Exam 10: Accounting for Long-Term Liabilities

Charger Company's most recent balance sheet reports total assets of $27,000,000,total liabilities of $15,000,000 and total equity of $12,000,000.The debt to equity ratio for the period is (rounded to two decimals):

On April 1,a company issues 6%,10-year,$600,000 par value bonds that pay interest semiannually each March 31 and September 30.The bonds sold at $592,000.The company uses the straight-line method of amortizing bond discounts.Prepare the general journal entry to record the first interest payment on September 30.

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

The debt-to-equity ratio is calculated by dividing stockholders' equity attributable to common shareholders by total liabilities.

A premium reduces the interest expense of a bond over its life.

On January 1,a company issues bonds dated January 1 with a par value of $200,000.The bonds mature in 3 years.The contract rate is 4%,and interest is paid semiannually on June 30 and December 31.The market rate is 5%.Using the present value factors below,the issue (selling)price of the bonds is:

When the contract rate on a bond issue is less than the market rate,the bonds sell at a discount.

An advantage of bond financing is that issuing bonds does not affect owner control.

________ bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Bond interest paid by a corporation is an expense,whereas dividends paid are not an expense of the corporation.

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

The Premium on Bonds Payable account is a(n):

A company enters into an agreement to make 5 annual year-end payments of $3,000 each,starting one year from now.The annual interest rate is 6%.The present value of an annuity (series of payments)for 5 periods at 6% is 4.2124.What is the present value of these five payments?

________ bonds are bonds that are scheduled for maturity on one specified date.

Present values can be found using Excel,a calculator or present value tables.

On January 1,a company issues bonds dated January 1 with a par value of $600,000.The bonds mature in 3 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The bonds are sold for $564,000.The journal entry to record the first interest payment using straight-line amortization is:

A company calls its bonds at a price of $105,000.The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745.The issuer's journal entry to record the retirement will include a:

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

On January 1,a company issued 10-year,10% bonds payable with a par value of $500,000,and received $442,647 in cash proceeds.The market rate of interest at the date of issuance was 12%.The bonds pay interest semiannually on July 1 and January 1.The issuer uses the straight-line method for amortization.Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

A company issued 10%,10-year bonds with a par value of $1,000,000 on January 1,at a selling price of $885,295 when the annual market interest rate was 12%.The company uses the effective interest amortization method.Interest is paid semiannually each June 30 and December 31. (1)Prepare an amortization table for the first two payment periods using the format shown below: (2)Prepare the journal entry to record the first semiannual interest payment.