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Exam 10: Accounting for Long-Term Debt

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Question 81

Multiple Choice

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On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.Which of the following shows the effects on the financial statement of the cash payment on December 31, Year 1?

A) Option A
B) Option B
C) Option C
D) Option D

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

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Question 82

True/False

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On January 1, Year 1, O'Keefe Company issued bonds with a face value of $400,000 and a stated interest rate of 10%. The bonds have a life of ten years and were sold at 108. O'Keefe uses the straight-line method to amortize bond discounts and premiums. On December 31, Year 4, O'Keefe called the bonds at 106. Indicate whether each of the following statements is true or false.a)The interest expense for Year 1 was $40,000.b)The balance in the bonds payable account was $400,000 on December 31, Year 1.c)The carrying value of bonds payable was $419,200 on December 31, Year 4.d)When O'Keefe repurchased the bonds, total assets decreased by $419,200.e)When O'Keefe repurchased the bonds, it had to recognize a loss in the amount of $4,800.

A) True
B) False

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Question 83

Multiple Choice

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A company uses the effective interest method to amortize a bond discount. Which of the following statements is true regarding the interest expense that is recognized each year?

Franklin Company obtained a $85,000 line of credit from State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 1% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month. What is the amount of interest expense recognized in March? (Do not round your intermediate calculations. Roundyour final answer to the nearest dollar.)

Indicate whether each of the following statements about lines of credit is true or false.a)Line-of-credit agreements generally involve a fluctuating rate of interest.b)A line-of-credit agreement allows a company to borrow on an as-needed basis.c)Interest rates on line-of-credit agreements are often pegged to the consumer price index.d)The signing of a line-of-credit agreement is an asset source transaction.e)The expense recognition for the payment of monthly interest is an asset exchange transaction.

Why would some bonds be classified as "secured bonds"? Provide an example of a common type of secured bond.

On January 1, Year 1, Wayne Company issued bonds with a face value of $630,000, 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 bond for 104, what is the amount of interest expense that will be reported on the income statement for the year ending December 31, Year 1?

Amortization of a discount on bonds payable is an asset use transaction.

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Does the amortization of a bond premium increase, decrease, or not affect interest expense for an accounting period? Explain.

Explain the concept of financial leverage..a)Issuing the note will increase assets and liabilities.b)The first payment on the note will reduce liabilities and assets but will not affect stockholders' equity.c)The second payment on the note will include higher interest expense than did the first payment.d)Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities.e)The amount of the principal repayment will increase with each succeeding payment.

Gates, Incorporated and Markham, Incorporated each had the same financial position on January 1, Year 2. The following is a summary of each of their balance sheets on that date: Gates is about to raise $200,000 in cash by issuing bonds. Markham is going to raise $200,000 on the same day by issuing common stock. Immediately after these transactions, which of the following statements will be correct?

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, Briand Company paid cash and recognized interest expense on bonds it had issued at face value on January 1, Year 1.

Which financial statements are affected by the payment of bond interest and the related amortization of a discount? Describe how each of the four financial statements is affected.

On January 1, Year 1, Weller Company issued bonds with a $340,000 face value, a stated rate of interest of 9.50%, 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 7.50%. Interest is paid annually on December 31. Assuming Weller issued the bonds for $386,676, what is the carrying value of the bonds on the December 31, Year 3? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Stanton Company issued ten-year 7% bonds with a face value of $100,000, for $96,567.94 on January 1, Year 1, when the market (effective)rate of interest was 7.5%. The bonds pay annual interest each December 31. Stanton uses the effective interest method to amortize bond discounts and premiums. (Round your answers to two decimal places.)Required:a)Determine the annual amount of cash that will be paid to bondholders for interest.b)Calculate the amounts of:(1)Interest expense in Year 1(2)Discount amortization in Year 1(3)Carrying amount of the liability on December 31, Year 1c)Calculate the amounts of:(1)Interest expense in Year 2(2)Premium amortization in Year 2(3)Carrying amount of the liability at December 31, Year 2?d)Determine the total amount of interest that will be recorded in interest expense over the life of the bond.

On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.What is the amount of principal repayment included in the payment made on December 31, Year 1?

On January 1, Year 1, Jones Company issued bonds with a $260,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 98. 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?

On January 1, Year 1, Burton Corporation issued bonds with a face value of $200,000 for $196,000 cash.: Which of the following correctly describes the related transaction?

If $200,000 of 12% bonds are issued at 101.5, what amount of cash will be received by the corporation?