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Exam 14: Long-Term Liabilities

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Question 61

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Match each of the following terms with the appropriate definitions.

Premises

Responses

The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties.

Serial bonds

Bonds that are scheduled for payment on one specified date.

Installment note

The interest rate that borrowers are willing to pay and that lenders are willing to accept for a particular bond at its risk level.

Unsecured bonds

Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection.

Market rate

Bonds that are made payable to whoever holds them; also called unregistered bonds.

Convertible bonds

An obligation requiring a series of periodic payments to the lender.

Bearer bonds

Bonds that are backed by the issuer's credit standing.

Term bonds

Bonds that mature at more than one date and are usually paid over a number of periods.

Bond indenture

An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest.

Coupon bonds

Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock.

Effective interest rate method

Premises

The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties.

Bonds that are scheduled for payment on one specified date.

The interest rate that borrowers are willing to pay and that lenders are willing to accept for a particular bond at its risk level.

Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection.

Bonds that are made payable to whoever holds them; also called unregistered bonds.

An obligation requiring a series of periodic payments to the lender.

Bonds that are backed by the issuer's credit standing.

Bonds that mature at more than one date and are usually paid over a number of periods.

An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest.

Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock.

Responses

Serial bonds

Installment note

Unsecured bonds

Market rate

Convertible bonds

Bearer bonds

Term bonds

Bond indenture

Coupon bonds

Effective interest rate method

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Correct Answer

Premises

Responses

The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties.

Bonds that are scheduled for payment on one specified date.

The interest rate that borrowers are willing to pay and that lenders are willing to accept for a particular bond at its risk level.

Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection.

Bonds that are made payable to whoever holds them; also called unregistered bonds.

An obligation requiring a series of periodic payments to the lender.

Bonds that are backed by the issuer's credit standing.

Bonds that mature at more than one date and are usually paid over a number of periods.

An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest.

Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock.

Premises

The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties.

Bonds that are scheduled for payment on one specified date.

The interest rate that borrowers are willing to pay and that lenders are willing to accept for a particular bond at its risk level.

Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection.

Bonds that are made payable to whoever holds them; also called unregistered bonds.

An obligation requiring a series of periodic payments to the lender.

Bonds that are backed by the issuer's credit standing.

Bonds that mature at more than one date and are usually paid over a number of periods.

An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest.

Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock.

Responses

Question 62

True/False

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

A) True
B) False

Correct Answer

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Question 63

Multiple Choice

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Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

A pension plan:

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:

On January 1,$300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock.The entry to record the conversion of the bonds includes all of the following entries except:

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?

On January 1 of Year 1,Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000.The bonds pay interest semiannually on January 1 and July 1.The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%.The bond premium or discount is being amortized at a rate of $10,000 every six months. The amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:

A company issued 10-year,9% bonds with a par value of $500,000 when the market rate was 9.5%.The company received $484,087 in cash proceeds.Using the straight-line method,prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

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

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage.

A company issued 9.2%,10-year bonds with a par value of $100,000.Interest is paid semiannually.The market interest rate on the issue date was 10%,and the issuer received $95,016 cash for the bonds.On the first semiannual interest date,what amount of cash should be paid to the holders of these bonds for interest?

On January 1,a company issues bonds with a par value of $300,000.The bonds mature in 5 years,and pay 8% annual interest,payable each June 30 and December 31.On the issue date,the market rate of interest for the bonds is 10%.Compute the price of the bonds on their issue date.The following information is taken from present value tables:

The party that has the right to exercise the call option on callable bonds is(are) :

The _________________________ method of amortizing a bond discount allocates an equal portion of the total bond interest expense to each interest period.

An advantage of bond financing is that issuing bonds does not affect owner control.

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Bonds owned by investors whose names and addresses are recorded by the issuing company,and for which interest payments are made with checks or cash transfers to the bondholders,are called: