Exam 10: Accounting for Long-Term Debt

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. With this loan, the amount of interest expense that Ditech reports on its income statement will be the same for each year of the loan.

The carrying value of the bond liability on the December 31, 2015 balance sheet was:

Explain the difference between the straight-line and the effective interest method of amortization of bond premiums and discounts.

Assuming Wagoner issued the bond for $215,970, the amount of interest expense appearing on the 2015 income statement would be:

If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

If a company chooses to call some of its callable bonds before their maturity, generally it will have to pay an amount that is greater than the carrying value of the bonds.

June Company issued a bond at a discount. Which of the following choices accurately reflects how the issue would affect June's financial statements?

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

Maine Corporation issued ten-year, $50,000, 8% bonds on July 1, 2013. The bonds pay interest semiannually. Maine uses the straight line method to amortize bond premium and discount. The company made the following entry relating to the first interest payment made on December 31, 2013: Required: How much cash did Maine receive for the issuance of the bond on July 1, 2013?

Company A and Company B are identical in all regards except that during 2013 Company A borrowed $20,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $20,000 from sale of common stock. Company B agreed to pay a $2,000 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2013, and by what amount?

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

The amount of interest expense appearing on the December 31, 2015 income statement would be:

Compute the amount of cash a company will receive from the following bond issues.

The amount of cash outflow from operating activities shown on Joiner's December 31, 2014 statement of cash flows would be:

On January 1, 2013, Crown Co. issued $100,000 of bonds payable at 101 ½. Indicate the effects of issuing these bonds.

Why would some bonds be classified as "secured bonds"? Provide an example of a common type of secured bond.

Discuss the advantages of establishing a line of credit.

If a company has issued bonds at a premium, the amount of interest expense reported on the income statement each year will be greater than the amount of cash paid to bondholders for interest.

Does the amortization of a bond premium increase, decrease, or not affect interest expense for an accounting period? Explain.