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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 51

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Match the following descriptions to their terms

Premises

Responses

the principal of the bond is paid back in installments

Debenture

allows the issuer to redeem bonds before maturity date

Term bond

the value of a bond stated on the bond certificate

Face value

a bond issued without any collateral or security

Indenture

the entire principal of the bond is paid back on maturity date

Callable bond

allows the bond hold to exchange bond for shares of stock

Serial bond

the legal contract between issuer and bond holder

Convertible bond

Premises

the principal of the bond is paid back in installments

allows the issuer to redeem bonds before maturity date

the value of a bond stated on the bond certificate

a bond issued without any collateral or security

the entire principal of the bond is paid back on maturity date

allows the bond hold to exchange bond for shares of stock

the legal contract between issuer and bond holder

Responses

Debenture

Term bond

Face value

Indenture

Callable bond

Serial bond

Convertible bond

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Correct Answer

Premises

Responses

the principal of the bond is paid back in installments

allows the issuer to redeem bonds before maturity date

the value of a bond stated on the bond certificate

a bond issued without any collateral or security

the entire principal of the bond is paid back on maturity date

allows the bond hold to exchange bond for shares of stock

the legal contract between issuer and bond holder

Premises

the principal of the bond is paid back in installments

allows the issuer to redeem bonds before maturity date

the value of a bond stated on the bond certificate

a bond issued without any collateral or security

the entire principal of the bond is paid back on maturity date

allows the bond hold to exchange bond for shares of stock

the legal contract between issuer and bond holder

Responses

Question 52

Multiple Choice

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The Merchant Company issued 10-year bonds on January 1, 2011. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2011, Merchant should record interest expense (round to the nearest dollar) of

A) $7,032
B) $7,500
C) $8,790
D) $14,065

E) A) and D)
F) A) and C)

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Question 53

True/False

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An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note.

(a) Prepare the journal entry to issue $100,000 bonds which sold for $94,000. (b) Prepare the journal entry to issue $100,000 bonds which sold for $104,000.

Balance sheet and income statement data indicate the following: Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places) ?

Which of the following is not an advantage of issuing bonds instead of common stock?

The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

The interest expense recorded on an interest payment date is increased

Given the following data, determine the times interest earned ratio. Net income - $70,000 Bonds Payable (issued at face value), 8% - $5,000,000 Preferred Stock ($50 par value, 6%, 10,000 shares issued & outstanding) Tax rate - 30%

If $1,000,000 of 8% bonds are issued at 103 1/2, the amount of cash received from the sale is

On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000. Journalize the entry to record the issuance of the bonds.

A legal document that indicates the name of the issuer, the face value of the bond and such other data is called

Using the following table, what is the present value of $25,000 to be received 5 years, if the market rate is 7% compounded annually?

A secured bond is called a debenture bond and is backed only by the general creditworthiness of the corporation.

On January 1, 2010 Orange Retail Co. issued a $300,000, 3 year, 6% installment note payable with payments of $100,000 principal and interest due on January 1st for each of the next 3 years. 1. Prepare the adjusting journal entry to accrue interest at the end of the 2nd year - 12/31/11. 2. Show the account(s) and amount (s) and where the account(s) will appear on a multi-step income statement prepared on December 31, 2011. 3. Show the account(s) and amount(s) and where the account(s) will appear on a classified balance sheet prepared on December 31, 2011.

If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of $250,000 will be

Balance sheet and income statement data indicate the following:

The Designer Company issued 10-year bonds on January 1, 2011. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2011, Designer should record interest expense (round to the nearest dollar) of