Exam 14: Long-Term Liabilities

Long-term bonds have relatively higher interest rates because they carry higher risk due to the longer time period.

A company retires its bonds at 105. 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:

What are the methods that a company may use to retire its bonds?

Describe installment notes and the way in which installment notes are paid.

_______________ bonds are bonds that mature at more than one date, often in a series, and thus are usually repaid over a number of periods.

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 factor for 5 periods, 6% is 4.2124. What is the present value of these five payments?

Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

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 journal entry to record the first interest payment is:

Explain the accounting procedures when a bond's interest period does not coincide with the issuer's accounting period.

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 $101,137 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A company issued 9%, 10-years bonds with a par value of $1,000,000 on September 1, Year 1 when the market rate was 9%. The bonds were dated June 30, Year 1. The bond issue price included accrued interest. Interest is paid semiannually on December 31 and June 30. (a) Prepare the issuer's journal entry to record the issuance of the bonds on September 1. (b) Prepare the issuer's journal entry to record the semiannual interest payment on December 31, Year 1.

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

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.

Explain how to record the issuance and sale of a bond between interest payment dates.

A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. The issuer uses the effective interest method for amortization. On the first semiannual interest date, what amount of discount should issuer amortize?

The carrying (book) value of a bond payable is the par value of the bonds plus the discount.

A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 to yield the buyers an 8% annual return. The company uses the effective interest method of amortization. (1) Prepare an amortization table for the first two semiannual payment periods using the format shown below. (2) Prepare the journal entry to record the first semiannual interest payment.