Question 1

A bond sells at a discount when the:

Accepted Answer

A) Contract rate is above the market rate 
B) Contract rate is equal to the market rate 
C) Contract rate is below the market rate 
D) Bond has a short-term life 
E) Bond pays interest only once a year

Question 2

Which of the following statements is true?

Accepted Answer

A) Interest on bonds is tax deductible 
B) Interest on bonds is not tax deductible 
C) Dividends to stockholders are tax deductible 
D) Bonds do not have to be repaid 
E) Bonds always decrease return on equity

Question 3

A company purchased two new delivery vans for a total of $250,000 on January 1,2009.The company paid $40,000 cash and signed a $210,000,3-year,8% note for the remaining balance.The note is to be paid in three annual end-of-year payments of $81,487 each,with the first payment on December 31,2009.Each payment includes interest on the unpaid balance plus principal.
(1)Prepare a note amortization table using the format below:
 $$\begin{array} { | l | c | c | c | c | c | } 
\hline \begin{array} { c } 
\text { Period } \
\text { Ending Date }
\end{array} & \begin{array} { c } 
\text { Beginning } \
\text { Balance }
\end{array} & \begin{array} { c } 
\text { Debit Interest } \
\text { Expense }
\end{array} & \begin{array} { c } 
\text { Debit Notes } \
\text { Payable }
\end{array} & \text { Credit Cash } & \begin{array} { c } 
\text { Ending } \
\text { Balance }
\end{array} \
\hline 12 / 3109 & & & & & \
\hline 12 / 31 / 10 & & & & & \
\hline 12 / 31 / 11 & & & & & \
\hline
\end{array}$$ 
(2)Prepare the general journal entries to record the purchase of the vans on January 1,2009 and the second annual installment payment on December 31,2010.

Accepted Answer

The answer of A company purchased two new delivery vans...

Question 4

A company purchased two new trucks for a total of $250,000 on January 1,2009.The company paid $40,000 cash and gave a $210,000,3-year,8% note for the remaining balance.The note is to be paid in three annual end-of-year payments beginning December 31,2009.Assume the annual installment payments are to consist of equal amounts of principal plus accrued interest.Prepare a note amortization table using the format below.
 $\begin{array}{|l|c|c|c|c|c|}
\hline\begin{array}{c}
\text { Period } \
\text { Ending Date }
\end{array} & \begin{array}{c}
\text { Beginning } \
\text { Balance }
\end{array} & \begin{array}{c}
\text { Debit Interest } \
\text { Expense }
\end{array} & \begin{array}{c}
\text { Debit Notes } \
\text { Payable }
\end{array} & \text { Credit Cash } & \begin{array}{c}
\text { Ending } \
\text { Balance }
\end{array} \
\hline 12 / 31 / 09 & & & & & \
\hline 12 / 31 / 10 & & & & & \
\hline 12 / 31 / 11 & & & & &\
\hline
\end{array}$

Accepted Answer

The answer of A company purchased two new trucks for...

Question 5

What methods can a company use to retire its bonds?

Accepted Answer

The answer of What methods can a company use to...

Question 6

The process of systematically reducing a bond discount to zero over the life of the bond is called ______________________________.

Accepted Answer

The answer of The process of systematically reducing a bond...

Question 7

Operating leases differ from capital leases in that

Accepted Answer

A) For a capital lease the lessee records the lease payments as rent expense,but for an operating lease the lessee reports the lease payments as depreciation expense 
B) For an operating lease the lessee depreciates the asset acquired under lease,but for the capital lease the lessee does not 
C) Operating leases create a long-term liability on the balance sheet,but capital leases do not 
D) Operating leases do not transfer ownership of the asset under the lease,but capital leases often do 
E) Operating lease payments are generally greater than capital lease payments

Question 8

On March 1,a company issues bonds with a par value of $300,000.The bonds mature in 10 years and pay 6% annual interest,payable each June 30 and December 31.The bonds sell at par value plus interest accrued since January 1.Prepare the general journal entry to record the issuance of the bonds on March 1.

Accepted Answer

The answer of On March 1,a company issues bonds with...

Question 9

Bonds with a par value of less than $1,000 are known as:

Accepted Answer

A) Junk bonds 
B) Baby bonds 
C) Callable bonds 
D) Unsecured bonds 
E) Convertible bonds

Question 10

On January 1,2010,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.Six years later,on January 1,2016,Jacob retires 30% of these bonds by buying them on the open market at 98½. All interest is accounted for and paid through December 31,2015,the day before the purchase.The straight-line method is used to amortize any bond discount.What is the carrying value of the bond on January 1,2016?

Accepted Answer

A) $472,000 
B) $531,076 
C) $584,924 
D) $609,000 
E) $600,000

Question 11

A bond traded at 102 ½ means that:

Accepted Answer

A) The bond pays 2.5% interest 
B) The bond traded at $1,025 per $1,000 bond 
C) The market rate of interest is 2.5% 
D) The bonds were retired at $1,025 each 
E) The market rate of interest is 2 ½% above the contract rate

Question 12

If a company has 5-year installment note payable,with each payment consisting of interest plus equal amounts of principal,the interest each period is determined by multiplying ___________________________ times __________________________________.

Accepted Answer

The answer of If a company has 5-year installment note...

Question 13

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

Accepted Answer

A) Debentures 
B) Discounted notes 
C) Installment notes 
D) Indentures 
E) Investment notes

Question 14

_______________ bonds are bonds that mature at more than one date,often in a series and thus are usually repaid over a number of periods.

Accepted Answer

The answer of _______________ bonds are bonds that mature at...

Question 15

On January 1,2010,Lane issues $700,000 of 7%,15-year bonds at a price of 106 3/4.The interest payments are made on June 30 and December 31.Lane elects a fiscal year ending September 30.What is the appropriate adjusting journal entry required for September 30,2010?

Accepted Answer

A) 
$\begin{array}{|c|r|r|}
\hline \text { Interest Expense } & 22,925 & \
\hline \text { Cash } & & 22,925 \
\hline
\end{array}$ 
B) 
$$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 22,925 & \
\hline \text { Premium on Bonds Payable } & 1,575 & \
\hline \text { Cash } & & 24,500 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l| r | r | } 
\hline \text { Interest Expense } & 11,462 & \
\hline \text { Premium on Bonds Payable } & 788 & \
\hline \text { Interest Payable } & & 12,250 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | r | r | } 
\hline \text { Interest Payable } & 11,462 & \
\hline \text { Premium on Bonds Payable } & 788 & \
\hline \text { Cash } & & 12,250 \
\hline
\end{array}$$ 
E) 
$$\begin{array} { | l | r | r | } 
\hline \text { Interest Payable } & 11,462 & \
\hline \text { Discount on Bond Payable } & 788 & \
\hline \text { Interest Expense } & & 12,250 \
\hline
\end{array}$$

Question 16

The debt to equity ratio helps assess the risks of a company's financing structure.

Accepted Answer

A) True 
 B)False

Question 17

Shin Company has a loan agreement that provides it with cash today.The company must repay this loan in 4 years with $25,000.Shin agrees to a 6% interest rate.The present value factor for 4 periods,6% is 0.7921.What is the amount of cash that Shin Company receives today?

Accepted Answer

The answer of Shin Company has a loan agreement that...

Question 18

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99,the gain or loss on this retirement is:

Accepted Answer

A) $1,000 gain 
B) $1,000 loss 
C) $2,700 loss 
D) $2,700 gain 
E) $3,700 gain

Question 19

What is a lease? Be sure to explain the differences between an operating lease and a capital lease.

Accepted Answer

The answer of What is a lease? Be sure to...

Question 20

The issue price of bonds is found by computing the present value of the bond's cash payments,discounted at the _______________ rate of interest at the time of issuance.

Accepted Answer

The answer of The issue price of bonds is found...

Exam 10: Reporting and Analyzing Long-Term Liabilities