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Exam 14: Long-Term Liabilities

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Question 1

True/False

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The contract rate on previously issued bonds changes as the market rate of interest changes.

A) True
B) False

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Question 2

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A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:

A) $0.
B) $10,000 gain.
C) $10,000 loss.
D) $22,000 gain.
E) $22,000 loss.

F) A) and B)
G) A) and C)

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Question 3

Multiple Choice

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The debt-to-equity ratio:

On January 1,a company issued 10%,10-year bonds with a par value of $720,000.The bonds pay interest each July 1 and January 1.The bonds were sold for $817,860 cash,based on an annual market rate of 8%.Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

On January 1,a company issues 8%,5 year,$300,000 bonds that pay interest semiannually each June 30 and December 31.On the issue date,the annual market rate of interest is 6%.Compute the price of the bonds on their issue date.The following information is taken from present value tables:

The Discount on Bonds Payable account is:

An ________________________________ is an obligation requiring a series of payments to the lender.

The market value (price) of a bond is equal to:

A bond is issued at par value when:

On March 1,a company issues 6%,10 year $300,000 par value bonds that pay semiannual interest 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.

When convertible bonds are converted to a company's stock,the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

A premium reduces the interest expense of a bond over its life.

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

Adonis Corporation issued 10-year,8% bonds with a par value of $200,000.Interest is paid semiannually.The market rate on the issue date was 7.5%.Adonis received $206,948 in cash proceeds.Which of the following statements is true?

The market value (issue price)of a bond is equal to the present value of all future cash payments provided by the bond.

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

A company issued 9%,10-years bonds with a par value of $1,000,000 on September 1,Year 1 when the market rate was 9%.The bonds were dated June 30,Year 1.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 on September 1. (b)Prepare the issuer's journal entry to record the semiannual interest payment on December 31,Year 1.

_____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

When applying equal total payments to a note,with each payment the amount applied to the note principal ____________ while the interest expense for the note _____________. Answers must appear in this order.