Deck 16: Financing Liabilities

Question 1

Jacobsen,Inc.borrowed $500,000 from F&M Bank on June 15 of the current year.The bank required 6% interest.Interest will be paid when the 12-month note becomes due.What amount should be accrued as Interest Payable for the December 31 end of the current year?

A)$13,750
B)$15,000
C)$16,250
D)$30,000

Answer 1

C

Question 2

Harrison Corporation borrowed $35,000 from F&M Bank on June 1 of the current year.The bank required 8% interest.Interest will be paid when the nine-month note becomes due.What is the interest expense for the current year?

A)$0
B)$1,400
C)$1,633
D)$2,100

Answer 2

C

Question 3

Notes payable are formal credit arrangements that require the payment of a specified face amount of principal at a fixed maturity date.

Answer 3

True

Question 4

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.The press had no known market value.Hornet agreed to pay $300,000 at the end of three years and asked for a 3% interest rate.At the time,Hornet's incremental borrowing rate was 7%.How should the seller and buyer record the transaction?

A)Each should record the sale/purchase at $300,000.
B)The seller should record the sale at $300,000 and Hornet at the present value of $300,000.
C)Each should record the transaction at the present value of the note payable.
D)Hornet should record the sale at $300,000 and the seller at the present value of $300,000.

Question 5

On January 2,Zhang Company borrowed $2,000,000 on a 10-year,7%,term loan from its bank.
Required: Compute the annual interest expense and total interest expense for the loan.

Question 6

While the payment on an installment loan is the same each period,the amount applied to principal decreases each period.

Question 7

Notes payable are reported on the balance sheet as current liabilities when they are due and payable within one year from the balance sheet date or operating cycle,whichever is longer.

Question 8

Proceeds on issuance and repayment of the principal on short-term notes payable are generally reported as financing activities on the statement of cash flows.

Question 9

Interest payments are classified as cash flows from financing activities.

Question 10

When a company borrows a discounted note for $30,000,it receives less than $30,000 and must repay $30,000.

Question 11

Which statement below most accurately describes the definition of a current Note Payable?

A)A note payable due within one fiscal year.
B)A note payable due within one fiscal year or one operating cycle,which ever is shorter.
C)A note payable due within one fiscal year or one operating cycle,which ever is longer.
D)A note payable that will be liquidated from current assets or the creation of another current liability.

Question 12

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.The press was installed on January 2,2016.The press had no known market value.Hornet agreed to pay $300,000 December 31,2018 and asked for a 3% interest rate.At the time,Hornet's incremental borrowing rate was 7%.The seller agreed to the terms but requested interest payments on December 31,each year.
Required: Compute the selling price of the machine.Prepare the three year amortization table for the note payable.Prepare the journal entries to record the purchase of the machine,the first annual interest payment,and the final payment of interest and principal.

Question 13

On November 1,Yung Corp.borrowed $50,000 on a six-month note from its bank.Interest at 8% will be paid when the note is due.Record any journal entries necessary to record these transactions.Yung's fiscal year is the calendar year.

Question 14

Short-term debt typically carries a higher interest rate than long-term notes.

Question 15

Morrison Corporation borrowed $45,000 from Commercial Bank on June 1 of the current year.The bank required 9% interest.Interest will be paid every three months until the 9-month note is paid.What is the total Interest Expense and the Interest Payable at December 31 of the current year?

A)Interest Expense $2,362.50; Interest Payable $2362.50
B)Interest Expense $337.50; Interest Payable $337.50
C)Interest Expense $2,362.50; Interest Payable $337.50
D)Interest Expense $3,037.50; Interest Payable $2362.50

Question 16

A company records interest expense by debiting the expense account and crediting notes payable.

Question 17

Georgia International borrowed $1,000,000 for eight months from its bank during the current year.Interest is payable in full on the due date of the note.
Required: Determine the amount of interest expense for the current year based on the following borrowing dates,fiscal year end dates,and interest rates.

Question 18

The Hudson Company borrowed $250,000 to purchase machinery and agreed to pay 4% interest for six years on an installment note.Each note payment is $47,690.How much interest is Hudson paying over the life of the loan?

A)$23,860
B)$36,140
C)$40,000
D)$60,000

Question 19

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

Question 20

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.The press was installed on January 2,2016.The press had a market value of $300,000.Hornet agreed to pay for the press in three equal installments beginning December 31,2016.At the time,Hornet's incremental borrowing rate was 7%.
Required: Compute the installment payments and prepare the three year amortization table for the note payable.Prepare the journal entries to record the purchase of the machine,the first annual payment,and the final payment on the note.

Question 21

When a company issues bonds,there is typically one debtor and one creditor that transact directly.

Question 22

When bonds are issued at a discount,interest expense will be less than interest paid.

Question 23

Xenia Corporation issued 3,000 term bonds with a face value of $1,000 each and no additional features for $3,200,000.The bonds' selling price indicated that the bonds were paying interest that was ________.

A)lower than the market rate
B)the rate the bond investors wanted
C)equal to par value
D)higher than the market rate

Question 24

Secured bonds are also referred to as debenture bonds.

Question 25

When bonds are issued at par,the market rate is equal to the stated rate.

Question 26

A bond issuer incurs a technical default when it ________.

A)fails to pay interest when due
B)declines to repay the principal when specified
C)fails to meet required ratios at year end
D)pays interest before it is due for payment

Question 27

Callable bonds can be paid off and retired at the option of the issuing company at specified dates.

Question 28

A bond's issue price is normally the sum of the present value of the future interest payments plus the present value of the face value of the bonds.

Question 29

When a bond sells at 102,this means the bondholder has paid $102 to acquire the bond.

Question 30

Discuss what causes bonds to sell at par,a premium,or a discount.

Question 31

Debt covenants include all of the following except ________.

A)restrictions for holding compensating balances of cash
B)eliminating dividends to shareholders
C)maintaining set ratios for working capital values
D)restrictions on future borrowings

Question 32

The highest Standard and Poor credit rating is a AAA rating.

Question 33

The stated interest rate is also referred to as the yield rate.

Question 34

Actual default by a bond issuer occurs when the debtor ________.

A)violates one of the debt convenants
B)fails to meet working capital ratio requirement
C)fails to make interest payments
D)allows the retained earnings balance to fall below required levels

Question 35

When the stated interest rate for bonds is lower than the market rate,the bonds will be issued at a discount.

Question 36

A technical default occurs when a debtor misses interest and/or principal payments.

Question 37

The face value of a bond is also referred to as its par value.

Question 38

Bonds typically have a face value of $1,000.

Question 39

The contract between a corporation and its bondholders is a ________.

A)bond indenture
B)bond covenant
C)restriction for compensating balances
D)secured bond

Question 40

Determine the type of Bonds that match the following bond descriptions:

Question 41

On January 2,Lincoln Motors,Inc.issued 1,000,$1,000 bonds to finance a new showroom.The bonds are 5-year,6% bonds that pay interest on December 31 each year.When issued,investors required 7% interest and the bonds are due December 31,Year 5.
Required:
1.Compute the selling price of the bonds.
2.Prepare the entry to record the sale of the bonds.
3.Prepare the amortization table for the bonds.
4.Prepare the journal entries for the first annual interest payment and the final repayment of the bonds.

Question 42

Premium amortization reduces the carrying value of the bonds.

Question 43

Bonds that do not pay cash interest are referred to as zero-coupon bonds.

Question 44

Given the following information from an amortization table for December 31,2017,prepare the journal entry to record the accrual of interest at year end if the fiscal year of the company ends on September 30,assuming the last interest payment occurred on 6/30/2017.

A)Journal Entry
B)Journal Entry
C)Journal Entry
D)Journal Entry

Question 45

Given the following information from an amortization table,compute the effective interest expense and the carrying value for the next line of the table:

A)Effective Interest $416; Carrying Value $41,177
B)Effective Interest $423; Carrying Value $41,942
C)Effective Interest $412; Carrying Value $40,789
D)Effective Interest $408; Carrying Value $40,397

Question 46

The account Bond Discounts is a contra-liability account.

Question 47

To compute the selling price of the bond,calculate the present value of par value using the present value of $1 ________.

A)and the interest payments using the present value of an ordinary annuity,at the market interest rate for both
B)at the stated rate and the interest payments using the present value of an ordinary annuity at the market rate
C)and the interest payments using the present value of an ordinary annuity,at the stated rate for both
D)at the market rate and the interest payments using the present value of an ordinary annuity at the stated rate

Question 48

When determining how to compute the present value of a bond,the buyer computes the ________.

A)present value of par value at the market rate and the present value of the interest at the stated rate
B)future value of par value and interest at the stated interest rate
C)present value of the interest at the market rate and the present value of par value at the stated rate
D)present value of par value and the present value of the interest at the market interest rate

Question 49

Given the following information from an amortization table for December 31,prepare the journal entry to record the payment of interest.

A)Journal Entry
B)Journal Entry
C)Journal Entry
D)Journal Entry

Question 50

The effective interest rate properly reflects the effective cost of borrowing at the ________.

A)stated rate for the bonds
B)current market rate each year
C)historical market rate at the date sold
D)current stated rate for bonds with the same bond rating

Question 51

The selling price of a bond is the ________.

A)par value of the bond
B)par value plus the discount of the bond or minus the premium of the bond
C)present value of par value plus the present value of the interest payments
D)present value of par value minus the present value of the interest payments

Question 52

Given the following information from an amortization table for December 31,prepare the journal entry to record the payment of interest at year end if the fiscal year of the company ends on December 31.

A)Journal Entry
B)Journal Entry
C)Journal Entry
D)Journal Entry

Question 53

The effective interest rate method computes interest expense by multiplying the stated interest rate by the beginning balance of the debt.

Question 54

$100,000 of five-year bonds are sold for $98,500 on the issue date.Interest of $4,000 is paid each year until the bonds are repaid.What is the total interest expense to the company for issuing these bonds?

A)$18,500
B)$20,000
C)$21,000
D)$21,500

Question 55

Under IFRS,a bond's carrying value is the same as reported under U.S.GAAP.

Question 56

Under IFRS,bond discounts are recorded in a separate contra-liability account.

Question 57

Given the following information from an amortization table,compute the effective interest expense,discount amortization,and the carrying value for the next line of the table:

A)Effective Interest $46,664; Discount Amortization $4,664; Carrying Value $671,297
B)Effective Interest $47,340; Discount Amortization $5,340; Carrying Value $681,628
C)Effective Interest $48,114; Discount Amortization $6,114; Carrying Value $693,456
D)Effective Interest $47,714; Discount Amortization $5,714; Carrying Value $687,342

Question 58

What is the main difference in computing the selling price of a zero-coupon bond and the selling price of a traditional bond?

A)There is no difference.
B)Zero coupon bonds have zero interest paid during the term of the bond.
C)No present value calculations are necessary.
D)Zero-coupon bonds typically sell at a premium.

Question 59

The additional cash received when bonds are issued at a premium is accounted for as an increase of future interest expense.

Question 60

Over the life of a bond,the interest expense is the ________.

A)total cash interest payments to the bondholders
B)difference between the selling price and the amount repaid plus interest payments
C)difference between the selling price and the amount repaid less interest payments
D)total cash paid to the bondholders over the life of the bonds

Question 61

On January 2,Andrew Corp.issued 1,000,$1,000 bonds to finance a new showroom.The bonds are 5-year,6% bonds that pay interest on December 31 each year.When issued,investors required 5% interest and the bonds are due December 31,Year 5.
Required:
1.Compute the selling price of the bonds.
2.Prepare the entry to record the sale of the bonds.
3.Prepare the amortization table for the bonds.
4.Prepare the journal entries for the first annual interest payment and the final repayment of the bonds.

Question 62

Under U.S.GAAP,bond issue costs are capitalized and amortized over the life of the bonds.

Question 63

Wilson Corp.issued $1,000,000 of 4% bonds on April 30 at par value.The bonds were dated January 1.The company pays interest on June 30 and December 31 each year.How much will the buyer need to pay the company in accrued interest?

A)$5,000
B)$6,667
C)$10,000
D)$13,333

Question 64

When bonds are sold between interest dates,the amount of accrued interest a buyer pays is equal to the face value of the bond times the market interest rate times the portion of a year since the prior interest date.

Question 65

Hudson,Inc.issued $500,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 4% interest for bonds of similar risk.The bonds pay interest on December 31 each year.The bonds sold at $532,744 including accrued interest.
Required: Prepare the journal entries for the sale of the bonds and the December 31 payment for the interest for these bonds.

Question 66

When bonds are sold between interest dates,the buyer must pay the issuer the amount of accrued interest from the prior interest date.

Question 67

Jorge Corp issued $500,000 of 6%,5-year bonds on January 2,2016 for par.The company incurred $25,000 in bond issue costs.What is the correct amount of bond issue expense to be recorded each semi-annual interest period using GAAP?

A)$5,000
B)$2,500
C)$1,250
D)Unable to determine without amortization table.

Question 68

Samuel's,Inc.sold $15,000 of 6% bonds to an individual on April 1 at par value.The bonds pay interest on June 30 and December 31 each year.What are the proper entries for the sale of the bonds and the June 30 payment of the interest for these bonds?

Question 69

Clausen Corp.,an IFRS company,sold $1,000,000 of 6%,3-year bonds on January 1,2016.The bonds pay semi-annual interest each June 30 and December 31.It cost the company $32,000 in bond issue costs.Which one of the following is the correct journal entry to record the sale of the bonds?

Question 70

A company's calculated effective borrowing rate is higher under IFRS than U.S.GAAP.

Question 71

When working with bonds issued between interest dates,the accountant must ________.

A)reevaluate the actual interest rate for the entire amortization table
B)assume that the bonds were issued on the intended issue date
C)adjust the first period of the amortization table
D)omit the first interest period from the amortization table

Question 72

All companies capitalize bond issue costs which are amortized over the life of the bond issue.

Question 73

Walker,Inc.issued $600,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 6% interest for bonds of similar risk.The bonds pay interest on December 31 each year.
Required: Determine the selling price of the bonds and prepare the journal entries for the issuance of the bonds and the payment of the first interest payment.

Question 74

In U.S.GAAP,Unamortized Bond Issue Costs have a debit balance and are considered ________.

A)an element in determining the carrying value of the bonds outstanding
B)a cost of borrowing that reduces the effective interest expense
C)a cost of borrowing that increases the effective interest expense
D)an initial cost that is expensed when the bonds are issued

Question 75

Swanson,Inc.issued $600,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 4% interest for bonds of similar risk.The bonds pay interest on December 31 each year.
Required: Determine the selling price of the bonds and prepare the journal entries for the issuance of the bonds and the payment of the first interest payment.

Question 76

Zhang Company,an IFRS company,sold $1,000,000 of 6%,3-year bonds on January 1,2016.The bonds pay semi-annual interest each June 30 and December 31.It cost the company $30,000 in bond issue costs. What is the effective semi-annual interest rate for the bonds?

A)3%
B)3)5%
C)3)56%
D)3)76%

Question 77

Wilson Corp.issued $1,000,000 of 5% bonds on April 1 at par value.The bonds were dated January 1.The company pays interest on June 30 and December 31 each year.How much will the buyer need to pay the company in accrued interest at purchase and how much will the buyer receive in interest on June 30?

A)pay April 1,$0; receive June 30 $25,000
B)pay April 1 $10,000; receive June 30 $20,000
C)pay April 1 $16,667; receive June 30 $25,000
D)pay April 1 $12.500; receive June 30 $25,000

Question 78

When bonds are sold at a discount between interest dates,the buyer ________.

A)pays no interest to the issuer
B)pays the issuer interest from the date of the bonds to the purchase date
C)receives interest from the issuer from the date of the bonds to the purchase date
D)receives a discount from the issuer for the loss of the interest before purchase

Question 79

Lincoln,Inc.issued $500,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 6% interest for bonds of similar risk.The bonds pay interest on December 31 each year.The bonds sold at $493,251 including accrued interest.
Required: Prepare the journal entries for the sale of the bonds and the December 31 payment for the interest for these bonds.

Question 80

When bonds are sold between interest dates,the issuer will pay the bondholder a lower amount of interest on the next interest date.