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Exam 9: Long-Term Liabilities

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Question 1

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For a finance lease,the lessee must record both an asset and a liability.The amount of the asset is subsequently reduced by the process of ____________________.

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Question 2

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Match these terms with their definitions. -agreement whereby the legal owner of the asset retains substantially all of the risks and obligations of ownership

A) callable bonds
B) finance lease
C) convertible bonds
D) debenture bonds
E) junk bonds
F) mortgage bonds
G) notes payable
H) operating lease
I) secured bonds

J) A) and D)
K) E) and H)

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Question 3

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If a bondholder has the right to retire the bonds,they are referred to as callable.

A company wants to issue $600,000 of 10-year,6.8% bonds,with interest paid annually at the end of the year.The market rate of interest is currently 5%.What information is needed to determine the selling price?

Kalahari Limited On January 2, Year 1, this company issued 1,000,000 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method for amortizing bond discounts and premiums. Refer to the PV table on pages 717 to 720 of the text. -Refer to the figure Kalahari Limited.What is the carrying value of the bonds after the first interest payment is made on June 30,Year 1?

A company issued $10,000,000 of bonds.Assuming the most common denomination of bonds was issued,what was the number of bonds sold?

On January 1,Year 1,a company buys equipment for $666,633 with a 14% installment note to pay off the debt with six semiannual payments over three years.The payments are $139,857. Required: A) Provide the journal entry to record the purchase of the equipment. B) Give the journal entries for June 30 and December 31.

When do bonds sell at a premium?

When each payment reduces the outstanding loan balance,which,in turn,reduces the interest expense in the subsequent period,it is called a(n)____________________ debt.

Match these terms with their definitions. -general term that refers to debt that provides collateral (e.g.,some asset) for the lender

Match these terms with their definitions. -the amount that must be repaid at maturity

The following footnote accompanied the company's Year 3 financial statements: The Corporation leases office, warehouse and showroom space, retail stores, and office equipment under operating leases, which expire no later than 2025. The Corporation normalizes fixed escalations in rental expense under its operating leases. Minimum annual rentals under non-cancellable operating leases, excluding operating cost escalations and contingent rental amounts based upon retail sales, are payable as follows: Fiscal year ending March 31, $\begin{array}{lr}\text { Year } 4 & \$ 10,051,000 \\\text { Year } 5 & 11,121,000 \\\text { Year 6 } & 10,161,000 \\\text { Year } 7 & 9,063,000 \\\text { Year 8 } & 8,814,000 \\\text { Thereafter } & 46,681,000\end{array}$ Rent expense was $12,551,000; $8,911,000; and $5,768,000 for the years ended March 31, Year 3, Year 2, and Year 1, respectively. -Refer to Korn Business Solutions.What are the two types of leases that a company can have? Describe each briefly.

Match these terms with their definitions. -give the lender the option to convert the debt into other securities-typically shares of common shares.

A company's balance sheet shows the following amounts for liabilities and shareholders' equity accounts: current liabilities,$50,000; bonds payable,$600,000; finance lease obligations,$120,000; and deferred income tax liability,$20,000.Total shareholders' equity is $520,000.What is the debt-to-equity ratio?

Which of the following does long-term debt generally include?

You own a thriving bookstore in a major college town.You have been talking with your CA about borrowing $5,000,000 to finance a larger and more modern building.One option is to issue 20-year bonds with a fixed rate of 8% while another option is to issue 20-year bonds with a variable rate of one-year LIBOR (London Interbank Offered Rate)plus 5%.For the first year,this will result in a 6.2% rate,but the rate will be adjusted annually.The current market interest rate is 8%. What things should you consider in making the decision about which borrowing option is better for your company?

Which of the following describes a callable bond?

The liabilities section of the company's most recent consolidated balance sheets is provided below: $\begin{array}{c}\text { King Cotton Company }\\ \text {Consolidated Balance Sheets}\\ \text { (in millions)}\\\begin{array}{llr}\hline && \text { December 31, } \\&\text { Year 2 } & \text { Year 1 } \\ \text { Current liabilities } &\\ \text { Short-term borrowings } &\$250&\$200\\ \text {Accounts payable and other current liabilities } &4,500&4,450\\ \text {Income taxes payable } &\underline{200}&\underline{50}\\ \text {Total current liabilities } &\$4,950&\$4,700\\\\ \text { Long-term debt } &2,700&3,000\\ \text {Other long-term liabilities } &3,800&3,950\\ \text { Deferred income taxes} &1,500&1,400\\\end{array}\end{array}$ -Refer to King Cotton Company.What is the percent increase/decrease of long-term liabilities from Year 1 to Year 2? Which liability appears to have caused the greatest change?

Kids R Kids Company Selected data from the comparative financial statements are provided below: $\begin{array}{c}\text { Kids R Kids Company}\\\text { Income Statement}\\\text { Selected amounts}\\\text { (in thousands)}\\\begin{array}{r}\hline\text { Year ended December 31,}\\\begin{array}{lrr}&\underline{\text { Year 2}}&\underline{\text { Year 1}}\\\text { Net sales } & \$ 18,813 & \$ 18,868 \\\text { Interest expense (all paid with cash) } & 277 & 258 \\\text { Income before income taxes } & 5,198 & 6,055 \\\text { Income taxes } & 1,665 & 1,926 \\\text { Net income } & 3.533 & 4.129\end{array}\end{array}\end{array}$ $\begin{array}{c}\text { Kids R Kids Company}\\\text { Income Statement}\\\text { Selected amounts}\\\text { (in thousands)}\\\begin{array}{r}\hline\text { Year ended December 31,}\\\begin{array}{lrr}&\underline{\text { Year 2}}&\underline{\text { Year 1}}\\\text { Net cash provided by operating activities } & \$ 3,433& \$ 4,033 \\\text { Financing activities: } & \\\text { Cash dividends paid } & (1,480))&(1,387)\\\text { Purchase of treasury shares } & (1,563)& (1,262) \\\text { Issuance of debt } &1,818& 155\\\text { Repayment of long-term debt}&(410)&(751)\\\text { Issuances of shares }&302&150\end{array}\end{array}\end{array}$ -Refer to Kids R Kids Company.The total long-term liabilities at December 31,Year 2,are (in thousands):

A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year.What is the company's net cash outflow if the effective tax rate is 40%?