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Exam 10: Accounting for Long-Term Debt

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Question 71

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Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

A) Restrictions on increases in executive salaries
B) Restrictions on additional borrowing activities
C) Requirements that the names and addresses of the bondholders be registered with the bond issuer
D) Limitations on the payment of dividends

E) None of the above
F) A) and B)

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Question 72

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On January 1, Year 1, Hanover Corporation issued bonds with a face value of $300,000 and a 10-year term to maturity. On that date, the market interest rate was 7%. The bonds were issued at 103.5. Interest in the amount of $22,495 is payable in cash on December 31 of each year. Hanover Corporation uses the effective interest method to amortize discounts and premiums on bonds. (Round all intermediate calculations to two decimal places and final answers to whole dollars.)Required:a)Determine the amount of the premium on the bonds when they were issued.b)(1)Determine the amount of interest expense for Year 1.b)(2)Determine the amount of premium amortization for Year 1.c)Determine the carrying value of the bonds on December 31, Year 1.d)Determine the amount of interest expense for Year 2. Answer Key Test name: chapter 10

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a)$10,500b)(1)$21,735b)(2)$760c)$309,740...

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Question 73

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North Woods Company has a line of credit with Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: What is the amount of interest paid at the end of March?

On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.What is the amount of cash outflow from operating activities shown on Jones' statement of cash flows for the year ending December 31, Year 2?

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a 10-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is repayment of principal is $3,587.

Indicate whether each of the following statements is true or false.a)Interest expense on long-term installment notes increases each year.b)Cash for machinery or buildings is often obtained by issuing long-term debt.c)Short-term notes payable normally mature within a year.d)Long-term installment notes are repaid all at once two to five years after the issue date.e)Most long-term loans are obtained from the corporation's stockholders.

The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

San Jose Company issued ten-year 8% bonds with a face value of $100,000, for $107,023.58 on January 1, Year 1 when the market (effective)rate of interest was 7%. The bonds pay annual interest each December 31. San Jose uses the effective interest method to amortize bond discounts and premiums. (Round all intermediate calculations and final answers to two decimal places.)Required:a)Determine the annual amount of cash that will be paid to bondholders for interest?b)Calculate the amounts of:(1)Interest expense in Year 1(2)Premium amortization in Year 1(3)Carrying amount of the liability on December 31, Year 1c)Calculate the amounts of:(1)Interest expense in Year 2(2)Premium amortization in Year 2(3)Carrying amount of the liability at December 31, Year 2?d)Determine the total amount of interest that will be recorded in interest expense over the life of the bond.

Jacobs Company issued bonds with a $170,000 face value on January 1, Year 1. The bonds were issued at 105 and carried a 5-year term to maturity. They had a 8% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method to amortize bond discounts and premiums. Based on this information alone, how does the recognition of interest expense during Year 1 affect the company's accounting equation?

Bonds sold as separate components of a single issue may have different maturity dates.

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

On January 1, Year 1, Bluestone Company issued bonds with a face value of $500,000 at 90. How will this transaction affect Bluestone Company's cash account?

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.On December 31, Year 5, Gordon Corporation records interest and amortization. Immediately after that, Gordon pays off the bonds as scheduled. Which of the following shows the effect of the bond payoff on the financial statements?

On January 1, Year 1, Bluefield Company issued bonds with a face value of $200,000, a stated rate of interest of 10%, and a 20-year term to maturity. The bonds were issued at face value. If Bluefield's tax rate is 40%, what is the after-tax cost of borrowing related to these bonds for Year 1?

Park Enterprises issued bonds with a face value of $500,000, a stated rate of interest of 7%, and a 5-year term to maturity. The proceeds from the issuance were $508,000. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, the amount of interest expense for the first year would be $31,600.

Which of the following correctly describes an installment note?

Indicate whether each of the following statements regarding the effective interest method is true or false.a)The effective interest method matches interest expense with the change in the carrying value of the bond.b)Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization.c)The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.d)Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.e)Effective interest amortization can only be used on bonds that pay interest annually.

Which of the following describes a callable bond?

On January 1, Year 1, Jones Company issued bonds with a $220,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method. What is the amount of interest expense shown on Jones' income statement for the year ending December 31, Year 1?

On January 1, Year 1, Bluefield Company issued bonds with a face value of $118,000, a stated rate of interest of 10%, and a 20-year term to maturity. The bonds were issued at face value. If Bluefield's tax rate is 40%, what is the after-tax cost of borrowing related to these bonds for Year 1?