Question 1

On January 1, 2016, Sheena Corporation issued a 3-year, 7%, $4,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The bonds were issued at 104¼. Calculate the issue price.

Accepted Answer

The answer of On January 1, 2016, Sheena Corporation issued...

Question 2

Gibson Corporation amortizes its bonds using the effective interest method. Which statement is correct?

Accepted Answer

A) [Interest expense] = [Stated rate] X [Carrying value of the bonds] 
B) [Interest expense] - [Cash interest paid] = [Increase in carrying value if sold at a discount] 
C) [Cash interest payment] = [Bond face amount] X [Market interest rate] 
D) [Interest expense] - [Cash interest paid] = [Increase in carrying value if sold at a premium]

Question 3

A debt covenant

Accepted Answer

A) serves to give assurance to a creditor that the debtor will have the ability to pay interest and principal at maturity. 
B) serves to give assurance to the debtor that the interest rate is reasonable. 
C) allows the creditor to become an owner of the company if the covenant is violated. 
D) allows the debtor to forego any interest on the debt.

Question 4

On January 1, 2017, Lukens Corporation issued 5-year bonds with a $50,000 face amount and a 6% annual coupon rate paid annually on January 1. The bonds were issued at $44,166 when the market rate of interest was 9%.
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2017. Round to the nearest dollar.
B. Were the bonds issued at a premium or discount? How do you know?

Accepted Answer

The answer of On January 1, 2017, Lukens Corporation issued...

Question 5

A call provision in a bond contract may specify that the issuing company

Accepted Answer

A) can issue the bonds at any interest rate it can entice the investors to accept. 
B) must make periodic interest payments. 
C) must deposit cash in the bank to be available when the bonds mature. 
D) may buy back bonds from the investors.

Question 6

Were the bonds issued at a discount or premium? How do you know?

Accepted Answer

The answer of Were the bonds issued at a discount...

Question 7

On January 1, 2016, Action Corporation issued a two-year, 5%, $1,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 3%. Calculate the present value of the bond issued by Action on January 1, 2016.

Accepted Answer

The answer of On January 1, 2016, Action Corporation issued...

Question 8

Stevens Company is about to issue $400,000 of 10-year bonds paying an 8% interest rate with interest payable semiannually. The effective interest rate for such securities is 10%. Below are available time value of money factors that Stevens chooses from to calculate compounded interest.
$\begin{array}{|l|l|l|l|l|}
\hline &10 \text { periods, } & 20 \text { periods, } & 10 \text { periods, } & 20 \text { periods, } \
&8 \% & 4 \% & 10 \% & 5 \%\
\hline \text { Present Value of 1 } & 0.46319 & 0.45639 & 0.38554 & 0.37689 \
\hline \text { Future Value of 1 } & 2.15892 & 2.19112 & 2.59374 & 2.65330 \
\hline \begin{array}{l}
\text { Present Value of an } \
\text { Annuity of 1 }
\end{array} & 6.71008 & 13.59033 & 6.14457 & 12.46221 \
\hline \begin{array}{l}
\text { Future Value of an } \
\text { Annuity of 1 }
\end{array} & 14.48656 & 29.77808 & 15.93743 & 33.06595 \
\hline
\end{array}$
To the closest dollar, how much can Stevens expect to receive for the sale of these bonds?

Accepted Answer

A) $350,151 
B) $292,637 
C) $800,000 
D) $1,405,503

Question 9

Describe the two cash flows associated with bonds.

Accepted Answer

The answer of Describe the two cash flows associated with...

Question 10

Match between columns
                        Premises: Loss on bond redemption
1-year non-interest-bearing note receivable
Discount on bonds that mature in 3 years
 6-month note payable
Premium on bonds issued that mature in 8 months
Discount on notes payable due in 12 months
Lease liability on a 5-year capital lease paid annually

Accepted Answer

The Answer of Current assets and Long-term assets and Current is...

Question 11

Which one of the following is not one of the three contractual kinds of notes?

Accepted Answer

A) Non-interest-bearing note 
B) Interest-bearing notes 
C) Installment notes 
D) Bank notes

Question 12

On January 1, a 7-year, $8,000, non-interest-bearing note payable was issued when the market rate of interest was 7%. What amount should be recorded for the note on the balance sheet at the issue date?

Accepted Answer

A) $3,570 
B) $4,982 
C) $11,241 
D) $37,725

Question 13

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2017, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2022 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The interest expense for 2017 is:

Accepted Answer

A) $12,000 
B) $10,000 
C) $10,743 
D) $ 9,246

Question 14

Burns Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Burn's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The journal entry on December 31, 2017 will include:

Accepted Answer

A) a debit to Interest Expense for $45,000.00 
B) a credit to Discount on Bonds Payable for $1,889.50 
C) a credit to Interest Payable for $45,000.00 
D) a credit to Cash for $46,973.95

Question 15

On January 1, a 6-year, $5,000, non-interest-bearing note payable was issued when the market rate of interest was 8%. The present value of the note is

Accepted Answer

A) $3,151. 
B) $2,080. 
C) $865. 
D) $5,000.

Question 16

Payments on an installment obligation typically include the payment of

Accepted Answer

A) principal only. 
B) both principal and interest. 
C) interest only. 
D) interest, but only if collateral is involved.

Question 17

On January 1, 2016, Standard Incorporated is going to issue long-term debt in order to obtain money required to finance the purchase of equipment. It will have to pay a market rate of interest of 10% on this borrowed money. Standard is considering two different financial instruments in order to obtain $10,494. The first instrument being considered is a 3-year, 12%, $10,000 note with interest payable every December 31 over the life of the note. Alternatively, a 3-year, non-interest-bearing note with maturity value of $13,657 will be issued. Show how Standard's January 1, 2016 balance sheet and 2016 income statement will differ if Standard chooses to issue the non-interest-bearing note instead of the 10% note.

Accepted Answer

The answer of On January 1, 2016, Standard Incorporated is...

Question 18

On September 10, 2016, Humbert Company issued bonds with a face value of $600,000 for a price of 96. During 2017, Humbert exercised a call provision and redeemed the bonds for 101. At the time of the redemption, the bonds had a book value of $590,000. The journal entry to record the redemption includes:

Accepted Answer

A) a credit to Bonds Payable for $576,000. 
B) a debit to Loss on Bond Redemption for $16,000. 
C) a credit to Discount on Bonds for $24,000. 
D) a debit to Discount on Bonds Payable for $10,000.

Question 19

If an interest-bearing note payable is issued at par, then the contractual cash payment for interest is

Accepted Answer

A) equal to interest expense. 
B) less than interest expense. 
C) greater than interest expense. 
D) It cannot be determined from the information given.

Question 20

Distinguish between an installment obligation and a non-interest-bearing obligation.

Accepted Answer

The answer of Distinguish between an installment obligation and a...

Exam 11: Long-Term Liabilities: Notes, Bonds, and Leases