Exam 14: Long-Term Liabilities

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607. While the amount borrowed equals $70,000, the total payments on this note amount to $86,428. Explain.

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

A company's total liabilities divided by its total shareholders' equity is called the:

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:

Harrison Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000. Calculate the company's debt-to-equity ratio.

A company must repay the bank a single payment of $10,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan is:

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

Shin Company has a loan agreement that provides it with cash today, and the company must pay $25,000 4 years from today. Shin agrees to a 6% interest rate. The present value factor for 4 periods, 6% is 0.7921. What is the amount of cash that Shin Company receives today?

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

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

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

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6. If total assets and total liabilities are $350,000 and $200,000, respectively, shareholders' equity must be $150,000. Thus, the debt-to-equity ratio is $200,000/$150,000 or 1.3.

Walker Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, Year 1. Interest is to be paid semiannually on each June 30 and December 31. The bonds are issued at $5,368,035 cash when the market rate for this bond is 12%. (a) Prepare the general journal entry to record the issuance of the bonds on January 1, year 1. (b) Show how the bonds would be reported on Walker's balance sheet at January 1, Year 1. (c) Assume that Walker uses the effective interest method of amortization of any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1.

_______________ bonds have specific assets of the issuing company pledged as collateral.

Pitt Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

The effective interest amortization method:

Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

Amortizing a bond discount: