Question 1

When the effective interest method is used to account for notes, the dollar amount of interest will increase or decrease throughout the maturity period. Explain why.

Accepted Answer

The answer of When the effective interest method is used...

Question 2

A non-interest-bearing obligation

Accepted Answer

A)  requires recognition of interest expense over the life of the obligation. 
B)  is an example of an installment obligation. 
C)  requires collateral. 
D)  is free of interest expense.

Question 3

Describe the two cash flows associated with bonds.

Accepted Answer

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

Question 4

What is the purpose of interest rate swaps?

Accepted Answer

The answer of What is the purpose of interest rate...

Question 5

Use the table below to answer the problems 30 through 33. 
-Determine the coupon rate of interest on the bonds. What does this amount represent?

Accepted Answer

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

Question 6

Felton Incorporated is considering leasing equipment. It can either lease that equipment for five or ten years with the same annual lease payments under either agreement. The five-year lease allows Felton to classify the lease as an operating lease. However, the ten-year lease requires Felton to classify the lease as a capital lease. If Felton desires to measure net income higher in the initial year of the lease agreement, which lease contract would you advise Felton to sign? Why?

Accepted Answer

The answer of Felton Incorporated is considering leasing equipment. It...

Question 7

If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which one of the following actions would increase the likelihood of violating the debt covenant?

Accepted Answer

A)  Issuing capital stock 
B)  Skip current cash dividends 
C)  Acquire money by issuing a non-interest-bearing note payable 
D)  Acquire money by collecting accounts receivable

Question 8

On January 1, a 3-year, $10,000 non-interest-bearing note payable was issued for $7,938 when the market rate of interest was 8%. Interest expense is recognized using the effective interest method. Calculate the balance sheet value of the note a year after its issuance. Round your final answer to the nearest dollar.

Accepted Answer

The answer of On January 1, a 3-year, $10,000 non-interest-bearing...

Question 9

Use the table below to answer the problems 30 through 33. 
-Were the bonds issued at a discount or premium? How do you know?

Accepted Answer

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

Question 10

A five-year, non-interest-bearing, $5,000 note, dated January 1, 2010, has a present value of $3,917. The market rate of interest is 5%. Interest expense for the period ending December 31, 2010, is

Accepted Answer

A)  $392. 
B)  $196. 
C)  $250. 
D)  $217.

Question 11

Crosson Company uses the straight-line method of amortization and had a ten-year, 12 percent, $1,000,000 bond issue outstanding that had been sold at a $12,000 discount in 2008. The bonds pay interest on June 30 and December 31, and the company's fiscal year end is December 31. The journal entry on June 30, 2011, will include:

Accepted Answer

A)  a $6,000 credit to Cash. 
B)  a $1,200 credit to Bond Premium. 
C)  a $58,800 debit to Interest Expense 
D)  a $600 credit to Bond Discount.

Question 12

A non-interest-bearing note was recorded in the accounting records. The book value of the note

Accepted Answer

A)  remains the same during the maturity period. 
B)  decreases during the maturity period. 
C)  increases throughout the maturity period. 
D)  is reported on income statement.

Question 13

On January 1, 2009, Sheena Corporation issued a 3-year, 7%, $4,000 bond payable. Beginning in 2010, 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, 2009, Sheena Corporation issued...

Question 14

Use the table below to answer the problems 30 through 33. 
-What is the nature of the table presented? What is being amortized?

Accepted Answer

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

Question 15

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 16

Which one of the following will result from receiving cash upon issuing long-term debt?

Accepted Answer

A)  Increase of the company's indebtedness 
B)  Decrease of the current ratio 
C)  Increase of retained earnings 
D)  Increase of total shareholders' equity

Question 17

If a company issues a non-interest-bearing note payable, then

Accepted Answer

A)  the cash received will exceed the maturity value of the note. 
B)  the interest is not accrued. 
C)  the cash received will be less than the maturity value of the note. 
D)  the cash received will be more than the maturity value of the note.

Question 18

Interest expense calculated under GAAP is equal to the stated rate of interest times the maturity value if the interest-bearing obligation is issued at

Accepted Answer

A)  a discount. 
B)  either a discount or a premium. 
C)  a premium. 
D)  par.

Question 19

Companies generate assets in three different ways. They are

Accepted Answer

A)  equity contributed by owners, borrowings, and receivables from affiliates. 
B)  equity issuances, borrowings, and interest rates. 
C)  borrowings, profitable operations, and equity issuances. 
D)  equity issuances, debt issuances, and financial instruments.

Question 20

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?
a. $3,570
b. $4,982
c. $11,241
d. $37,725

Accepted Answer

The answer of On January 1, a 7-year, $8,000, non-interest-bearing...

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

When the effective interest method is used to account for notes, the dollar amount of interest will increase or decrease throughout the maturity period. Explain why.

A non-interest-bearing obligation

Describe the two cash flows associated with bonds.

What is the purpose of interest rate swaps?

Use the table below to answer the problems 30 through 33. -Determine the coupon rate of interest on the bonds. What does this amount represent?

If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which one of the following actions would increase the likelihood of violating the debt covenant?

Use the table below to answer the problems 30 through 33. -Were the bonds issued at a discount or premium? How do you know?

A five-year, non-interest-bearing, $5,000 note, dated January 1, 2010, has a present value of $3,917. The market rate of interest is 5%. Interest expense for the period ending December 31, 2010, is

A non-interest-bearing note was recorded in the accounting records. The book value of the note

On January 1, 2009, Sheena Corporation issued a 3-year, 7%, $4,000 bond payable. Beginning in 2010, interest is payable every January 1 over the life of the bond. The bonds were issued at 104¼. Calculate the issue price.

Use the table below to answer the problems 30 through 33. -What is the nature of the table presented? What is being amortized?

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

Which one of the following will result from receiving cash upon issuing long-term debt?

If a company issues a non-interest-bearing note payable, then

Interest expense calculated under GAAP is equal to the stated rate of interest times the maturity value if the interest-bearing obligation is issued at

Companies generate assets in three different ways. They are

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? a. $3,570 b. $4,982 c. $11,241 d. $37,725