Exam 9: Long-Term Liabilities

On January 1, 2013, a company buys equipment for $666,633 with a 14% installment note to pay off the debt with 6 semiannual payments over three years. The payments are $139,857. Required:

When the yield rate of interest is greater than the stated rate, then the bond will be issued at a discount.

Refer to King Cotton Company. Describe briefly how each of the following long-term liabilities arises; i.e., what kind of transaction produces the resulting long-term liability? You may want to include the appropriate journal entry (ignore amounts)in your description.

An advantage of financing with debt rather than stock is that interest expense is ____________________ for tax purposes.

Match these terms with their definitions. a.Bond i.Lessor b.Contract, coupon, stated rate j.Leverage c.Discount k.Long-term debt d.Effective interest rate method l.Market rate, yield e.Face value, par value, principal m.Maturity f.Interest amortization n.Premium g.Lease o.Straight-line method h.Lessee -The party who has the use of a leased asset.

Match these terms with their definitions. a. Callable bonds f. Mortgage bonds b. Capital lease g. Notes payable c. Convertible bonds h. Operating lease d. Debenture bonds i. Secured bonds -Give the borrower the option to pay off the debt prior to maturity.

In an operating lease, the lessor retains the risks and obligations of ownership.

Match these terms with their definitions. a.Bond i.Lessor b.Contract, coupon, stated rate j.Leverage c.Discount k.Long-term debt d.Effective interest rate method l.Market rate, yield e.Face value, par value, principal m.Maturity f.Interest amortization n.Premium g.Lease o.Straight-line method h.Lessee -The process used to determine the amount of interest to be recorded in each of the periods the liability is outstanding.

Under the effective interest method of amortization, the interest expense for each period is the carrying value times the ____________________.

The current portion of long-term debt would appear on the balance sheet as

Obligations that extend beyond one year are referred to as ____________________.

The Premium on Bonds Payable account is shown on the balance sheet as

The two promises made by a bond issuer to the purchaser of the bond are to pay periodic interest and to ___________________.

Which of the following accounts would not appear on the balance sheet of a lessee company recording a capital lease?

A bond issuing at 101.25 means that the bond

Bonds are issued at a ____________________ when the issue price exceeds the face value.

-Refer to King Cotton Company. Which one of the liabilities shown in the balance sheets is used in the calculation of the debt-to-equity ratio? If we can assume that the stockholders' equity total remained relatively constant for the two years, how would the ratio change (increase/decrease)from 2012 to 2013? What would this say about the company's financial position?

In 2013, Karaoke Tunes issued $200,000 of bonds for $190,200. If the stated rate of interest was 6.5% and the market rate of interest was 7.1%, how would the company calculate the discount at the time the bonds were issued using the effective interest method?

Which of the following statements regarding bonds payable is true?

Refer to Kalahari Limited. The semiannual cash payment on the bonds is