Exam 11: Long-Term Liabilities

Lenz Corporation issued ten-year,8 percent bonds payable in 2012 at a premium.During 2012,the company's accountant failed to amortize any of the bond premium.The omission of the premium amortization will

Rowan Corporation issued ten-year term bonds on January 1,2013,with a face value of $400,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $345,480 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The carrying value of the bonds payable on the December 31,2013,balance sheet date should be (rounded to the nearest dollar)

If the face interest rate at the date of bond issuance exceeds the market interest rate,the bond will probably be sold at a discount.

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the bond will probably be sold at a premium.

When the effective interest method of amortization is used for a bond premium,the amount of interest expense for an interest period is calculated by multiplying the

On December 31,2012,the balance sheet of Gamma Corporation reported bonds outstanding with a face value of $2,000,000 and a related unamortized premium of $60,000.Interest is payable semiannually on January 1 and July 1. a.Prepare an entry in journal form without explanations to record the retirement of bonds with a face value of $1,200,000 on January 1,2013,assuming the bonds were redeemed at a call price of 104. b.Prepare an entry in journal form without explanation on January 1,2013,to record the conversion of bonds with a face value of $800,000 into common stock.Each $1,000 bond is convertible into 30 shares of $20 par value common stock.

A bond issue of $50,000 with a carrying value of $49,000 is converted into $10 par value common stock at the rate of fifty shares for each $1,000 bond.The entry to record the conversion of bonds would be:

Under a capital lease,the lessee records both an asset and a liability.

Rowan Corporation issued ten-year term bonds on January 1,2013,with a face value of $400,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $345,480 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The entry to be recorded on December 31,2013,for the payment of interest (rounded to the nearest dollar)and the amortization of discount is:

Match each definition with the correct term below. a. A security that represents money that a corporation borrows from the investing public. b. A long-term debt secured by real property. c. Bonds that are issued in the name of the bondholder. d. The method of bond amortization that uses a constant interest rate each period to amortize the bond premium or discount. e. Bonds that do not require periodic interest payments but instead promise to pay a fixed amount at the maturity date. f. The excess of the face value over the issue price of a bond. g. A contract that requires a company to pay benefits to its employees after they retire. h. The excess of the issue price over the face value of a bond. i. A liability or an asset that results from using different methods to calculate income taxes on the income statement and income tax liability on the income tax return. j. The method of bond amortization that equalizes amortization of a bond discount or premium for each interest period over the life of the bond. -Straight-line method

Montgomery Corporation has a 7 percent,$300,000 bond issue that originally was issued five years ago.There are now ten years remaining on the bond issue,and the market interest rate is 12 percent.Interest is paid semi-annually.Calculate the current market value of the bond issue,using present value tables.

The total interest cost on seventy-eight,ten-year,6 percent,$1,000 bonds that are issued at 98 is

The higher the debt to equity ratio,the greater the financial risk the company is taking.

Rowan Corporation issued ten-year term bonds on January 1,2013,with a face value of $400,000.The face interest rate is 8 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $345,480 to yield an effective annual rate of 10 percent.The effective interest method of amortization is to be used.The entry on June 30,2013,to record the payment of interest and amortization of discount will be:

Failure to make interest payments on debt can force a company into bankruptcy.

Flint Corporation issues $1,000,000 of 30-year,8 percent bonds at 106.Interest is paid semi-annually,and the effective interest method is used for amortization.Assume that the market interest rate for similar investments is 7 percent and that the bonds are issued on an interest date. a.What amount was received for the bonds? b.How much interest is paid each interest period? c.How much bond interest expense is recorded on the first interest date (after the issue date)? d.What is the carrying value of the bonds after the first interest date (after the issue date)?

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Capital Stock.

When a monthly mortgage payment is made and recorded,the debit to Mortgage Payable represents the reduction in the principal balance.

Unamortized Bond Premium is subtracted from Bonds Payable on the balance sheet.

A ten-year bond has a face value of $10,000,a face interest rate of 11 percent,an unamortized bond premium of $400,and an effective interest rate of 10 percent.The bonds were issued on one of the semi-annual interest payment dates.The entry to record the bond interest expense on the first semi-annual interest payment date is: (assuming the effective interest method of amortization),