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Exam 10: Accounting for Long-Term Debt

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Question 21

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

A) $601,500
B) $613,500
C) $615,000
D) $616,500

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

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Question 22

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If a bond discount is amortized using the effective interest method,the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

A) True
B) False

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Question 23

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The journal entry used to record the interest payment on December 31,Year 2 would be:

Peak Enterprises issued bonds with a face value of $500,000,receiving cash of $508,000.To record this event,Bonds Payable should be credited for $500,000.

[The following information applies to the questions displayed below.] 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 elements of the financial statements?

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?

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?

[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 a 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. )

On January 1,Year 1,Jack Incorporated borrows $38,000 to purchase a new company car by agreeing to a 6%,5-year note with the bank.Payments of $734.65 are due at the end of each month with the first installment due on January 31,Year 1.What are the amounts of interest and principal,respectively,that will be paid in the first month?

Which of the following correctly describes an installment note?

Why are bonds sometimes issued at a discount?

[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 bond for $431,940,what is the amount of interest expense that will be recognized during Year 3?

If a company has issued bonds at a premium,the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

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

[The following information applies to the questions displayed below.] On January 1, Year 1, the 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 correctly shows the effects of the December 31,Year 2 payment (rounded to the nearest whole dollar) ?

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

What is another term used to describe unsecured bonds?

On January 1,Year 1,Brown Co.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?

Davis Corporation borrowed $50,000 on January 1,Year 1.The loan is for a 5-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 interest expense is $4,500.

How are bonds payable usually classified on the balance sheet?