Exam 10: Accounting for Long-Term Liabilities

Mortgage contracts give the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

A company borrowed cash from the bank and signed a 6-year note at 7% annual interest.The present value for an annuity (series of payments)at 7% for 6 years is 4.7665.The present value of 1 (single sum)at 7% for 6 years is 0.6663.Each annual payment equals $8,400.The present value of the note is:

Mortgage bonds are backed only by the good faith and credit of the issuing company.

When the contract rate is above the market rate,a bond sells at a discount.

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the journal entry to record the first annual payment?

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the payment on the note on December 31,Year 2 is:

Interest on bonds is tax deductible.

The Discount on Bonds Payable account is:

Return on equity increases when the expected rate of return from the acquired assets is ________than the rate of interest on the bonds used to finance the asset acquisition.

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.If the company calls these bonds at a price of $95,000,the gain or loss on retirement is:

On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,087 every six months.After accruing interest at year end,the company's December 31,Year 1 balance sheet should reflect total liabilities associated with the bond issue (including interest)in the amount of:

A company issued 10-year,9% bonds,with a par value of $500,000 when the market rate was 9.5%.The issuer received $484,087 in cash proceeds.Prepare the issuer's journal entry to record the bond issuance.

Describe installment notes and the nature of the typical payment pattern.

A bond traded at 102½ means that:

A company issued 5-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $102,105 cash for the bonds.Using the effective interest method,the amount of recorded interest expense for the first semiannual interest period is:

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

A company issued 8%,15-year bonds with a par value of $550,000 that pay interest semiannually.The market rate on the date of issuance was 8%.The journal entry to record each semiannual interest payment is:

On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The carrying value of the bonds immediately after the first interest payment is:

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793. -The journal entry to record the first interest payment using the effective interest method of amortization is: