Chapter 14 Long-Term Liabilities

MULTIPLE CHOICE QUESTIONS

1. The legal contract between the issuing corporation and the bondholders is called the bond indenture.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Interest on bonds is tax deductible.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. The relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

True

• 1. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

Debentures always have specific assets of the issuing company pledged as collateral.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

Bond market values are expressed as a percent of their par (face) value.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

A bond with a par value of $1,000 trading at 101½ sells for a premium.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

A bond with a par value of $1,000 trading at 97½ sells for a premium.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

True

• 1. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

True

• 1. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

True

• 1. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

A bond's par value is not necessarily the same as its market value.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

• 1. True
  2. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

Mortgage bonds are backed only by the good faith and credit of the issuing company.

• 1. True
  2. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Decision Making

1. A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Decision Making

1. Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company borrows $10,000 and issues a 5-year, 6% installment note with interest payable annually. The factor for the present value of an annuity at 6% for 5 years is 4.2124. The factor for the present value of a single sum at 6% for 5 years is 0.7473. The amount of the annual payment is

$2,373.94.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

An annuity is a series of equal payments at equal time intervals.

• 1. True
  2. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. The present value of an annuity is equal to the sum of the individual future values for each payment.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

True

• 1. False

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Resource Management; FN Measurement

1. A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

True

• 1. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

True

• 1. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

True

• 1. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

True

• 1. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Understand

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

True

• 1. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with periodic interest payments. Normal 0 false false false EN-IN X-NONE X-NONE

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

An advantage of bond financing is that issuing bonds does not affect owner control.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Periodic interest payments on bonds are determined by multiplying the par value of the bond by the contract rate.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement; FN Risk Analysis

The use of debt financing ensures an increase in return on equity.

• 1. True
  2. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement; FN Risk Analysis

1. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

True

• 1. False

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A company's ability to issue unsecured debt depends on its credit standing.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

• 1. True
  2. False

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

True

• 1. False

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

• 1. True
  2. False

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

True

• 1. False

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

• 1. True
  2. False

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

True

• 1. False

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The contract rate on previously issued bonds changes as the market rate of interest changes.

• 1. True
  2. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

True

• 1. False

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.

• 1. True
  2. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

When the contract rate is above the market rate, a bond sells at a discount.

• 1. True
  2. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The carrying (book) value of a bond at the time it is issued is always equal to its par value.

• 1. True
  2. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The carrying (book) value of a bond payable is the par value of the bonds plus any discount or minus any premium.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of

$473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of

$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $1,634.69.

True

• 1. False

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of

$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is

$25,000.

True

• 1. False

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A premium reduces the interest expense of a bond over its life.

• 1. True
  2. False

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A discount reduces the interest expense of a bond over its life.

• 1. True
  2. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The market value (issue price) of a bond is equal to the present value of all future cash payments provided by the bond.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Premium on Bonds Payable is an adjunct liability account, as it increases the carrying value of the bond.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking AICPA: BB Industry; FN Reporting

1. When the contract rate of a bond is greater than the market rate on the date of issuance, the bond sells at a discount.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

True

• 1. False

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

True

• 1. False

Learning Objective: 14-P6 Appendix 14B-Compute and record amortization of a bond premium using the effective interest method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

True

• 1. False

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

True

• 1. False

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

True

• 1. False

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Sinking fund bonds:

• 1. Require equal payments of both principal and interest over the life of the bond issue.
  2. Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
  3. Decline in value over time.
  4. Are bearer bonds.
  5. Are registered bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

Sinking fund bonds.

• 1. Callable bonds.
  2. Convertible bonds.
  3. Serial bonds.
  4. Junk bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A bond traded at 102½ means that:

• 1. The market rate of interest is 2½% above the contract rate.
  2. The bonds were retired at $1,025 each.
  3. The bond traded at 102.5% of its par value.
  4. The bond pays 2.5% interest.
  5. The market rate of interest is 2.5%.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Secured bonds:

• 1. Are backed by the issuer's bank.
  2. Are called debentures.
  3. Are the same as sinking fund bonds.
  4. Have specific assets of the issuing company pledged as collateral.
  5. Are subordinated to those of other unsecured liabilities.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:

Serial bonds.

• 1. Coupon bonds.
  2. Registered bonds.
  3. Callable bonds.
  4. Convertible bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

Coupon bonds.

• 1. Registered bonds.
  2. Callable bonds.
  3. Bearer bonds.
  4. Serial bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n):

Debenture.

• 1. Installment note.
  2. Bond indenture.
  3. Mortgage contract.
  4. Mortgage.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:

Registered bonds.

• 1. Serial bonds.
  2. Bearer bonds.
  3. Callable bonds.
  4. Sinking fund bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A contract pledging title to assets as security for a note or bond is known as a(an):

• 1. Mortgage.
  2. Lease.
  3. Sinking fund.
  4. Indenture.
  5. Equity.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Communication

AICPA: BB Legal; FN Decision Making

1. Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

Investment notes.

• 1. Debentures.
  2. Indentures.
  3. Installment notes.
  4. Discounted notes.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The carrying value of a long-term note payable is computed as:

• 1. The present value of all remaining interest payments, discounted using the current market rate of interest.

The future value of all remaining payments, using the market rate of interest.

• 1. The face value of the long-term note less the total of all future interest payments.
  2. The face value of the long-term note plus the total of all future interest payments.
  3. The present value of all remaining payments, discounted using the market rate of interest at the time of issuance.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The carrying value of bonds at maturity always equals:

• 1. the amount of cash originally received in exchange for the bonds. B) $0.

1. the amount of discount or premium.
2. the amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.

the par value of the bond.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan (rounded) is:

A) $25,195. B) $51,542. C) $20,000. D) $7,761. E) $15,876.

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an annuity factor at 8% for 5 years is 3.9927.The present value of a single sum at 8% for 5 years is .6806. Each annual payment equals $75,000. The present value of the note is:

A) $299,452.50. B) $110,196.89. C) $56,352.84. D) $375,000.00 E) $18,784.28.

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The present value of an annuity factor for 6 years at 7% is 4.7665.The present value of a single sum factor for 6 years at 7% is 0.6663. The annual annuity payments equal:

A) $8,391.90.

B) $40,000.00.

C) $60,033.02. D) $190,660.00. E) $26,652.00.

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330.The present value of a single sum factor for 7 years at 9% is 0.5470. The present value of the loan is:

A) $4,923. B) $63,000. C) $9,000. D) $45,297. E) $16,453.

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A pension plan:

• 1. Can be underfunded if the plan assets are more than the accumulated benefit obligation.
  2. Is the same as Other Postretirement Benefits.
  3. Is always funded fully by employers.
  4. Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Can be a defined benefit plan or an undefined benefit plan.

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

All of the following statements regarding leases are true except:

• 1. For a capital lease the lessee records the leased item as its own asset.
  2. For an operating lease the lessee reports the lease payments as rental expense.
  3. For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.

Capital leases create a long-term liability on the balance sheet, but operating leases do not.

• 1. Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.

Learning Objective: 14-C3 Appendix 14C-Describe accounting for leases and pensions. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

A disadvantage of bond financing is:

• 1. Bonds do not affect owners' control.
  2. Bonds can increase return on equity.
  3. Interest on bonds is tax deductible.
  4. Bonds pay periodic interest and the repayment of par value at maturity.
  5. It allows firms to trade on the equity.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

An advantage of bonds is:

• 1. Bond payments can be burdensome when income and cash flow are low.
  2. Bonds require payment of par value at maturity.
  3. Bonds require payment of periodic interest.
  4. Bonds can decrease return on equity.
  5. Bonds do not affect owner control.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Which of the following statements is true?

• 1. Interest on bonds is not tax deductible.
  2. Dividends to stockholders are tax deductible.
  3. Interest on bonds is tax deductible.
  4. Bonds do not have to be repaid.
  5. Bonds always increase return on equity.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A bondholder that owns a $1,000, 10%, 10-year bond has:

• 1. The right to receive $10,000 at maturity.
  2. Ownership rights in the issuing company.
  3. The right to receive dividends of $1,000 per year.
  4. The right to receive $10 per year until maturity.
  5. The right to receive $1,000 at maturity.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Collateral agreements for a note or bond can:

• 1. Increase the risk of loss in comparison with unsecured debt.
  2. Have no effect on risk.
  3. Increase total cost for the borrower.
  4. Reduce the risk of loss in comparison with unsecured debt.
  5. Reduce the issuer's assets.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The party that has the right to exercise a call option on callable bonds is:

• 1. The bondholder.
  2. The bond indenture.
  3. The bond trustee.
  4. The bond issuer.
  5. The bond underwriter.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Which of the following accurately describes a debenture?

• 1. A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.

A bond with specific assets pledged as collateral.

• 1. A type of bond which is not collateralized but backed only by the issuer's general credit standing.

A type of bond issued in the names and addresses of the bondholders.

• 1. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A company's total liabilities divided by its total stockholders' equity is called the:

• 1. Return on total assets ratio.
  2. Equity ratio.
  3. Pledged assets to secured liabilities ratio.
  4. Times secured liabilities earned ratio.
  5. Debt-to-equity ratio.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The debt-to-equity ratio:

• 1. Is not relevant to secured creditors.
  2. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
  3. Can always be calculated from information provided in a company's income statement.
  4. Must be calculated from the market values of assets and liabilities.
  5. Is a means of assessing the risk of a company's financing structure.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of

$15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):

A) 1.80 B) 0.56 C) 1.25 D) 0.80 E) 0.44

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Analyze

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.

• 1. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
  2. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
  3. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
  4. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Analyze

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of

$16,000,000 and stockholders' equity of $26,000,000. Management is considering using

$3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?

Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.

• 1. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
  2. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
  3. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
  4. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Analyze

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

A bond is issued at par value when:

• 1. Straight line amortization is used by the company.
  2. The bond pays no interest.
  3. The bond is callable.
  4. The bond is not between interest payment dates.
  5. The market rate of interest is the same as the contract rate of interest.

Learning Objective: 14-A2 Assess debt features and their implications.; 14-P1 Prepare entries to record bond issuance and interest expense.

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

When a bond sells at a premium:

• 1. The contract rate is below the market rate.
  2. The bond pays no interest.
  3. The contract rate is above the market rate.
  4. It means that the bond is a zero coupon bond.
  5. The contract rate is equal to the market rate.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A bond sells at a discount when the:

• 1. Contract rate is equal to the market rate.
  2. Bond pays interest only once a year.
  3. Contract rate is above the market rate.
  4. Contract rate is below the market rate.
  5. Bond has a short-term life.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

A) $375,000. B) $67,500. C) $33,750. D) $60,000. E) $30,000.

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

No entry is needed, since no interest is paid until the bond is due.

• 1. Debit Bond Interest Expense $22,000; credit Cash $22,000.
  2. Debit Bond Interest Payable $22,000; credit Cash $22,000.
  3. Debit Bond Interest Expense $550,000; credit Cash $550,000.
  4. Debit Bond Interest Expense $44,000; credit Cash $44,000.

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

Debit Cash $2,000,000; credit Bonds Payable $2,000,000.

• 1. Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
  2. Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
  3. Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable

$2,000,000.

• 1. Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable

$135,903.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of

$10,087 every six months.After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

A) $3,780,000.

B) $3,782,437.

C) $3,340,063.

D) $3,217,563.

E) $3,902,500.

Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense.; 14-P2 Compute and record amortization of a bond discount using the straight-line method.

Bloom's: Apply

AACSB: Analytical Thinking AICPA: BB Industry; FN Reporting

1. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of

$10,087 every six months.

The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

A) $224,826. B) $245,000. C) $132,500. D) $225,000. E) $265,174.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,087 every six months. The life of these bonds is:

30 years. B) 26.5 years. C) 35 years. D) 32 years E) 15 years.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Amortizing a bond discount:

• 1. Decreases the Bonds Payable account.
  2. Increases the market value of the Bonds Payable.
  3. Increases cash flows from the bond.
  4. Allocates a portion of the total discount to interest expense each interest period.
  5. Decreases interest expense each period.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The Discount on Bonds Payable account is:

• 1. A contra expense.
  2. A contra liability.
  3. A contra equity.
  4. A liability.
  5. An expense.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A discount on bonds payable:

• 1. Is not allowed in many states to protect creditors.
  2. Increases the Bond Payable account.
  3. Occurs when a company issues bonds with a contract rate more than the market rate.
  4. Occurs when a company issues bonds with a contract rate less than the market rate.
  5. Decreases the total bond interest expense.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Debit Bond Interest Expense $14,000; credit Cash $14,000.

• 1. Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.

Debit Bond Interest Expense $28,000; credit Cash $28,000.

• 1. Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash

$14,200.

• 1. Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash

$14,000.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

A) $400,000. B) $396,200. C) $399,800. D) $400,200. E) $395,800.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is:

A) $395,800. B) $400,000. C) $399,800. D) $396,200. E) $396,400.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 10-year, 7% bonds with a par value of $100,000. The company received

$96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

A) $7,347.40. B) $3,500.00. C) $3,673.70. D) $7,000.00. E) $3,326.00.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The effective interest amortization method:

• 1. Allocates bond interest expense over the bond's life using a constant interest rate.
  2. Allocates bond interest expense over the bond's life using a changing interest rate.
  3. Allocates bond interest expense using the current market rate for each interest period.
  4. Allocates a decreasing amount of interest over the life of a discounted bond.
  5. Is not allowed by the FASB.

Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of a bond discount using the effective interest method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

A) $3,673.01. B) $3,705.30. C) $7,000.00. D) $7,346.03. E) $3,500.00.

Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of a bond discount using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,946.80 cash for the bonds. Using the effective interest method, the amount of interest expense for the second semiannual interest period is:

A) $3,679.49. B) $7,000.00. C) $3,673.01. D) $7,346.03. E) $3,500.00.

Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of a bond discount using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The market value (price) of a bond is equal to:

• 1. The present value of the principal for an interest-bearing bond.
  2. The future value of all future interest payments provided by a bond.
  3. The present value of all future cash payments provided by a bond.
  4. The future value of all future cash payments provided by a bond.
  5. The present value of all future interest payments provided by a bond.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The Premium on Bonds Payable account is a(n):

• 1. Contra asset account.
  2. Contra revenue account.
  3. Adjunct liability account.
  4. Equity account.
  5. Revenue account.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Remember

AACSB: Analytical Thinking AICPA: BB Industry; FN Reporting

1. Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

Adonis must pay $206,948 at maturity plus 20 interest payments of $8,000 each.

• 1. Adonis must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
  2. Adonis must pay $200,000 at maturity and no interest payments.
  3. Adonis must pay $206,948 at maturity and no interest payments.
  4. Adonis must pay $200,000 at maturity plus 20 interest payments of $8,000 each.

Learning Objective: 14-A1 Compare bond financing with stock financing.; 14-P3 Compute and record amortization of a bond premium using the straight-line method.

Bloom's: Understand AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a:

Credit to Discount on Bonds Payable.

• 1. Credit to Premium on Bonds Payable.
  2. Credit to Interest Income.
  3. Debit to Discount on Bonds Payable.
  4. Debit to Premium on Bonds Payable.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

If an issuer sells bonds at a premium:

• 1. The carrying value of the bond stays constant over time.
  2. The carrying value increases from the par value to the issue price over the bond's term.
  3. The carrying value decreases from the par value to the issue price over the bond's term.
  4. The carrying value decreases from the issue price to the par value over the bond's term.
  5. The carrying value increases from the issue price to the par value over the bond's term.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issues 9%, 5-year bonds with a par value of $100,000 on January 1 at a price of

$106,160, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

A) $4,000. B) $4,500. C) $9,000. D) $8,000. E) $0.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

A) $3,200. B) $1,400. C) $0. D) $1,600. E) $2,800.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

A) $6,633.70. B) $7,000.00. C) $3,500.00. D) $3,289.50. E) $3,613,70.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A) $7,000.00. B) $1,750.00. C) $3,318.41. D) $6,573.90. E) $3,500.00.

Learning Objective: 14-P6 Appendix 14B-Compute and record amortization of a bond premium using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company may retire bonds by all but which of the following means?

• 1. Paying them off at maturity.
  2. The holders converting them to stock.
  3. Purchasing the bonds on the open market.
  4. Paying all future interest and cancelling the debt.
  5. Exercising a call option.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Bonds that give the issuer an option of retiring them before they mature are:

• 1. Registered bonds.
  2. Sinking fund bonds.
  3. Serial bonds.
  4. Callable bonds.
  5. Debentures.

Learning Objective: 14-A2 Assess debt features and their implications.; 14-P4 Record the retirement of bonds. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?

A) $1,500 loss. B) $3,000 loss. C) $3,000 gain.

1. $0 gain or loss. E) $1,500 gain.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of

$97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

A) $2,700 loss. B) $2,300 loss. C) $2,300 gain. D) $5,000 loss. E) $2,700 gain.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company has bonds outstanding with a par value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the gain or loss on this retirement is:

A) $1,000 loss. B) $3,700 gain. C) $2,700 gain. D) $1,000 gain. E) $2,700 loss.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of

$203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:

A) $1,000 loss. B) $3,000 gain. C) $2,000 loss. D) $2,000 gain. E) $1,000 gain.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:

Credit to Gain on Bond Retirement.

• 1. Credit to Bonds Payable.
  2. Debit to Premium on Bonds.
  3. Debit to Discount on Bonds.
  4. Credit to Premium on Bonds.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:

A) $10,000 loss. B) $22,000 gain. C) $0.

D) $10,000 gain. E) $22,000 loss.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The present value of a single sum factor for 3 years at 6% is 0.8396. The payment each July 31 will be:

A) $80,190,00.

B) $10,000.00.

C) $10,400.00.

D) $11,223.34.

E) $1,223.34.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the issuance of the note?

Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.

• 1. Debit Cash $37,258; credit Notes Payable $37,258.
  2. Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.
  3. Debit Cash $250,000; credit Notes Payable $250,000.
  4. Debit Notes Payable $250,000; credit Cash $250,000.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?

A) $37,258 B) $20,000 C) $232,742 D) $25,000 E) $17,258

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principal will be included in the first annual payment?

A) $17,258 B) $232,742 C) $20,000 D) $37,258 E) $25,000

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

Debit Interest Expense $20,000; debit Interest Payable $17,258; credit Cash $37,258.

• 1. Debit Interest Expense $20,000; credit Cash $20,000.
  2. Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
  3. Debit Interest Expense $20,000; debit Notes Payable $17,258; credit Cash $37,258.
  4. Debit Interest Expense $37,258; credit Cash $37,258.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.

• 1. Debit Notes Payable $11,250; credit Cash $11,250.
  2. Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
  3. Debit Notes Payable $32,136; credit Cash $32,136.
  4. Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:

Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

• 1. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
  2. Debit Notes Payable $14,238; credit Cash $14,238.
  3. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
  4. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is:

Debit Interest Expense $6,493; debit Notes Payable $7,745; credit Cash $14,238.

• 1. Debit Notes Payable $14,238; credit Cash $14,238.
  2. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
  3. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
  4. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.

Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond is:
   1. Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable

$312,177.

• 1. Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable

$300,000.

Debit Cash $312,177; credit Bonds Payable $312,177.

• 1. Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
  2. Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable

$300,000.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using straight-line amortization is:
   1. Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
   2. Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.
   3. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
   4. Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.

Debit Interest Payable $13,500; credit Cash $13,500.00.

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:
   1. Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
   2. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

Debit Interest Payable $13,500; credit Cash $13,500.00.

• 1. Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00.
  2. Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash

$13,500.00.

Learning Objective: 14-P6 Appendix 14B-Compute and record amortization of a bond premium using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors:

A) $1,085,308 B) $658,792 C) $1,341,208 D) $1,000,000 E) $789,244

Learning Objective: 14-P3 Compute and record amortization of a bond premium using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Sharmer Company issues 5%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following factors:

A) $1,213,255 B) $957,355 C) $1,000,000 D) $786,745 E) $1,250,000

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.

• 1. Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable

$400,000.

Debit Cash $383,793; credit Bonds Payable $383,793.

• 1. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable

$400,000.

• 1. Debit Cash $400,000; credit Discount on Bonds Payable $16,207; credit Bonds Payable

$416,207.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:
   1. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash

$14,000.00.

Debit Interest Expense $14,000.00; credit Cash $14,000.00.

• 1. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
  2. Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash

$14,000.00.

• 1. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash

$14,000.00.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

Debit Interest Payable $14,000.00; credit Cash $14,000.00.

• 1. Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash

$14,000.00.

• 1. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash

$14,000.00.

• 1. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash

$14,000.00.

• 1. Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash

$14,000.00.

Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of a bond discount using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30 and December 31. The market rate is 5%. Using the present value factors below, the issue (selling) price of the bonds is:

n= i=

Present Value of an

Annuity Present value of $1

3 4.0 % 2.7751 0.8890

6 2.0 % 5.6014 0.8880

3 5.0 % 2.7232 0.8638

6 2.5 % 5.5081 0.8623

A) $172,460. B) $194,492. C) $22,032. D) $205,607. E) $200,000.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:
   1. Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash

$21,000.

• 1. Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash

$15,000.

Debit Interest Expense $21,000; credit Cash $21,000.

• 1. Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash

$21,000.

Debit Interest Payable $21,000; credit Cash $21,000.

Learning Objective: 14-P2 Compute and record amortization of a bond discount using the straight-line method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the second interest payment using the effective interest method of amortization is:
   1. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash

$14,000.00.

• 1. Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash

$14,000.00.

Debit Interest Payable $14,000.00; credit Cash $14,000.00.

• 1. Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash

$14,000.00.

• 1. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash

$14,000.00.

Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of a bond discount using the effective interest method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are true except:

Accounting for bonds and notes under U.S. GAAP and IFRS is similar.

• 1. Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
  2. Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital leases.

The criteria for identifying a lease as a capital lease are more general under IFRS.

• 1. Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Understand

AACSB: Analytical Thinking AICPA: BB Global; FN Reporting

1. On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.

• 1. Debit to Bonds Payable $310,000.
  2. Debit to Premium on Bonds Payable $10,000.
  3. Credit to Common Stock $250,000.
  4. Debit to Bonds Payable $300,000.

Learning Objective: 14-P4 Record the retirement of bonds. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables:

What is the issue (selling) price of the bond?

A) $402,362 B) $300,010 C) $420,000 D) $308,107 E) $325,592

Learning Objective: 14-C2 Appendix 14A-Explain and compute bond pricing. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

SHORT ANSWER QUESTIONS

1. Match each of the following terms with the appropriate definitions.
2. Discount on bonds
3. Callable bonds
4. Annuity
5. Debt-to-equity ratio
6. Sinking fund bonds
7. Secured bonds
8. Carrying value
9. Premium on bonds
10. Bond indenture
11. Contract rate

Learning Objective: 14-A1 14-A2 14-P3 14-P1

Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Measurement

1. Match each of the following terms with the appropriate definitions.
2. Term bonds
3. Coupon bonds
4. Market rate
5. Bond indenture
6. Convertible bonds
7. Bearer bonds
8. Installment note
9. Unsecured bonds
10. Serial bonds
11. Effective interest rate method

Learning Objective: 14-A1 14-A2 14-C114-P1 14-P5 Bloom's: Remember

AACSB: Communication

AICPA: BB: Industry; FN: Measurement

ESSAY QUESTIONS

What is a bond? Identify and discuss the different characteristics and features bonds may possess.

Learning Objective: 14-A1 14-A2 Bloom's: Understand

AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

Describe installment notes and the nature of the typical payment pattern.

Learning Objective: 14-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Decision Making

SHORT ANSWER QUESTIONS

1. On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest at 9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428. Explain.

Learning Objective: 14-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Decision Making

Explain the present value concept as it applies to long-term liabilities.

Learning Objective: 14-C2

Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Decision Making

93

What is a lease? Explain the difference between an operating lease and a capital lease.

Learning Objective: 14-C3 Bloom's: Understand AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

Identify the advantages and disadvantages of bond financing.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Understand

AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

ESSAY QUESTIONS

1. A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under Plan #2, 50,000 additional shares of common stock would be issued at $20 per share. The corporation currently has 300,000 shares of stock outstanding, and it expects to earn $700,000 per year before bond interest and income taxes. The net income and return on investment for both plans is shown below:

Comment on the relative effects of each alternative, including when one form of financing is preferred to another.

Learning Objective: 14-A1 14-A3

Bloom's: Analyze AACSB: Analytic

AICPA: BB: Critical Thinking;; FN: Decision Making

SHORT ANSWER QUESTIONS

1. Describe the journal entries required to record the issuance of bonds at par and the payment of bond interest.

Learning Objective: 14-P1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Describe the journal entries required to record the issuance of bonds at a premium and the payment of bond interest, including any applicable amortization.

Learning Objective: 14-P3 Bloom's: Understand

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond interest, including any applicable amortization.

Learning Objective: 14-P2 Bloom's: Understand

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Explain the amortization of a bond discount. Identify and describe the amortization methods available.

Learning Objective: 14-P2 14-P5

Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

How are bond issue prices determined?

Learning Objective: 14-P2 14-P3

Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Explain the amortization of a bond premium. Identify and describe the amortization methods available.

Learning Objective: 14-P3 14-P6

Bloom's: Understand AACSB: Communication

AICPA: BB: Industry; FN: Measurement

What are methods that a company may use to retire its bonds?

Learning Objective: 14-P4 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Describe the recording procedures for the issuance, retirement, and paying of interest for installment notes.

Learning Objective: 14-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Zhang Company has a loan agreement that provides it with cash today, and the company must pay

$25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4 periods at 6% is 0.7921. What is the amount of cash that Zhang Company receives today?

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Wasp Corporation has a loan agreement that provides it with cash today, and the company must pay

$25,000 one year from today, $15,000 two years from today, and $5,000 three years from today. Wasp agrees to pay 10% interest. The following are factors from a present value table:

What is the amount of cash that Wasp receives today?

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting one year from now. The annual interest rate is 6%. The present value of an annuity factor for 5 periods at 6% is 4.2124. What is the present value of these five payments?

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, the Rodrigues Corporation leased some equipment on a 2-year lease, paying $15,000 per year each December 31. The lease is considered to be an operating lease. Prepare the general journal entry to record the first lease payment on December 31.

Learning Objective: 14-C3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, Haymark Corporation leased a truck, agreeing to pay $15,252 every December 31 for the six-year life of the lease. The present value of the lease payments, at 6% interest, is $75,000. The lease is considered a capital lease.
2. Prepare the general journal entry to record the acquisition of the truck with the capital lease.
3. Prepare the general journal entry to record the first lease payment on December 31.
4. Record straight-line depreciation on the truck on December 31, assuming a 6-year life and no salvage value.

Learning Objective: 14-C3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Sharma Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000. Calculate the company's debt-to-equity ratio.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Risk Analysis

1. On July 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par. The bonds pay interest June 30 and December 31. What amount of bond interest expense should the company report on its current year income statement?

Learning Objective: 14-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1. Interest is payable each June 30 and December 31.
2. Prepare the general journal entry to record the issuance of the bonds on January 1.
3. Prepare the general journal entry to record the first interest payment on June 30.

Learning Objective: 14-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 9%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. On the first semiannual interest date, what amount of cash should be paid to the holders of these bonds for interest?

Learning Objective: 14-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

Learning Objective: 14-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10-year, 9% bonds, with a par value of $500,000 when the market rate was 9.5%. The issuer received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the bond issuance.

Learning Objective: 14-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.(Round amounts to the nearest whole dollar)

Learning Objective: 14-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual interest payments. On the issue date, the annual market rate of interest is 8%. Compute the issue (selling) price of the bonds. The following information is taken from present value tables:

Present value of an annuity for 10 periods at 3% 8.5302 Present value of an annuity for 10 periods at 4% 8.1109 Present value of 1 due in 10 periods at 3%................... 0.7441

Present value of 1 due in 10 periods at 4% 0.6756

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The annual market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. The issuer uses the effective interest method for amortization. On the first semiannual interest date, what amount of discount should the issuer amortize?

Learning Objective: 14-P5

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, at a selling price of $885,295 when the annual market interest rate was 12%. The company uses the effective interest amortization method. Interest is paid semiannually each June 30 and December 31.
2. Prepare an amortization table for the first two payment periods using the format shown below:

1. Prepare the journal entry to record the first semiannual interest payment.

Learning Objective: 14-P5

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the effective interest method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

Learning Objective: 14-P5

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the issuance of the bond.

Learning Objective: 14-P2 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the holders an annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment, assuming it uses the straight-line method of amortization.

Learning Objective: 14-P3 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually each June 30 and December 31. On the issue date, the annual market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually each June 30 and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Learning Objective: 14-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issues 6%, 10 year $300,000 par value bonds that pay semiannual interest each June 30 and December 31. The bonds sell at par value. Prepare the general journal entry to record the issuance of the bonds on January 1.

Learning Objective: 14-P1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

110

1. On April 1, a company issues 6%, 10-year, $600,000 par value bonds that pay interest semiannually each March 31 and September 30. The bonds sold at $592,000. The company uses the straight-line method of amortizing bond discounts. Prepare the general journal entry to record the first interest payment on September 30.

Learning Objective: 14-P3

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Strider Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, Year 1. Interest is to be paid semiannually on each June 30 and December 31. The bonds are issued at

$5,368,035 cash when the market rate for this bond is 12%.

1. Prepare the general journal entry to record the issuance of the bonds on January 1, year 1.
2. Show how the bonds would be reported on Strider's balance sheet at January 1, Year 1.
3. Assume that Strider uses the effective interest method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1.
4. Assume instead that Strider uses the straight-line method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1.

Learning Objective: 14-P6

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The bonds pay interest each July 1 and January 1. The bonds were sold for $817,860 cash, based on an annual market rate of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

Learning Objective: 14-P6

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 based on an annual market rate of 8%. The company uses the effective interest method of amortization.
2. Prepare an amortization table for the first two semiannual payment periods using the format shown below.

1. Prepare the journal entry to record the first semiannual interest payment.

Learning Objective: 14-P6

Bloom's: Apply AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company holds $150,000 par value of bonds with a carrying value of $147,950. The company calls the bonds at $151,000. Prepare the journal entry to record the retirement of the bonds.

Learning Objective: 14-P4 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company has 10%, 20-year bonds outstanding with a par value of $500,000. The company calls the bonds at 96 when the unamortized discount is $24,500. Calculate the gain or loss on the retirement of these bonds.

Learning Objective: 14-P4 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and a carrying value of $475,000. The company calls the bonds at $482,000. Calculate the gain or loss on the retirement of these bonds.

Learning Objective: 14-P4 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current year's interest date, after the bond interest was paid and after 40% of the total premium had been amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds on January 1 of the current year.

Learning Objective: 14-P4 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due on December 31, Year 1.
2. Prepare the company's journal entry to record the note's issuance.
3. Prepare the journal entries to record the first and second installment payments.

Learning Objective: 14-C1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the journal entries to record the first and second installment payments.

Learning Objective: Bloom's:

AACSB: AICPA:

1. On January 1, Year 1 Cleaver Company borrowed $85,000 cash by signing a 7% installment note that is to be repaid with 4 annual year-end payments of $25,094, the first of which is due on December 31, Year 1.
2. Prepare the company's journal entry to record the note's issuance.
3. Prepare the journal entries to record the first installment payment.

Learning Objective: 14-C1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. A company purchased two new delivery vans for a total of $250,000 on January 1, Year 1. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December 31, Year 1. Each payment includes interest on the unpaid balance plus principal.
2. Prepare a note amortization table using the format below:

1. Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the second annual installment payment on December 31, Year 2.

Learning Objective: 14-C1 Bloom's: Apply

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

bonds have specific assets of the issuing company pledged as collateral.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

________ bonds are bonds that are scheduled for maturity on one specified date.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

1. bonds are bonds that mature at more than one date, often in a series, and thus are usually repaid over a number of periods.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

1. bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

Bonds payable to whoever holds them are called ________ bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

1. ________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

1. ________ bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication

AICPA: BB: Legal; FN: Decision Making

1. The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ________.

Learning Objective: 14-A1 Compare bond financing with stock financing. Bloom's: Remember

AACSB: Communication

AICPA: BB: Legal; FN: Decision Making

An ________ is an obligation requiring a series of payments to the lender.

Learning Objective: 14-C1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. When applying equal total payments to a note, with each payment the amount applied to the note principal ________ while the interest expense for the note ________.

Learning Objective: 14-C1 Bloom's: Understand AACSB: Analytic

AICPA: BB: Industry; FN: Measurement

1. The ________ concept is the idea that cash paid (or received) in the future has less value now than the same amount of cash paid (or received) today.

Learning Objective: 14-C2

Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

An ________ is a series of equal payments at equal time intervals.

Learning Objective: 14-C2 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. A ________ is a contractual agreement between an employer and its employees for the employer to provide benefits (payments) to employees after they retire.

Learning Objective: 14-C3 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. leases are short-term or cancelable leases in which the lessor retains the risks and rewards of ownership.

Learning Objective: 14-C3 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. leases are long-term or noncancelable leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee.

Learning Objective: 14-C3 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. Return on equity increases when the expected rate of return from the acquired assets is

________than the rate of interest on the bonds used to finance the asset acquisition.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Understand

AACSB: Analytic

AICPA: BB: Industry; FN: Risk Analysis

Bonds issued in the names and addresses of their holders are bonds.

Learning Objective: 14-A2 Assess debt features and their implications. Bloom's: Remember

AACSB: Communication AICPA: BB: Legal

The ________ ratio is used to assess the risk of a company's financing structure.

Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use. Bloom's: Understand

AACSB: Analytic

AICPA: BB: Industry; FN: Risk Analysis

1. The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level is the ________ of interest.

Learning Objective: 14-P1 Bloom's: Remember AACSB: Communication

AICPA: BB: Industry; FN: Decision Making

1. The ________ method of amortizing a bond discount allocates an equal portion of the total bond interest expense to each interest period.

Learning Objective: 14-P2 Bloom's: Remember

AACSB: Analytic

AICPA: BB: Industry; FN: Measurement