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Exam 14: Long-Term Liabilities

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Question 71

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A bondholder that owns a $1,000, 10%, 10-year bond has:

A) Ownership rights in the issuing company.
B) The right to receive $10 per year until maturity.
C) The right to receive $1,000 at maturity.
D) The right to receive $10,000 at maturity.
E) The right to receive dividends of $1,000 per year.

F) All of the above
G) C) and E)

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Question 72

True/False

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Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

A) True
B) False

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Question 73

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When the contract rate is above the market rate, a bond sells at a discount.

Match each of the following terms with the appropriate definitions.

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Explain the amortization of a bond discount. Identify and describe the amortization method.

Long-term bonds have relatively higher interest rates because they carry higher risk due to the longer time period.

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

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

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

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

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

The debt-to-equity ratio:

A bond sells at a discount when the:

A disadvantage of bonds is:

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 to yield the buyers an 8% annual return. The company uses the effective interest method of amortization. (1) Prepare an amortization table for the first two semiannual payment periods using the format shown below. (2) Prepare the journal entry to record the first semiannual interest payment.

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

Adidas 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%. Adidas received $206,948 in cash proceeds. Which of the following statements is ?

A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. The issuer uses the effective interest method for amortization. On the first semiannual interest date, what amount of discount should issuer amortize?