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Exam 10: Accounting for Long-Term Debt

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Question 31

True/False

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The tax deductibility of interest expense on bonds makes the effective cost of borrowing less than the amount of cash paid for interest.

A) True
B) False

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Question 32

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On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to an 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1. How much will the company still owe on the loan at the end of Year 2? (Round your final answer to the nearest dollar.)

A) $186,727
B) $184,000
C) $129,090
D) $165,910

E) B) and C)
F) A) and B)

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Question 33

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Peak Enterprises issued bonds with a face value of $500,000, and received cash of $508,000. In recording this transaction, the liability account, Bonds Payable, will be increased by $500,000.

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the carrying value of the bond liability at December 31, Year 3?

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 total amount of liabilities shown on Jones' balance sheet at December 31, Year 2?

Explain the difference between the straight-line method and the effective interest method when amortizing bond discounts and premiums.

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.Which of the following shows the effect of the bond issuance on the financial statements?

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?

On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year 1. Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following shows the effect of this event on the financial statements?

Which of the following statements is true when bonds are issued at a premium?

Describe the advantage of establishing a line of credit.

Describe the effect on the accounting equation of the issuance of bonds at 103.5 that have a face value of $500,000, a stated rate of interest of 8%, and a 10-year term to maturity. Use numerical amounts in your answer.

On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31. Assuming Weller issued the bonds for $453,681, what is the carrying value of the bonds on the December 31, Year 3? (Round the final answer to the nearest dollar.)

If a bond issuer's bond ratings drop, the company probably will have to pay higher interest rates on bonds that have already been issued.

Discuss the purpose of a sinking fund.

Marvin Company issues $125,000 of bonds at face value on January 1. The bonds carry a 6% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following shows the effect of the first interest payment on the financial statements?

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.Which of the following shows the effect of the first interest payment and amortization of the premium or discount on the financial statements?

Which of the following describes the characteristics of a convertible bond?

What is meant by the "spread" with regards to financial leverage? What does the "spread" have to do with the issuance of bonds?

On January 1, Year 1, Williams Corporation issued $200,000 of callable bonds at face value. The bonds carried a 2% call premium. If Williams calls the bonds, how would this event affect the company's accounting equation?