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Exam 10: Accounting for Long-Term Liabilities

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Question 51

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A contract pledging title to assets as security for a note or bond is known as a(an) :

A) Sinking fund.
B) Mortgage.
C) Equity.
D) Lease.
E) Indenture.

F) A) and D)
G) A) and C)

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Question 52

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One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

A) True
B) False

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Question 53

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A company invests $10,000 at 7% compounded annually. At the end of the second year, the company should have $11,400 in the fund.

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

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.

Premium on Bonds Payable is an adjunct or accretion liability account.

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.

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

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:

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:

The use of debt financing ensures an increase in return on equity.

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

A company's total liabilities divided by its total stockholders' equity is called the:

On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the holders an annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment, assuming it uses the straight-line method of amortization.

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

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:

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.

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

Bonds issued in the names and addresses of their holders are ________________ bonds.

Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1. Interest is payable each June 30 and December 31. (a) Prepare the general journal entry to record the issuance of the bonds on January 1. (b) Prepare the general journal entry to record the first interest payment on June 30.