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Exam 10: Long-Term Liabilities

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Question 61

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On January 1, 2010, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96½. Six years later, on January 1, 2016, Jacob retires 20% of these bonds by buying them on the open market at 105½. 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 total interest expense for the life of the bond?

A) $936,000
B) $964,000
C) $936,000.
D) $772,000.
E) $844,000.

F) B) and E)
G) A) and B)

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Question 62

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The _________________________ method of amortizing a bond discount allocates an equal portion of the total bond interest expense to each interest period.

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Question 63

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On October 1 of the current year a corporation sold, at par plus accrued interest, $1,000,000 of its 12% bonds, which were dated July 1 of this year. What amount of bond interest expense should the company report on its current year income statement?

To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by:

A company has 10%, 20-year bonds outstanding with a par value of $500,000. The company calls the bonds at 96 when the unamortized discount is $24,500. Calculate the gain or loss on the retirement of these bonds.

Identify and explain the advantages and disadvantages of bond financing.

On April 1, 2010, Jared Enterprises issues bonds dated January 1, 2010, that have a $2,430,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par plus four months' accrued interest. What is the total amount of cash Jared Enterprises will collect on April 1, 2010?

A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current year's interest date, after the bond interest was paid and after 40% of the total premium had been amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds. $\begin{array} { | l | r | } \hline \text { Par value of bonds } & \$ 2,000,000 \\\hline \text { Unamortized premium } & \underline { 72,000 ^ { * } } \\\hline \text { Carrying value of bonds } & 2,072,000 \\\hline \text { Cash paid } & \underline { 1,960,000 ^ { * * } } \\\hline \text { Gain on retirement } & \underline { \$ 112,000 } \\\hline\end{array}$ * $120,000 x 60% = $72,000 ** $2,000,000 x .98 = $1,960,000

A company with liabilities of $2,816,000 and equity of $826,000 has a debt to equity ratio equal to 29.33%

Bonds may only be issued on an interest payment date.

On June 1, a company issued $200,000 of 12% bonds at their par value plus accrued interest. The interest on these bonds is payable semiannually on January 1 and July 1. Prepare the issuer's journal entry to record the bond issuance of June 1.

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

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 journal entry to record the first interest payment on June 30, 2010?

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

____________________ leases are long-term or non-cancelable leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee.

A company issued 9%, 10-year bonds with a par value of $1,000,000 on September 1, 2010 when the market rate was 9%. The bonds were dated June 30, 2010. The bond issue price included accrued interest. Interest is paid semiannually on December 31 and June 30. (a) Prepare the issuer's journal entry to record the issuance of the bonds. (b) Prepare the issuer's journal entry to record the semiannual interest payment on December 31, 2010. Interest Payable: $1,000,000 x 9% x 2/12 year = $15,000

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 amount that would be recorded as cash paid in the December 31, 2010 journal entry?

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

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.