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Exam 10: Accounting for Long-Term Debt

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Question 41

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On January 1, Year 1, Wayne Company issued bonds with a face value of $810,000, a 11% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. Assuming Wayne issued the bonds for 104, what is the carrying value of the bonds on the December 31, Year 1 balance sheet?

A) $839,160
B) $813,240
C) $845,640
D) $842,400

E) A) and D)
F) C) and D)

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Question 42

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If a company uses the effective interest method to amortize a bond discount, does the interest expense increase, decrease, or stay the same over time? Explain.

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Amortization of a bond discount using th...

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Question 43

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Currie Company borrowed $13,000 from Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $5,227. Based on this information, what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar.)

Does United States tax law encourage debt financing or equity financing of a corporation? Why?

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. Assuming Wayne issued the bonds for 102.5, what is the carrying value of the bonds on the December 31, Year 1 balance sheet?

Which of the following statements about installment notes is correct?

If a company chooses to call some of its callable bonds before their maturity, generally it will have to pay an amount that is greater than the carrying value of the bonds.

Currie Company borrowed $20,000 from Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar.)

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. Assuming Wayne issued the bond for 102.5, what is the amount of interest expense that will be reported on the income statement for the year ending December 31, Year 1?

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter dollar amounts.Increase = I Decrease = D Not Affected = NAOn December 31, Year 1, Ravenwood Company made an annual payment on a long-term installment note payable.

Thrasher Company reported income before taxes of $180,000. The company is in a 30% income tax bracket. Also, Thrasher's income statement contained a charge for interest expense amounting to $60,000. Based on this information alone, what is the company's times-interest-earned ratio?

Explain the special feature that makes callable bonds attractive to an issuing corporation.

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter dollar amounts.Increase = I Decrease = D Not Affected = NAUpon maturity, Eagle Company repaid the face value of a bond liability.

On January 1, Year 1, Denver Company issued bonds with a face value of $100,000, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were sold at 102.5. Denver uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense during Year 1?

A company uses the effective interest method to amortize a bond premium. Which of the following statements is true regarding the carrying value of the bond?

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.On January 1, Year 2, Pierce Corporation called the bonds payable at a price of $25,450. Which of the following shows the effect of this transaction on the financial statements?

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 interest expense shown on Jones' income statement for the year ending December 31, Year 1?

On January 1, Year 1, Sheffield Company issued bonds with a face value of $200,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. Sheffield uses the straight-line method to amortize bond discounts and premiums. What is the carrying value of the bonds at December 31, Year 4?

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.Which of the following shows the effect of the bond issuance on January 1, Year 1?

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. With this loan, the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.