Exam 11: Notes, Bonds, and Leases

Henson Manufacturing Company signed a 3-year contract for the use of certain manufacturing equipment with an estimated life of three years.Henson Manufacturing Company cannot cancel the contract.What entry is made to record the contract?

On February 1, Year 1, Centra issues $100,000 semi-annual 12% bonds at par plus accrued interest.The interest is payable on July 1 and January 1 of each year.What entry is necessary to record the issuance of the bonds on February 1?

(CMA adapted, Dec 86 #20) On January 1, Year 1, Nicole Company sold its 5-year, $100,000 face value, 8% bonds at $108,530, to yield an effective annual interest rate of 6%.The bonds are dated January 1, Year 1, and interest is payable annually on January 1.Using the effective interest method of premium amortization, the amount of interest expense (rounded to the nearest dollar) reported by Nicole Company in Year 1 is

Capital leases are economically similar to purchasing assets with funds obtained from issuing long-term bonds and result in similar accounting.

Bonds whose indentures contain a provision which requires the issuing firm to make a provision for partial early retirement of the bond issue are sinking fund bonds and _____ bonds.

Notes, bonds, leases and derivatives are _____.

(CMA adapted, Dec 92 #10) There are many similarities between lessee and lessor accounting for the capitalization of leases.Which one of the following is a criterion for the capitalization of a lease by a lessee?

A zero coupon bond provides for _____ periodic payments of interest while the bond is outstanding; and the bond requires payment of all _____ at maturity.

Authoritative guidance requires firms that account for notes and bonds using the _____ market interest rate to report the carrying values, or book values, on the balance sheet and to disclose the _____ of these notes and bonds in notes to the financial statements.

Describe the various methodologies in accounting for leases.

When the bond indenture provides that stated amounts of principal will become due during the term of the bond, the bond is called a _____ bond.

U.S.GAAP specifies criteria for a capital lease.Which of the following is not one of the criteria?

Firms that need cash for long-term purposes, such as acquiring buildings and equipment or financing a business acquisition, and that wish to use debt as a means of obtaining cash, will

A firm classifies liabilities which fall due after the operating cycle, usually greater than one year, as

Firms classify the portion of bonds due within the next year as a noncurrent liability.

The term face value refers to the principal amount printed on the face of the bond certificate.

In Year 7, Nortel Manufacturing issued $100,000 semi-annual 12% bonds at par.Interest is payable on July 1 and January 1.What entry is necessary at December 31, Year 9?

Charm City Electric is a regulated monopoly providing electric services in a large city.Property, plant, and equipment dominate the asset side of the balance sheet.Which of the following is/are true?

ALT Company, as tenant, acquired for $600,000, paid in a single amount, the right to use an entire office building for the next ten years.ALT expects to rent out the floors in the building to various commercial tenants.As tenant, ALT accounts for its lease as a capital lease amortizing the leasehold asset on a straight-line basis over ten years.ALT, as landlord, signed operating leases with the tenants for all of the rentable space.The rents total $150,000 received at the end of each year for the next ten years, $1.5 million in total. Required: a. Under current GAAP, can ALT treat the same property as a capital lease and an operating lease? b. What is the book value of this property after two years? Assume, independent of your answer to the preceding question, that the book value of the property after two years is $400,000. On that date, some of the tenants go bankrupt and ALT believes it will be unable to rent their now-vacant space, which will remain empty for the remaining eight years. The fair market value of the remaining leasehold with still-solvent, rent-paying tenants is $300,000. c. If the remaining tenants will pay $800,000 in total, with present value $310,000, what entry, if any, will ALT make? d. If the remaining tenants will pay $320,000 in total, with present value $290,000, what entry, if any, will ALT make?

Firms must disclose a list of their long-term debt obligations in notes to the financial statements.