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Exam 10: Accounting for Long-Term Debt

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Question 1

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On March 27, 2013, Lincoln Corp. signed an agreement for a line of credit with the Washington Bank. Under the agreement, Lincoln can borrow up to $50,000 at any time during the following year. Lincoln will make any borrowings or repayments on the first day of a month and make interest payments on the last day of any month when a balance exists. The annual interest rate will be the bank's prime rate plus 2% and will be applied to the outstanding monthly balance. The following table gives the appropriate information for April, May, and June of 2013. Record all necessary journal entries on the dates indicated below. Round figures to the nearest dollar.

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Explanation: 3/27/2013 - No entry is ma...

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Question 2

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Cavanaugh Company borrowed $10,000 from the Big Apple Bank by issuing a 10% three-year note. Cavanaugh agreed to repay the principal and interest by making annual payments in the amount of $4,021. Based on this information, the amount of the interest expense associated with the second payment would be: (round your answer to the nearest dollar)

A) $365.
B) $698.
C) $1,000.
D) $4,021.

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

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B

Question 3

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How are interest rates normally set for lines of credit?

Explain the concept of financial leverage.

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions?

The amount of interest expense shown on Joiner's December 31, 2013 income statement would be:

On January 1, 2013, Garrison Corporation issued $200,000 6%, 10-year bonds at 104. Interest payments are due each year on December 31. Garrison uses the straight-line method of amortization on bond premium. Required: a) Prepare the journal entry to record issuing the bonds at a premium and the journal entry to record the first interest payment and amortization of the bond premium. b) Assuming Garrison Corporation called the bonds at a price of $205,500 on January 1, 2017, prepare the journal entry to record this transaction.

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

Which of the following answers shows the effect of the bond issuance on the financial statements?

Why does interest expense decrease during the life of an installment note payable? How is the amount of interest expense computed?

Which of the following shows the effect of the interest payment and amortization on 12/31/13?

The journal entry used to record the interest payment on December 31, 2014 would be:

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

On January 1, 2013, the Hawthorne Company borrowed $25,000 from the Columbus Bank, issuing a three-year, 8% note payable. Payments of $9,700.84 are to be made each year on December 31. The payment will include both the interest and a portion of the principal. Using the table below, prepare an amortization schedule for the note.

The amount of principal repayment included in the December 31, 2013 payment is:

Which of the following answers shows the effect of the bond issuance on 1/1/13?

On December 31, 2013, Crown Co. paid cash for interest on bonds it had issued on January 1, 2013 at 98, and amortized part of the discount on bonds. Crown Co. uses the straight-line method of amortizing bond discounts. Indicate the effects of the amortization of the discount only.

Knight Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on Knight's statements?

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

Based on the above, how much interest expense will Hamilton report on its income statement on December 31, 2013? (rounded)