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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 41

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Basil Corporation issues for cash $1,000,000 of 8%,10-year bonds,interest payable annually,at a time when the market rate of interest is 7%.The straight-line method is adopted for the amortization of bond discount or premium.Which of the following statements is true?

A) The carrying amount increases from its amount at issuance date to $1,000,000 at maturity.
B) The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.
C) The amount of annual interest paid to bondholders increases over the 10-year life of the bonds.
D) The amount of annual interest expense decreases as the bonds approach maturity.

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

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Question 42

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Bondholders claims on the assets of the corporation rank ahead of stockholders.

A) True
B) False

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Question 43

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The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded annually is $3,636.30.

Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the interest method.

Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1, at 97. Glover’s year­end is December 31. a- Were the bonds issued at a premium, a discount, or at par? b- Was the market rate of interest higher, lower, or the same as the contract rate of interest? c- If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? d- What is the carrying value of the bonds on December 31?

Use the following tables to calculate the present value of a $25,000, 7%, 5-year bond that pays $1,750 $25,000 × 7% interest annually, if the market rate of interest is 7% Present Value of $1 at Compound Interest $\begin{array}{|l|l|l|l|l|}\hline \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% \\\hline 1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 \\\hline 2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 \\\hline 3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 \\\hline 4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 \\\hline 5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 \\\hline 6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 \\\hline 7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 \\\hline 8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 \\\hline 9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 \\\hline 10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 \\\hline\end{array}$ Present Value of Annuity of $1 at Compound Interest

On January 1,Zero Company obtained a $52,000,4-year,6.5% installment note from Regional Bank.The note requires annual payments consisting of principal and interest of $15,179,beginning on December 31 of the current year.The December 31,Year 1 carrying amount in the amortization table for this installment note will be equal to:

The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

The adjusting entry to record the amortization of a discount on bonds payable is

On January 1, Yeargan Company obtained a $125,000, 7-year 5% installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352. Requirement: 1 Journalize the following entries: a. Issued the installment notes for cash on January 1. b. Paid the first annual payment on the note.

The higher the number of times interest charges are earned ratio,the better the creditors' protection.

The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be

When there are material differences between the results of using the straight-line method and using the effective interest rate method of amortization,the effective interest rate method should be used.

If the market rate of interest is 10%,a $10,000,12%,10-year bond that pays interest semiannually would sell at an amount

Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.

Numbers of times interest charges are earned is computed as

The market interest rate related to a bond is also called the

The journal entry a company records for the payment of interest,interest expense,and amortization of bond premium is

Given the following data,determine the number of times interest charges are earned ratio. Net income,$70,000 Bonds payable,issued at face value,8%,$5,000,000 Preferred Stock,$50 par value,6%,10,000 shares issued & outstanding Tax rate is 30%

A bond indenture is