Exam 10: Accounting for Long-Term Debt

Jacobs Company issued bonds with $300,000 face value on January 1,2016.The bonds were issued at 102 and carried a 5-year term to maturity.They had a 9% stated rate of interest that was payable in cash on December 31st of each year.Jacobs uses the straight-line method of amortization.Based on this information alone,the recognition of interest expense on December 31,2016 would act to:

If a company has issued bonds at a premium,the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

The times interest earned ratio is usually calculated as the ratio of net income to interest expense.

Johansen Company issued a bond at a discount.Which of the following choices accurately reflects how the issue would affect June's financial statements?

When the stated interest rate of a bond is lower than the market interest rate,will the bond sell at a premium or at a discount?

Use the following to answer questions On January 1,2016,Pierce Corporation issued $25,000 in 8%,5-year bonds payable at 102.Interest payments are due each December 31.Potter uses the straight-line method of amortization. -Which of the following answers shows the effect of the bond issuance on 1/1/16?

Burton Corporation recorded the following in its general journal on 1/1/16: Which of the following answers correctly describes the transaction on 1/1/16?

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 borrowed $20,000 on a line-of-credit from City Bank.Show the effects of this transaction on Flagler's financial statements.

Indicate whether each of the following statements about bonds is true or false. _____ a)The carrying value of a bond increases over time if the bond was issued at a premium. _____ b)At the end of the term of the bonds,the carrying value of a bond issue is equal to the issue price. _____ c)If bonds are sold below face value,the difference between the issue price and the face value is called the bond discount. _____ d)The payment of interest is an operating activity on the statement of cash flows. _____ e)The issuance of bonds does not appear on the statement of cash flows.

Clayton Corporation made the following entry in its general journal on 12/31/16: Which of the following answers describes the above transaction?

If a company chooses to call some of its callable bonds before their maturity,generally it will have to pay an amount that is greater than the carrying value of the bonds.

Use the following to answer questions The Platte Corporation issues a 5-year note payable on January 1,2016 for $5,000.The interest rate is 5% and the annual payment of $1,156,due each December 31,includes both interest and principal. -Which of the following answers correctly shows the effect of the issuance of the note on Platte's financial statements?

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Which of the following describes the characteristics of a convertible bond?

Alexander Corporation issued 20-year bonds payable at a discount in 2016.Will Alexander's net income for 2016 be higher,lower,or the same as it would have been had the bonds been issued at face value? Why?

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

If a bond discount is amortized using the effective interest method,the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

On January 1,2016,Grimes Corporation issued $400,000 in 6%,10-year bonds payable at 104.Interest payments are due each year on December 31.Grimes uses the straight-line method of amortization on bond premium. Required: a)Prepare the journal entry to record issuing the bonds at a premium and the journal entry to record the first interest payment and amortization of the bond premium. b)Assuming Grimes Corporation called the bonds at a price of $411,000 on January 1,2020,prepare the journal entry to record this transaction.

Kier Company issued $200,000 in bonds on January 1,2016.The bonds were issued at face value and carried a 4-year term to maturity.They had a 6 ½% stated rate of interest that was payable in cash on December 31st.Based on this information alone,the amount of interest expense shown on the 12/31/2016 income statement and the cash flow from operating activities shown on the 12/31/2016 statement of cash flows would be:

Use the following to answer questions The Gordon Corporation issued $70,000 of 6%,5-year bonds on January 1,2016 at 98.The interest payments are due on December 31 each year.Gordon uses the straight-line method of amortization. -Which of the following answers shows the effect of the bond issuance on the financial statements?