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Exam 10: Accounting for Long-Term Debt

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Question 61

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Blue Manufacturing Company issued $300,000 of 7%, 5-year bonds for $288,000, on January 1, 2013. Interest is payable on January 1 of each year. Blue uses the straight-line method of amortization. The first interest payment is to be made on January 1, 2014. Required: a) Show the effects of the following events on the accounting equation. Event 1. The issuance of the bonds. Event 2. Accrual of interest at December 31, 2013. Event 3. Amortization of discount at December 31, 2013. Event 4. Payment of interest on January 1, 2014. b) What is the carrying value of the bond on January 1, 2014? c) What is the amount of interest paid in (1) 2013? (2) 2014? d) What is the amount of interest expense shown on the income statement in 2013?

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a) b) $300,000 - ($12,000 - $2,400) = $...

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Question 62

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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 reduction of principal is $3,587.

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B) False

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Question 63

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On January 1, 2013, Fairmont Corporation signed a contract with the Community Bank for a line of credit that permitted Fairmont to borrow up to $50,000. Indicate the effects of signing this contract.

Grove begins his loan transactions with Commerce Bank by borrowing $1,000 on January 1, 2013. Which of the following answers shows the effect of this event on the financial statements?

Which choice reflects the financial statement effects of the cash payment on December 31, 2013?

If the stated interest rate for bonds is the same as the effective interest rate, the bonds will be issued at their face value.

Indicate whether each of the following statements is true or false. _____ a) EBIT stands for earnings before income taxes. _____ b) EBIT is used in the computation of the return-on-assets ratio. _____ c) A low times-interest-earned ratio is a sign of a high-risk company. _____ d) Dividends are deductible in the determination of taxable income. _____ e) Interest is deducted on the income statement but is ignored on the tax return.

Which financial statements are affected by the entry to record the payment of bond interest and the related amortization of a discount? Indicate how each statement is affected.

Wayne Company issued $20,000 of callable bonds at face value on January 1, 2013. The bonds carried a 2% call premium. If Wayne calls the bonds, this event would

The effective interest rate method of amortizing bond premium or discount gives a constant amount of interest expense every period.

On January 1, 2013, Epstein Co. issued $100,000 of bonds payable at the face value. When the bonds matured on December 31, 2018, Epstein used cash to repay the bond principal and the interest for one year, which had not been previously accrued. Indicate the effects of the 12/31/18 payment.

Explain the special feature that makes callable bonds attractive to an issuing corporation.

The journal entry used to record the issuance of the bond and the receipt of cash would be: (round to whole dollars)

Indicate whether each of the following statements about bonds payable is true or false. _____ a) A convertible bond may be converted into stock of the issuing company at the option of the bondholder. _____ b) Businesses issue bonds to banks to borrow large amounts of cash. _____ c) A debenture is an unsecured bond. _____ d) Callable bonds may be turned in for early retirement at the option of the bondholder. _____ e) The issuer of a bond receives cash when the bond is issued.

On December 31, 2013, Crown Co. paid cash for interest on bonds it had issued on January 1, 2013 at 98, and amortized part of the discount on bonds. Indicate the effects of the payment of interest and amortization of the discount.

Parsons Company issued at 97 bonds with a face value of $500,000. As a result of the issue:

The reason bonds are sometimes issued at a discount is:

Discuss the purpose of long-term debt financing.

If bonds are issued at a premium, the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

Which of the following correctly shows the effects of the December 31, 2014 payment?