Exam 11: Notes, Bonds, and Leases

Which of the following is/are not true?

How does a lessor account for leases?

The amount borrowed initially and the market value of a note or bond at any date subsequent to the initial borrowing equals

What determine(s) the risk of investing in a bond issue, which in turn affects the interest rate investors demand and therefore the bond's price?

Investors in bonds might exercise a _____ option if interest rates increase, and investors can reinvest the cash proceeds in debt securities with a higher yield.

What are the cash flows patterns related to bonds?

Describe the sources of long-term debt financing.

Why do lessees tend to prefer the operating lease method to the capital lease method?

U.S.GAAP and IFRS provide for two methods of accounting for long-term leases: the operating lease method and the capital or finance lease method.

The interest rate that discounts a series of future cash flows to its present value is called the

Part 1: Briefly explain a bond contract and its relationship to cash flows. Part 2: Define the following terminology with respect to bonds: a.Face Value b.Principal c.Maturity Value d.Market Value e.Coupon Interest Rate f.Historical Market Interest Rate or Initial Yield to Maturity g.Current Market Interest Rate

Bolton Co.leases workout equipment to health clubs.On January 1, Year 1, Bolton Co.leases to Powerhouse Gym, equipment valued at $150,000, for 2 years.The equipment has a 12-year life with zero salvage value.The lease payments equal $2,500 per year, payable on the last day of the year. Required: a.Identify the type of lease.Give reasons for your conclusion. b.State the correct entries to be made by the lessor for this lease.You may assume straight-line depreciation is used by Bolton.

Bonds are issued at greater than par value when

On January 1, Year 4, Jones Realty Company issued 8 percent term bonds with a face amount of $1 million due January 1, Year 14.Interest is payable semi-annually on January 1 and July 1.On the date of issue, investors were willing to accept an effective interest rate of 6 percent.Assume the bonds were issued on January 1, Year 4.for $1,148,959.The bonds were issued on January 1, Year 4, at

On January 1, Year 4, Jones Realty Company issued 8 percent term bonds with a face amount of $1 million due January 1, Year 14.Interest is payable semi-annually on January 1 and July 1.On the date of issue, investors were willing to accept an effective interest rate of 6 percent.Assume the bonds were issued on January 1, Year 4.for $1,148,959.Using the effective interest amortization method, Jones Realty Company recorded interest expense for the six months ended June 30, Year 4, in the amount of

The fair value of long-term debt

Which of the following is/are not true?

The approach which dominates current financial reporting of financial instruments [uses the historical market interest rate to compute the carrying value of notes and bonds while these obligations are outstanding] is the _____ approach.

Raines Corporation entered into a five-year lease for a computer on January 1, Year 3.The lease requires Raines to make equal payments of $20,000 on January 1 each year for the five years of the lease, with the first payment made on January 1, Year 3.Raines' borrowing rate is 10 percent.Raines uses the straight-line depreciation method for financial reporting.It estimates a zero salvage value.The accounting period is the calendar year.Round amounts to the nearest dollar. Required: a. Give the journal entries that Raines would make during Year 3 if this lease were considered an operating lease for financial reporting. b. Repeat [a] but assume the lease is a capital lease for financial reporting. c. Assume that this lease is considered a capital lease for financial reporting. Calculate depreciation expense for financial reporting purposes for Year 3 and Year 4. d. Compute the total expenses (ignore income taxes) that Raines would recognize over the 5-year term of the lease, assuming it is an operating lease. e. Repeat [d] but assume the lease is a capital lease.

On January 1, Year 1, Lamp Company acquires new equipment in exchange for a note.Lamp must pay a lump sum of $32,000 on December 31, Year 3.The equipment is being specifically manufactured for Lamp, so no market price exists for the equipment.On similar types of equipment purchases, Lamp has paid 15% interest.The equipment has a five-year life and the company uses straight-line depreciation with a 10% salvage value. Required: Prepare journal entries to record the following: a. original acquisition of equipment b. any adjusting journal entry necessary at December 31, Year 1 c. entry to record depreciation at December 31, Year 2 d. entry to record payment on December 31, Year 3