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Exam 10: Accounting for Long-Term Debt

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Question 31

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[The following information applies to the questions displayed below.] On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums. -On December 31,Year 5,Gordon Corporation makes the final entry to record 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?

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

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

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Question 32

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If a bond issuer's bond ratings drop,the company probably will have to pay higher interest rates on bonds that have already been issued.

A) True
B) False

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Question 33

Multiple Choice

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On January 1,Year 1,Bluestone Company issued bonds with a face value of $500,000 at 90.Which of the following journal entries would be required to record the bond issue?

If bonds are issued at a premium,the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

The journal entry used to record the issuance of the bond and the receipt of cash would be:

Which of the following describes a callable bond?

Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

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?

Bonds sold as separate components of a single issue may have different maturity dates.

[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?

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

Franklin Company obtained a $160,000 line of credit from State Bank on January 1,Year 1.The company agreed to accept a variable interest rate that was set at 2% 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?

On January 1,Year 1,Burton Corporation recorded the following journal entry: Which of the following correctly describes the related transaction?

[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 cash outflow from operating activities shown on Jones' statement of cash flows for the year ending December 31,Year 2?

On January 1,Year 1,Eureka Company issued $100,000 of five-year,7% bonds at face value.The annual cash payment for interest is due on January 1 of each year beginning January 1,Year 2.Based on this information,what is the total amount of liabilities related to these bonds that will be reported on the balance sheet at December 31,Year 1? (Hint: Consider the interest that might be owed to bondholders at December 31,Year 1. )

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

On January 1,Year 1,Williams Corporation issued $200,000 of callable bonds at face value.The bonds carried a 2% call premium.If Williams calls the bonds,how would this event affect the company's accounting equation?

Which of the following statements regarding the stated rate of interest is true if a bond is sold at 101?

[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. -Which of the following statements is true if Wayne issued the bonds for 96?

Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?