Exam 10: Accounting for Long-Term Debt

Does US tax law encourage debt financing or equity financing of a corporation? Why?

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

A discount or premium on bonds payable can be defined by which of the following statements?

Sandridge Company issued five-year 8% bonds with a face value of $50,000, for $53,512 on January 1, 2013 when the market (effective) rate of interest was 7%. The bonds pay annual interest each December 31. Sandridge uses the effective interest method for amortization of premium or discount on bonds payable. (Round your answers to the nearest dollar.) Required: a) What is the annual amount of cash that Sandridge will pay out for interest? b) What amount of interest expense and premium amortization should Sandridge recognize for 2013? What is the carrying amount of the liability on December 31, 2013? c) What amount of interest expense and premium amortization should Sandridge recognize for 2014? What is the carrying amount of the liability on December 31, 2014? d) What is the total amount of interest that Sandridge will record in interest expense over the life of the bond?

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

Assuming Wagoner issued the bonds for $215,970, the carrying value of the bonds on the 12/31/15 balance sheet would be:

Burton Company issued bonds with a face value of $100,000 on January 1, 2013 at 90. Which of the following journal entries would be required to record the bond issue?

The times-interest-earned ratio is calculated by which of the following?

On January 1, 2013, Racine Company issued a long-term installment note. Show how the issuance of the note affected the financial statements.

Garza, Inc. and Marx, Inc. each had the same financial position on 1/1/13. The following is a summary of each of their balance sheets as of 1/1/13: Garza is about to raise $200,000 in cash by issuing bonds. Marx is going to raise $200,000 on the same day by issuing common stock. Immediately after these transactions, which of the following statements will be correct?

Assuming Winfield issued the bonds for 105, the carrying value of the bonds on the 12/31/13 balance sheet would be:

Indicate whether each of the following statements about bonds payable is true or false. _____ a) Premium on Bonds Payable is recorded when bonds are issued at less than their face value. _____ b) Premium on Bonds Payable is a liability account. _____ c) The balance in the Discount on Bonds Payable account increases liabilities. _____ d) Discount on Bonds Payable is an expense account. _____ e) A discount on bonds payable occurs when the stated interest rate on the bonds is less than the market or effective interest.

If bonds with a face value of $200,000 are issued at 98, the amount of cash received from issuing the bonds is $204,082.

Which of the following conditions indicate a company has a relatively high level of financial risk?

What is the issue price of $100,000 in bonds that sell at 95.5?

Greenwich Company issued fifty, $1,000, 6% bonds that mature in ten years. Interest is paid annually. The bonds were sold at 103 ½, and Greenwich amortizes bond discounts and premiums using the straight-line method. Calculate the amount of annual interest expense for Greenwich Co.

On January 1, 2013, Tara Co. issued $100,000 of bonds at the face value. Interest is paid in cash on December 31 of each year. Indicate the effects of the payment of interest on 12/31/2013.

Grove records the first year's interest payment on December 31, 2013. Commerce's prime rate is 4% for 2013. Which of the following answers shows the effect of this event on the financial statements?

The amount of cash flow from operating activities on the December 31, 2015 statement of cash flows would be:

What is the name used for the type of secured bond that requires a pledge of a designated piece of real property in case of default?