Exam 10: Accounting for Long-Term Debt

Bonds sold as separate components of a single issue may have different maturity dates.

Charleston Corporation made the following entry it its general journal on 12/31/13: Which of the following answers describes the above transaction?

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

If $400,000 of 12% bonds are issued at 101 ½, what amount of cash will be received by the corporation?

Which of the following answers correctly shows the effect of the issuance of the note on Patterson's financial statements?

Indicate whether each of the following statements about bonds is true or false. _____ a) The carrying value of a bond increases over time if the bond was issued at a premium. _____ b) At the end of the term of the bonds, the carrying value of a bond issue is equal to the issue price. _____ c) If bonds are sold below face value, the difference between the issue price and the face value is called the bond discount. _____ d) The payment of interest is an operating activity on the statement of cash flows. _____ e) The issuance of bonds does not appear on the statement of cash flows.

On January 1, 2013, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. When the bonds mature, Daniels will have to pay the face value of the bonds to the bondholders.

Discuss one advantage of issuing bonds versus borrowing money from a bank.

If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond

On December 31, 2013, Racine Company made an annual payment on its long-term installment note payable. Show how this annual payment affected Racine's financial statements.

Indicate whether each of the following statements about lines of credit is true or false. _____ a) Line-of-credit agreements generally involve a fluctuating rate of interest. _____ b) A line-of-credit agreement allows a company to borrow on an as-needed basis. _____ c) Interest rates on line-of-credit agreements are often pegged to the consumer price index. _____ d) The signing of a line-of-credit agreement is an asset source transaction. _____ e) The expense recognition for the payment of monthly interest is an asset exchange transaction.

The times interest earned ratio is usually calculated as the ratio of net income to interest expense.

Canton Company borrowed $50,000 on a four-year, 8% installment note. Canton will record the issuance of this note with the following entry:

The total amount of liabilities shown on Joiner's December 31, 2014 balance sheet would be:

On January 1, 2013, Morris Company borrowed cash from Green Valley Bank by issuing a $200,000 face value 3-year installment note payable that carried a 9% interest rate. The note is to be repaid by making annual cash payments of $118,516.43, which includes both principal and interest. The payments are to be made on December 31 of each year. Required: a) Prepare an amortization schedule for the term of the loan, showing the amounts to be paid on principal and interest for 2013, 2014, and 2015 and the loan balance at the end of each year. b) What amount of interest expense will be shown on the 2014 income statement? c) What amount of liability for the note will be shown on the balance sheet as of December 31, 2014? d) Prepare the journal entry to record the payment made on December 31, 2014.

Serial bonds are issued based on the overall strength of the borrower's credit.

On January 1, 2013, Crown Co. issued $200,000 of bonds payable at 98. Indicate the effects of issuing the bonds.

On January 1, 2013, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. These bonds were issued at a discount.

Ditech Corporation borrowed $50,000 on January 1, 2013. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Ditech will make a payment of $7,791, which includes both principal and interest. The amount of the payment for 2013 that is interest expense is $4,500.

Ferguson Company obtained an $80,000 line of credit from the Metropolitan Bank on January 1, 2013. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2013 are shown in the following table. Assume that Ferguson borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. Based on this information alone, the amount of interest expense recognized for the month of March would be: