Exam 10: Accounting for Long-Term Debt

Long-term debt would likely be used for which of the following?

Everest Company issued $100,000 in bonds payable on January 1, 2013. The bonds were issued at face value and carried 5-year term to maturity. They had a 6% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, 2014. Based on this information, the amount of total liabilities appearing on the December 31, 2013 balance sheet would be:

If a company uses the effective interest method of amortizing a bond discount, the interest expense that is recognized each year

On December 31, 2013, Crown Co. paid cash for interest on bonds it had issued on January 1, 2013 at 101 ½, and amortized part of the premium on bonds. Indicate the effects of the payment of interest and amortization of the premium.

On January 1, 2013, KMR Co. issued bonds with a face value of $100,000, a term of ten years, and a stated interest rate of 6%. The bonds were issued at 105, and interest is payable each December 31. KMR uses the straight-line method to amortize the bond discount. The carrying value of the bonds that would be reported on the December 31, 2016 balance sheet is:

On January 1, 2013, Fairmont Corporation borrowed $20,000 on a line-of-credit from Community Bank. Show the effects of this transaction on Fairmont's financial statements.

Fiorentino Corporation recorded the following in its general journal on 1/1/13: Which of the following answers correctly describes the transaction on 1/1/13?

Unsecured bonds are called:

Kline Company issued $400,000 in bonds on January 1, 2013. The bonds were issued at face value and carried a 4-year term to maturity. They had a 6 ½% stated rate of interest that was payable in cash on December 31st. Based on this information alone, the amount of interest expense shown on the 12/31/2013 income statement and the cash flow from operating activities shown on the 12/31/2013 statement of cash flows would be:

If a bond is sold at 101, its stated rate of interest would be:

Indicate whether each of the following statements is true or false. _____ a) Long-term debt is frequently used to purchase current assets such as supplies. _____ b) Cash for machinery or buildings is often obtained by issuing long-term debt. _____ c) Short-term notes payable normally mature within a year. _____ d) Long-term installment notes are repaid all at once two to five years after the issue date. _____ e) Most long-term loans are obtained from the corporation's stockholders.

What is meant by the "spread" in banking? What does the "spread" have to do with the issuance of bonds?

El Dorado Co. issued bonds with a face value of $50,000 and a stated interest rate of 8%. The bonds have a life of five years and were sold at 102 ½. If El Dorado amortizes discounts and premiums using the straight-line method, the amount of interest expense each full year would be:

On January 1, 2013, Gen X Corporation issued a five-year term note. The note requires an annual cash payment on December 31 of each year. The payment includes a principal reduction and interest. Indicate whether each of the following statements is true or false. _____ a) The entry to record issuance of the note will increase assets and liabilities. _____ b) The first payment on the note will reduce liabilities and assets, but will not affect equity. _____ c) The second payment on the note will include higher interest expense than did the first payment. _____ d) Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities. _____ e) The amount of reduction in liabilities will increase with each succeeding payment.

Heather Corporation issued $300,000 in bonds payable on January 1, 2013 when the market interest rate at the time was 9%. Assume that the 10-year bonds were issued at 106.5, and the annual interest payment was $30,038. (Round your answers to the nearest dollar.) a) What was the amount of premium on the bonds when they were issued? b) Heather Corporation uses the effective interest method to amortize premium or discount on bonds payable. What was the amount of interest expense for 2013? What was the amount of premium amortization for 2013? c) What was the carrying value of the bond liability on January 1, 2014? What was the amount of interest expense for 2014?

Alpha Corporation issued 20-year bonds payable at a discount in 2013. Will Alpha's net income for 2016 be higher, lower, or the same as it would have been had the bonds been issued at face value? Why?

Which of the following describes the characteristics of a convertible bond?

Monroe Corp. issued $100,000 of 8%, 10 year bonds for 98 on January 1, 2013. Interest is payable annually on December 31. Required: Assuming that Monroe uses the straight-line method for amortization of premium or discount on bonds payable, a) Prepare the journal entry to record the issuance of the bond. b) Prepare the required journal entry on December 31, 2013. c) Prepare the liabilities section of the December 31, 2013 balance sheet. d) What amount of interest expense will be shown on the 2013 income statement? e) Prepare the operating activities section of the 2013 statement of cash flows.

Park Enterprises issued bonds with a face value of $500,000, receiving cash of $508,000. To record this event, Bonds Payable should be credited for $500,000.

Straight-line interest amortization of a premium or discount on bonds payable: