Exam 10: Long-Term Liabilities

Flagg Company issued $500,000 of bonds for $498,351, Interest is paid semiannually. The bond markets and the financial press are likely to state the bond issue price as

If an investor has the right to retire the bonds, they are referred to as callable.

The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.

Match the following bond and long-term liability related terms to the appropriate definition. -The process of transferring a portion of premium or discount to interest expense. This method transfers an amount resulting in a constant effective interest rate.

When the market rate of interest is less than the face rate, then the bond issue will be sold at a discount.

On January 1, 2012, the long-term liability section of Eden Company's balance sheet showed a balance of $35,000 in the bonds payable account. On December 31, 2012, the balance in that same account was $20,000. This change would appear on the statement of cash flows as

The amortization of bond discount increases the effective interest expense incurred each period for the issuer while amortization of bond premium decreases it.

A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2015. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate. REQUIRED: a Determine the effect on the accounting equation upon recording the issuance of the bonds. b Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31, 2015. Any premium or discount should be amortized using the effective interest rate method. c Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2016. d Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2016. Any premium or discount should be amortized using the effective interest rate method.

The accounting for leases is an excellent example of the differences in how U.S. and IFRS accounting standards are applied.

If Tanner Company becomes less creditworthy, the market price of its bonds will decline.

All liabilities that are not classified as current liabilities are classified as .

Callable bonds may be retired by the issuer before their specified due date.

On January 2, 2015, Lawn Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. What is the carrying value of the bonds at the end of ten years before the final maturity payment is made?

A friend of yours has asked you whether off-balance-sheet financing means that the amounts are immaterial and therefore are not reported. In a short paragraph, tell him what off-balance-sheet financing is and why firms engage in off-balance-sheet transactions?

Long­term liabilities are a component of the "capital structure" of a company.

Which of the following items should not appear in the long-term liability section of the balance sheet?

Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a premium, how will this component change as the bond approaches maturity?

If the market rate of interest is greater then the face rate, then the bonds are issued at an ________________________.

Discount on Bonds Payable is classified as a current liability.

The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a constant amount of interest expense from period to period.