Question 1

Investments in bonds are accounted for using

Accepted Answer

A)  historical cost. 
B)  capital leases. 
C)  the effective interest method. 
D)  net realizable value.

Question 2

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2006, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2011 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The interest expense for 2006 is:

Accepted Answer

A)  $12,000.00 
B)  $10,000.00 
C)  $107,734 
D)  $9,246

Question 3

On January 1, 2009, Richardson Company leased equipment under a 3-year lease with payments of $8,000 on January 1, 2010, 2011, and 2012. The present value of the lease payments at a discount rate of 7% is $20,992. RIchardson uses straight-line depreciation with no salvage value. The lease is considered a capital lease. Calculate depreciation expense and interest expense for 2009.

Accepted Answer

The answer of On January 1, 2009, Richardson Company leased...

Question 4

On January 1, 2010, Holly Company leased telephone equipment from ICON, Inc. Straight-line depreciation is used on all equipment with no salvage value. The contract required Holly to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to ICON. Using an effective rate of interest of 8%, the present value of the lease payments is $12,885. Numerically derive the difference in Holly's 2010 income if the lease is treated as an operating lease instead of a capital lease.

Accepted Answer

The answer of On January 1, 2010, Holly Company leased...

Question 5

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 6

If interest expense is equal to the contractual interest payment, then

Accepted Answer

A)  the note was issued at a premium. 
B)  the note was issued at a discount. 
C)  the note was issued at par. 
D)  It cannot be determined from the information given.

Question 7

The following information was extracted from the financial records of Lewis Company.  Based on this information, what is the effective interest rate on the notes payable?

Accepted Answer

A)  8.2% 
B)  8.8% 
C)  6.0% 
D)  2.2%

Question 8

How does an investor's required rate of return affect investing decisions?

Accepted Answer

The answer of How does an investor's required rate of...

Question 9

Why are some types of leases recorded as purchases?

Accepted Answer

The answer of Why are some types of leases recorded...

Question 10

On January 1, 2010, 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, 2010. 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, 2010, Lukens Corporation issued...

Question 11

Which one of the following bonds is considered unsecured?

Accepted Answer

A)  $50,000, 8%, debenture bonds 
B)  $100,000, 12%, restricted bonds 
C)  $20,000, 10%, five-year callable bonds 
D)  $40,000, 6%, collateralized bonds

Question 12

The following information was extracted from the financial records of Lewis Company.  Based on this information, the journal entry Lewis Company should prepare to record interest expense during 2010 would include:

Accepted Answer

A)  a credit to Interest Payable for $32,800. 
B)  a credit to Discount on Notes Payable for $24,000. 
C)  a credit to Cash for $28,000. 
D)  a credit to Notes Payable for $4,800.

Question 13

If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which of the following actions would help avoid a violation of the covenant?

Accepted Answer

A)  Purchase long-term investments 
B)  Increase current cash dividends declared 
C)  Exchange bonds payable for common stock 
D)  Acquire money by selling land at its balance sheet value

Question 14

Use the table below to answer the problems 30 through 33. 
-Calculate the effective interest rate on these bonds. Why is this amount different than the coupon rate?

Accepted Answer

The answer of Use the table below to answer the...

Question 15

On January 1, 2010, Gee Company issued a 2-year, 8%, $20,000 installment note payable. The payment on this note is $11,215 and is paid annually at year-end beginning December 31, 2009. When the note was issued, the market rate of interest was 8%. Complete the following amortization schedule.

Accepted Answer

The answer of On January 1, 2010, Gee Company issued...

Question 16

On January 1, 2009, Lundell Corporation issued a 5-year, 4%, $2,000 bond payable. Beginning in 2010, interest is payable every January 1 over the life of the bond. The bonds were issued at 105 3/4. How much cash did Lundell receive from issuing the bonds on January 1, 2009?

Accepted Answer

The answer of On January 1, 2009, Lundell Corporation issued...

Question 17

On January 1, 2010, Everton Company leased equipment under a 3-year lease with payments of $10,000 on January 1, 2010, 2011, and 2012. The present value of the lease payments at a discount rate of 9% is $27,591, which includes the immediate cash payment on January 1, 2010. If the lease is considered an operating lease, how much is rent expense for 2010?

Accepted Answer

The answer of On January 1, 2010, Everton Company leased...

Question 18

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2006, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2011 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The annual cash payment for interest on the bonds are:

Accepted Answer

A)  $10,000 
B)  $12,000 
C)  $5,000 
D)  $6,000

Question 19

On January 1, 2009, Edison Corporation issued a 4-year, 8%, $5,000 bond payable. Beginning in 2010, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2009 is 10%.
A. Calculate the contracted cash interest payments by Edison as specified by this bond.
B. Will the total interest expense over the life of the bond be less than or greater than the total cash payments for interest? Explain.

Accepted Answer

The answer of On January 1, 2009, Edison Corporation issued...

Question 20

If a company issues a note payable when the market rate of interest is greater than the stated rate, then

Accepted Answer

A)  the cash received will exceed the maturity value of the note. 
B)  the note will be issued at a discount. 
C)  the note will be issued at a premium. 
D)  the cash received will be equal to the maturity value of the note.

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