Question 1

[The following information applies to the questions displayed below.]
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?

Accepted Answer

A)   $17,500
B)   $12,500
C)   $14,250
D)   $15,000E) B) and D)
F) B) and C)

Question 2

Match between columns Premises: Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.
Effective interest amortization can only be used on bonds that pay interest annually.

The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.
The effective interest method matches interest expense with the declining carrying value of the bond.
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.

Accepted Answer

The Answer of False and True is...

Question 3

Which of the following statements about installment notes is correct?

Accepted Answer

A)   With each subsequent payment on an installment note, the amount of interest expense decreases.
B)   With each subsequent payment on an installment note, the amount of interest expense increases.
C)   With each subsequent payment on an installment note, the amount of the principal paid decreases.
D)   With each subsequent payment on an installment note, the amount of the principal paid remains unchanged.E) A) and B)
F) A) and C)

Question 4

Match between columns Premises: The expense recognition for the payment of monthly interest is an asset exchange Interest rates on line-of-credit agreements are often pegged to the consumer price index.
Line-of-credit agreements generally involve a fluctuating rate of interest. A line-of-credit agreement allows a company to borrow on an as-needed basis.
The signing of a line-of-credit agreement is an asset source transaction.

Accepted Answer

The Answer of False and True is...

Question 5

[The following information applies to the questions displayed below.]
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?

Accepted Answer

A)   $16,200
B)   $21,000
C)   $15,000
D)   $13,800E) C) and D)
F) A) and B)

Question 6

[The following information applies to the questions displayed below.]
On January 1, Year 1, Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.
-Which of the following shows the effect of the December 31,Year 1 payment?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) All of the above
F) B) and D)

Question 7

Serial bonds are issued based on the overall strength of the borrower's credit.

Accepted Answer

A) True 
 B)False

Question 8

[The following information applies to the questions displayed below.]
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?

Accepted Answer

A)   $241,000
B)   $242,500
C)   $237,500
D)   $245,000E) B) and C)
F) A) and D)

Question 9

Jacobs Company issued bonds with a $300,000 face value on January 1,Year 1.The bonds were issued at 102 and carried a 5-year term to maturity.They had a 9% 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?

Accepted Answer

A)   Decreases stockholders' equity by $25,800, decreases liabilities by $1,200, and decreases assets by $27,000
B)   Decreases both assets and stockholders' equity by $2,700
C)   Decreases both assets and stockholders' equity by $25,800
D)   Increases liabilities by $1,200, decreases assets by $25,800, and decreases stockholders' equity by $27,000E) C) and D)
F) B) and C)

Question 10

Pace Company issued bonds with a face value of $200,000 at 97.How does the issuance affect the company's accounting equation?

Accepted Answer

A)   Assets and liabilities would both increase by $200,000.
B)   Assets and liabilities would both increase by $194,000.
C)   Assets would increase by $194,000 and liabilities would increase by $200,000.
D)   Assets would increase by $200,000, and liabilities would increase by $194,000.E) A) and B)
F) A) and C) B

Question 11

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

Accepted Answer

A) True 
 B)False  False

Question 12

[The following information applies to the questions displayed below.]
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.)

Accepted Answer

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

Question 13

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 elements of the financial statements?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) C) and D)
F) A) and B)

Question 14

On January 1,Year 1,Denver Co.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?

Accepted Answer

A)   $7,500
B)   $8,500
C)   $8,000
D)   $8,200E) All of the above
F) None of the above

Question 15

Spokane Company called in bonds at a price that was above the carrying value of the bond liability.Which of the following shows how this event will affect the elements of the financial statements?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   Option DE) A) and C)
F) B) and C)

Question 16

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?

Accepted Answer

A)   2.1
B)   3.0
C)   3.1
D)   4.0E) B) and C)
F) None of the above

Question 17

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.)

Accepted Answer

A)   $730
B)   $1,396
C)   $2,000
D)   $8,042E) All of the above
F) A) and B)

Question 18

[The following information applies to the questions displayed below.]
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 $431,940,what is the carrying value of the bonds on the December 31,Year 3?

Accepted Answer

A)   $420,615
B)   $426,495
C)   $414,264
D)   $404,800E) A) and D)
F) A) and C) C

Question 19

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

Accepted Answer

A)   Term bonds
B)   Registered bonds
C)   Coupon bonds
D)   Serial bondsE) A) and D)
F) All of the above

Question 20

On January 1,Year 1,Sheffield Co.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?

Accepted Answer

A)   $204,000
B)   $200,000
C)   $205,000
D)   $206,000E) A) and C)
F) A) and B)

Exam 10: Accounting for Long-Term Debt

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Indicate whether each of the following statements regarding the effective interest method is true or false.

Which of the following statements about installment notes is correct?

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Indicate whether each of the following statements about lines of credit is true or false.

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Serial bonds are issued based on the overall strength of the borrower's credit.

Correct Answer
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Pace Company issued bonds with a face value of $200,000 at 97.How does the issuance affect the company's accounting equation?

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B

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

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False

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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 elements of the financial statements?

Correct Answer
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On January 1,Year 1,Denver Co.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?

Correct Answer
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Spokane Company called in bonds at a price that was above the carrying value of the bond liability.Which of the following shows how this event will affect the elements of the financial statements?

Correct Answer
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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?

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C

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

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Exam 10: Accounting for Long-Term Debt

Correct AnswerverifiedShow Answer

Indicate whether each of the following statements regarding the effective interest method is true or false.

Which of the following statements about installment notes is correct?

Correct AnswerverifiedShow Answer

Indicate whether each of the following statements about lines of credit is true or false.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Serial bonds are issued based on the overall strength of the borrower's credit.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Pace Company issued bonds with a face value of $200,000 at 97.How does the issuance affect the company's accounting equation?

Correct AnswerverifiedB

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

Correct AnswerverifiedFalse

Correct AnswerverifiedShow Answer

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 elements of the financial statements?

Correct AnswerverifiedShow Answer

On January 1,Year 1,Denver Co.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?

Correct AnswerverifiedShow Answer

Spokane Company called in bonds at a price that was above the carrying value of the bond liability.Which of the following shows how this event will affect the elements of the financial statements?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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B

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False

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C

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