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Exam 14: Long-Term Liabilities

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Question 91

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On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The present value of a single sum factor for 3 years at 6% is 0.8396. The payment each July 31 will be:

A) $80,190,00.
B) $10,000.00.
C) $10,400.00.
D) $11,223.34.
E) $1,223.34.

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

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Question 92

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The ________ ratio is used to assess the risk of a company's financing structure.

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Question 93

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A discount on bonds payable:

A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

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

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

Collateral agreements for a note or bond can:

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors: $\begin{array}{l}\begin{array} { r l c c } &&\text { Present Value of an }\\n = & \mathrm { i } = & \text { Annuity } & \text { Present value of \$1 } \\5 & 8 \% & 3.9927 & 0.6806 \\10 & 4 \% & 8.1109 & 0.6756 \\5 & 6 \% & 4.2124 & 0.7473 \\10 & 3 \% & 8.5302 & 0.7441\end{array}\end{array}$

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. - The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the second interest payment using the effective interest method of amortization is:

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.

Bond market values are expressed as a percent of their par (face) value.

On January 1, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

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 ________.

On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. -The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $1,634.69.

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Amortizing a bond discount:

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

What is a bond? Identify and discuss the different characteristics and features bonds may possess.