Exam 10: Accounting for Long-Term Debt

San Jose Company issued five-year 8% bonds with a face value of $100,000,for $107,023.58 on January 1,2016 when the market (effective)rate of interest was 7%.The bonds pay annual interest each December 31.San Jose uses the effective interest method for amortization of premium or discount on bonds payable.(Round your answers to two decimal places. ) Required: a)What is the annual amount of cash that San Jose will pay to bondholders for interest? b)What amount of interest expense and premium amortization should San Jose recognize for 2016? What is the carrying amount of the liability on December 31,2016? c)What amount of interest expense and premium amortization should San Jose recognize for 2017? What is the carrying amount of the liability on December 31,2017? d)What is the total amount of interest that San Jose will record in interest expense over the life of the bond?

Bonds payable are usually classified on the balance sheet as:

Which of the following correctly describes an installment note?

Indicate whether each of the following statements regarding effective interest amortization is true or false. _____ a)The effective interest method of bond premium amortization matches interest expense with the declining carrying value of the bond. _____ b)Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization. _____ c)The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year. _____ d)Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest. _____ e)Effective interest amortization can only be used on bonds that pay interest annually.

Peak Enterprises issued bonds with a face value of $500,000,receiving cash of $508,000.To record this event,Bonds Payable should be credited for $500,000.

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

Use the following to answer questions On January 1,2016,The Hanover Corporation issued $70,500 of 8%,5-year bonds at 97.Hanover uses the straight-line method of bond discount amortization.The interest payments are due on December 31 each year. -The journal entry used to record the issuance of the bond and the receipt of cash would be:

Does the amortization of a bond premium increase,decrease,or not affect interest expense for an accounting period? Explain.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On January 1,2016,Flagler Corporation signed a contract with the City Bank for a line of credit that permitted Flagler to borrow up to $50,000.Indicate the effects of signing this contract.

Callable bonds may be:

If bonds with a face value of $200,000 are issued at 98,the amount of cash received from issuing the bonds is $204,082.

The carrying value of a bond issued at a premium:

Use the following to answer questions Wayne Company issued bonds with a face value of $600,000,a 6% stated rate of interest,and a 10-year term.The bonds were issued on January 1,2016,and Wayne uses the straight-line method of amortization.Interest is paid annually on December 31. -Assuming Wayne issued the bonds for 102½,the carrying value of the bonds on the December 31,2016 balance sheet would be:

Discuss the purpose of a sinking fund.

Bonds that mature at specified intervals throughout the life of the issuance are called:

If bonds are issued at a premium,the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

Chico Company borrowed $40,000 on a four-year,8% installment note.Chico will record the issuance of this note with the following entry:

Use the following to answer questions On January 1,2016,the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank.It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year.All borrowings and repayments are to take place on January 1 of each year. -Niagara records the first year's interest payment on December 31,2016.Centennial's prime rate is 4% for 2016.Which of the following answers shows the effect of this event on the financial statements?

For a long-term note payable,repaying a portion of principal along with interest payments is called loan amortization.

Use the following to answer questions Wayne Company issued bonds with a face value of $600,000,a 6% stated rate of interest,and a 10-year term.The bonds were issued on January 1,2016,and Wayne uses the straight-line method of amortization.Interest is paid annually on December 31. -Assuming Wayne issued the bond for 102½,the amount of interest expense appearing on the 2016 income statement would be: