Exam 11: Notes, Bonds, and Leases

The more long-term debt in a firm's capital structure, the less the risk that the firm will experience difficulty making the required payments when due.

Common terminology refers to the calculations for amortizing a financial instrument to its maturity value over time as the _____ interest method.

Borrowers who retire long-term liabilities debit the liability account for its current book value, credit Cash, and recognizes any difference on the retirement of the debt as a

What disclosures are required for leases?

What are the effect of the operating and capital lease methods on the financial statements of the lessor?

(CMA adapted, Jun 86 #5) A bond issue sold at a premium is valued on the statement of financial position at the

When using the effective interest method the amount of interest expense each period equals the

First Communications Group is a communication services firm whose employees provide advertising, market research, public relations, and other services world-wide.Other than relatively small amounts of equipment, it owns virtually no property, plant, and equipment (it leases most of its office space).Which of the following is/are true?

A document or agreement giving the terms of the bond and the rights and duties of the borrower and other parties to the contract that provides some protection to the bondholders and typically limits the borrower's right to declare dividends, to make other distributions to owners, and to acquire other businesses is known as a

On January 1, Year 7, Quan Restaurant is planning to enter as the lessee into the two lease agreements described below.Each lease is noncancelable, and Quan does not receive title to either leased property during or at the end of the lease term.All payments required under these agreements are due on January 1 each year. Lessor Hadowav Inc. Cutter Electronics Type of property Oven Computer Yearly rental (not including executory costs) \ 15,000 \ 4,000 Lease term 10 years 3 years Economic life 15 years 5 years Purchase option None \ 3,000 Renewal option None None Fair market value at inception of lease \ 125,000 \ 10,200 Unguaranteed residual value None \ 2,000 Lessee's incremental borrowing rate 10\% 10\% Executory costs paid by Lessee Lessor Annual executory costs \ 800 \ 500 Present value factor at 10\% (of an annuity due) 6.76 2.74 (CMA adapted, Dec 93 #27) Refer to the Quan Restaurant example.Quan should treat the lease agreement with Hadaway Inc.as a(n)

When a capital lease for equipment is signed, the lessee records a liability called

The operating lease method is appropriate when the lessor enjoys most of the _____ and bears most of the _____ of ownership.

Debentures that the holder (lender) can exchange, possible after some specific period of time has elapsed, for a specific number of shares of common stock or, perhaps, preferred stock of the borrower are called _____ bonds.

A firm classifies mortgages, notes, bonds, and leases which were used to acquire its long-term assets that fall due after the operating cycle, (usually greater than one year) as

Rotor Corporation issues $10,000,000 face value, 10-year, 6% semiannual coupon bonds on January 1, 2013. The bonds require coupon payments on June 30 and December 31 of each year. The market initially priced the bonds to yield 6% compounded semiannually. The current market yield on these bonds was 6.2% compounded semiannually on June 30, 2013, and 6.6% compounded semiannually on December 31, 2008. Rotor Corporation computes interest expense for each six-month period using the market yield at the beginning of the period. Required: a. Compute the carrying value of these bonds on January 1, June 30, and December 31 of 2013, using the fair value option. You may interpolate in the interest tables or use a calculator or use a spreadsheet program to compute the compound interest factors not provided in the tables. b. Compute the total amount of interest expense and unrealized gain or loss for the first six months of 2013. Do not attempt to separate this amount into interest expense and holding gain or loss. c. Compute the total amount of interest expense and unrealized gain or loss for the second six months of 2013. Do not attempt to separate this amount into interest expense and holding gain or loss.

Modern business usage has come to restrict the word equity to mean only shareholders' equity, both contributed capital and retained earnings.

The FASB and the IASB refer to the approach that uses the current market interest rate instead of the historical market interest rate to discount the remaining cash flows from financial instruments as the

A bond that does not require a periodic cash payment, but instead promises a single payment at maturity, is called a _____ bond.

On January 1, Year 6, Pearson Corporation issued $1,000,000 face value, 20-year bonds.The bonds carry coupon interest of 6 percent per year, payable semiannually on June 30 and December 31.The bonds were initially priced on the market to yield 8 percent, compounded semiannually (for an effective annualized yield greater than 8 percent). Required: a. Compute the issue price of these bonds on January 1, Year 6. b. Compute the amount of interest expense on these bonds for Year 6, assuming that the firm uses the effective-interest method of amortizing bond premium or discount. c. Assume for this part that the firm recorded interest expense in Part b. in an amount equal to interest paid for the year. That is, it failed to record amortization of bond premium or discount. Indicate the effect (direction and amount) of this omission on the line items in the statement of cash flows using "O/S" (overstated), "U/S" (understated), or "No" (no effect). Ignore income taxes. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Direction $\quad$$\quad$$\quad$$\quad$$\quad$ Amount 1) Net Income 2) Adjustments that are added to net income 3) Adjustments that are subtracted from net income 4) Cash Flow from Operations

The following information is available from the comparative balance sheets and related income statement of the Horner Company for the year ended December 31, Year 7. December 31, December 31, Year 6 Year 7 Present value of lease obligation \ 2,040,508.60 \ 1,862,939.10 Leasehold (net of accumulated amortization) \ 1,987,224.30 \ 1,766,421.60 Interest expense on lease obligation for Year 7 \ 122,430.52 The company has only one lease contract outstanding, which it entered into on January 1, Year 6.The contract called for 10 equal lease payments commencing on December 31, Year 6. Required: a. What was the interest rate used to value the lease? b. What is the annual lease payment? c. What was the present value of the lease obligation on January 1, Year 6? d. What was the amortization expense for Year 6?