Exam 10: Accounting for Long-Term Debt

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

The Spokane Company called in bonds at a price that was above the carrying value of the bond liability.Which of the following choices accurately reflects how this event will affect Spokane's financial statements?

Use the following to answer questions Weller Company issued bonds with a face value of $400,000,a 10% stated rate of interest,and a 10-year term.The bonds were issued on January 1,2016,and Weller uses the effective interest method of amortization.The market rate of interest on the date of issue was 8%.Interest is paid annually on December 31. -Assuming Weller issued the bonds for $431,940,the carrying value of the bonds on the December 31,2018 balance sheet would be closest to:

Baird Manufacturing Company issued $150,000 of 7%,5-year bonds for $144,000,on January 1,2016.Interest is payable on January 1 of each year.Baird uses the straight-line method of amortization.The first interest payment is to be made on January 1,2017. Required: a)Show the effects of the following events on the accounting equation. Event 1.The issuance of the bonds. Event 2.Accrual of interest at December 31,2016. Event 3.Amortization of discount at December 31,2016. Event 4.Payment of interest on January 1,2017. b)What is the carrying value of the bond on December 31,2016? c)What is the amount of interest paid in (1)2016? (2)2017? d)What is the amount of interest expense shown on the income statement in 2016?

The reason bonds are sometimes issued at a discount is:

Indicate whether each of the following statements about bonds payable is true or false. _____ a)Premium on Bonds Payable is recorded when bonds are issued at less than their face value. _____ b)Premium on Bonds Payable is a liability account. _____ c)The balance in the Discount on Bonds Payable account increases liabilities. _____ d)Discount on Bonds Payable is an expense account. _____ e)A discount on bonds payable occurs when the stated interest rate on the bonds is less than the market or effective interest.

Davis Corporation borrowed $50,000 on January 1,2016.The loan is for a ten-year period and has an annual interest rate of 9%.At the end of each year,Davis will make a payment of $7,791,which includes both principal and interest.The amount of the payment for 2016 that is reduction of principal is $3,587.

How are interest rates normally set for lines of credit?

On January 1,2016,Daniels Company issued bonds with a face value of $500,000,receiving $496,000 cash.These bonds were issued at a discount.

Denver Co.issued bonds with a face value of $100,000 and a stated interest rate of 8%.The bonds have a life of five years and were sold at 102 ½.If Denver amortizes discounts and premiums using the straight-line method,the amount of interest expense each full year would be:

Greenwood Company issued 150 $1,000,6% bonds that mature in ten years.Interest is paid annually.The bonds were sold at 103 ½,and Greenwood amortizes bond discounts and premiums using the straight-line method. Calculate the amount of annual interest expense for Greenwood Co.

Use the following to answer questions Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1,2016.The bonds carried a 5-year term and sold for 95.Victor uses the straight-line method of amortization.Interest is payable on December 31 of each year. -The carrying value of the bond liability on the December 31,2018 balance sheet was:

Gates,Inc.and Markham,Inc.each had the same financial position on January 1,2016.The following is a summary of each of their balance sheets as of January 1,2016: Gates is about to raise $200,000 in cash by issuing bonds.Markham is going to raise $200,000 on the same day by issuing common stock.Immediately after these transactions,which of the following statements will be correct?

Davis Corporation borrowed $50,000 on January 1,2016.The loan is for a ten-year period and has an annual interest rate of 9%.At the end of each year,Davis will make a payment of $7,791,which includes both principal and interest.With this loan,the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

Indicate whether each of the following statements about bonds payable is true or false. _____ a)A convertible bond may be converted into stock of the issuing company at the option of the bondholder. _____ b)Businesses issue bonds to banks to borrow large amounts of cash. _____ c)A debenture is an unsecured bond. _____ d)Callable bonds may be turned in for early retirement at the option of the bondholder. _____ e)The issuer of a bond receives cash when the bond is issued.

Use the following to answer questions Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1,2016.The bonds carried a 5-year term and sold for 95.Victor uses the straight-line method of amortization.Interest is payable on December 31 of each year. -The amount of interest expense appearing on the December 31,2018 income statement would be:

Williams Company issued $200,000 of callable bonds at face value on January 1,2016.The bonds carried a 2% call premium.If Williams calls the bonds,this event would

Eureka Company issued $100,000 in bonds payable on January 1,2016.The bonds were issued at face value and carried 5-year term to maturity.They had a 7% stated rate of interest that was payable in cash on January 1st of each year beginning January 1,2017.Based on this information,the amount of total liabilities appearing on the December 31,2016 balance sheet would be:

Describe the effect on the accounting equation of the issuance of $500,000,8% ten-year bonds at 103 ½.Use numerical amounts in your answer.

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 December 31,2016,Briand Co.paid cash for interest on bonds it had issued on January 1,2016 at 98,and amortized part of the discount on bonds.Indicate the effects of the payment of interest and amortization of the discount.