase the amount of interest expense each year
C)Reduces the amount of interest expense each year
D)Either A or C, depending on market conditions

Question 30

If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

Question 31

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

Question 32

Which of the following correctly shows the effects of the December 31, 2014 payment?

A)Option A
B)Option B
C)Option C
D)Option D

Question 33

Norris Company has a line of credit with the Everett State Bank. Norris agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Activity to date is given as follows: The amount of interest paid at the end of March would be:

A)$75.
B)$125.
C)$133.
D)$150.

Question 34

The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

Question 35

Cavanaugh Company borrowed $10,000 from the Big Apple Bank by issuing a 10% three-year note. Cavanaugh agreed to repay the principal and interest by making annual payments in the amount of $4,021. Based on this information, the amount of the interest expense associated with the second payment would be: (round your answer to the nearest dollar)

A)$365.
B)$698.
C)$1,000.
D)$4,021.

Question 36

Which of the following answers correctly shows the effect of the issuance of the note on Patterson's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 37

Grove records the first year's interest payment on December 31, 2013. Commerce's prime rate is 4% for 2013. Which of the following answers shows the effect of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 38

The times interest earned ratio is usually calculated as the ratio of net income to interest expense.

Question 39

The tax deductibility of interest expense on bonds makes the effective cost of borrowing less than the amount of cash paid for interest.

Question 40

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

A)to repay the debt
B)to pay dividends
C)to pay interest
D)A and C are both correct

Question 41

Which of the following describes the characteristics of a convertible bond?

A)Bonds mature at specified intervals throughout the life of the total issuance.
B)Bonds may be exchanged for stock at the discretion of the issuer.
C)Bonds mature on a specified date in the future.
D)Bonds may be exchanged for stock at the discretion of the bondholder.

Question 42

Fiorentino Corporation recorded the following in its general journal on 1/1/13: Which of the following answers correctly describes the transaction on 1/1/13?

A)Fiorentino issued bonds at 98.
B)Fiorentino issued bonds at 102.
C)Fiorentino issued bonds at a $2,000 premium.
D)Fiorentino signed a note payable for $98,000.

Question 43

Everest Company issued $100,000 in bonds payable on January 1, 2013. The bonds were issued at face value and carried 5-year term to maturity. They had a 6% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, 2014. Based on this information, the amount of total liabilities appearing on the December 31, 2013 balance sheet would be:

A)$100,000.
B)$106,000.
C)$99,400.
D)$6,000.

Question 44

June Company issued a bond at a discount. Which of the following choices accurately reflects how the issue would affect June's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 45

Bonds payable are usually classified on the balance sheet as:

A)long-term liabilities.
B)current liabilities.
C)investments and funds.
D)other assets.

Question 46

Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

A)Maintenance of designated thresholds measured by financial ratios
B)Requirements that the names and addresses of the bondholders be registered with the bond issuer
C)Restrictions on future borrowing activities
D)Limitations on the payment of dividends

Question 47

Parsons Company issued at 97 bonds with a face value of $500,000. As a result of the issue:

A)Assets and liabilities would both increase by $500,000.
B)Assets would increase by $485,000 and liabilities would increase by $500,000.
C)Assets and liabilities would both increase by $485,000.
D)Assets would increase by $500,000, and liabilities would increase by $485,000.

Question 48

The Barden Company called in bonds at a price that was above the carrying value of the bond liability. Which of the following choices accurately reflects how this event will affect Barden's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 49

The total amount of liabilities shown on Joiner's December 31, 2014 balance sheet would be:

A)$98,200.
B)$97,000.
C)$95,800.
D)$97,600.

Question 50

Ferguson Company obtained an $80,000 line of credit from the Metropolitan Bank on January 1, 2013. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2013 are shown in the following table. Assume that Ferguson borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. Based on this information alone, the amount of interest expense recognized for the month of March would be:

A)$116.
B)$131.
C)$146.
D)$204.

Question 51

Madison Company issues $12,500 of bonds at face value on January 1. The bonds carry an 8% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following reflects the financial statement effects of the first interest payment?

A)Option A
B)Option B
C)Option C
D)Option D

Question 52

Bonds that mature at specified intervals throughout the life of the issuance are called:

A)term bonds.
B)registered bonds.
C)serial bonds.
D)coupon bonds.

Question 53

Burton Company issued bonds with a face value of $100,000 on January 1, 2013 at 90. Which of the following journal entries would be required to record the bond issue?

A)
B)
C)
D)

Question 54

Wayne Company issued $20,000 of callable bonds at face value on January 1, 2013. The bonds carried a 2% call premium. If Wayne calls the bonds, this event would

A)decrease equity by $400.
B)decrease liabilities by $20,000.
C)decrease assets by $20,400.
D)all of these.

Question 55

Unsecured bonds are called:

A)debenture bonds.
B)coupon bonds.
C)discount bonds.
D)par value bonds.

Question 56

The amount of cash outflow from operating activities shown on Joiner's December 31, 2014 statement of cash flows would be:

A)$7,500.
B)$8,100.
C)$6,900.
D)$8,700.

Question 57

What is the name used for the type of secured bond that requires a pledge of a designated piece of real property in case of default?

A)Debenture Bond.
B)Indenture Bond.
C)Mortgage Bond.
D)Registered BonD.A mortgage bond is secured with real property.

Question 58

The amount of interest expense shown on Joiner's December 31, 2013 income statement would be:

A)$6,900.
B)$10,500.
C)$7,500.
D)$8,100.

Question 59

Callable bonds may be:

A)called for early retirement at the option of the bondholder.
B)called for early retirement at the option of the issuer.
C)converted to common stock at the option of the bondholder.
D)converted to common stock at the option of the issuer.

Question 60

Kline Company issued $400,000 in bonds on January 1, 2013. The bonds were issued at face value and carried a 4-year term to maturity. They had a 6 ½% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the 12/31/2013 income statement and the cash flow from operating activities shown on the 12/31/2013 statement of cash flows would be:

A)Option A
B)Option B
C)Option C
D)Option D

Question 61

On January 1, 2013, KMR Co. issued bonds with a face value of $100,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. KMR uses the straight-line method to amortize the bond discount. The carrying value of the bonds that would be reported on the December 31, 2016 balance sheet is:

A)$102,000.
B)$103,000.
C)$102,500.
D)$100,000.

Question 62

On 12/31/18, Wise Corporation makes the final entry to record interest and amortization. Immediately after that, Wise pays off the bonds as scheduled. Which of the following answers shows the effect of the bond pay-off on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 63

Which of the following shows the effect of the interest payment and amortization on 12/31/13?

A)Option A
B)Option B
C)Option C
D)Option D

Question 64

Brennan's Company experienced an accounting event that was recorded in the company's general journal as indicated below: Which of the following choices accurately reflects how this event would affect Brennan's financial statements.

A)Option A
B)Option B
C)Option C
D)Option D

Question 65

A discount or premium on bonds payable can be defined by which of the following statements?

A)The difference between the market price of the bond on the issue date and the face value of the bond.
B)The difference between the call price of the bond and the face value of the bond.
C)The market rate of interest on the date of the bond issue.
D)The difference between the interest rate and the market price of the bonD.The market price on the issue date is the price necessary to produce an effective interest rate equal to other investments of similar risk. The bond's discount or premium is used to adjust the face value to the market value, or issue price.

Question 66

On January 1, 2014, Potter Corporation called the bonds payable at a price of $2,545. Which of the following answers shows the effect of this transaction on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 67

Jansen Company issued bonds with $150,000 face value on January 1, 2013. The bonds were issued at 102 and carried a 5-year term to maturity. They had a 9% stated rate of interest that was payable in cash on December 31st of each year. Jansen uses the straight-line method of amortization. Based on this information alone, the recognition of interest expense on December 31, 2013 would act to:

A)Decrease both assets and equity by $13,500.
B)Decrease equity by $12,900, decrease liabilities by $600, and decrease assets by $13,500.
C)Decrease both assets and equity by $12,900.
D)Increase liabilities by $600, decrease assets by $12,900, and decrease equity by $13,500.

Question 68

Knight Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on Knight's statements?

A)Made a payment on an installment loan.
B)Borrowed funds through a line-of-credit.
C)Amortized a bond premium.
D)Issued a bond at a discount.

Question 69

Based on the above, how much interest expense will Hamilton report on its income statement on December 31, 2013? (rounded)

A)$212
B)$1,058
C)$2,820
D)$3,032

Question 70

The journal entry used to record the issuance of the bond and the receipt of cash would be: (round to whole dollars)

A)
B)
C)
D)

Question 71

If a bond is sold at 101, its stated rate of interest would be:

A)equal to the market rate.
B)unrelated to the market rate.
C)higher than the market rate.
D)lower than the market rate.

Question 72

El Dorado Co. issued bonds with a face value of $50,000 and a stated interest rate of 8%. The bonds have a life of five years and were sold at 102 ½. If El Dorado amortizes discounts and premiums using the straight-line method, the amount of interest expense each full year would be:

A)$4,000.
B)$3,750.
C)$4,250.
D)$4,100.

Question 73

Which of the following answers shows the effect of the first interest payment and amortization of premium or discount?

A)Option A
B)Option B
C)Option C
D)Option D

Question 74

A five-year, $500,000 bond was issued on 1/1/13. The stated rate of interest was 8%, and the effective rate of interest was 10%. The interest is paid semiannually. Which of the following statements is correct?

A)This bond was issued at a premium, and the semiannual cash payment is $25,000 per period.
B)This bond was issued at a discount, and the annual interest expense is $40,000.
C)This bond was issued at a discount, and the semiannual cash payment is $20,000 per period.
D)This bond was issued at a premium, and the annual interest expense is $40,000.

Question 75

The carrying value of the bond liability on the December 31, 2015 balance sheet was:

A)$490,000.
B)$485,000.
C)$495,000.
D)$482,000.

Question 76

Which of the following answers shows the effect of the bond issuance on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 77

The journal entry used to record the interest payment on December 31, 2014 would be:

A)
B)
C)
D)

Question 78

Which of the following answers shows the effect of the bond issuance on 1/1/13?

A)Option A
B)Option B
C)Option C
D)Option D

Question 79

Charleston Corporation made the following entry it its general journal on 12/31/13: Which of the following answers describes the above transaction?

A)Charleston issues bonds with a face value of $5,400 for $5,000 cash.
B)Charleston records interest expense and amortization of discount on bonds payable.
C)Charleston records annual interest and amortization of premium on bonds.
D)Charleston redeems callable bonds when the carrying value is $5,400.

Question 80

The reason bonds are sometimes issued at a discount is:

A)the stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk.
B)the stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk.
C)the bonds are being issued between interest payment dates.
D)the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.