ACC 206 Week 7 Quiz – Strayer
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Purchase A+ Graded Course Material
Quiz 5 Chapter 15
CHAPTER15
LONG-TERMLIABILITIES
CHAPTERSTUDYOBJECTIVES
1.Explainwhybondsareissued.
2.Preparetheentriesfortheissuanceofbondsandinterestexpense.
3.Describetheentrieswhenbondsareredeemedorconverted.
4.Describetheaccountingforlong-termnotespayable.
5.Contrasttheaccountingforoperatingandcapitalleases.
6.Identifythemethodsforthepresentationandanalysisoflong-termliabilities.
7.Computethemarketpriceofabond.
8.Applytheeffective-interestmethodofamortizingbonddiscountandbondpremium.
a9.Applythestraight-linemethodofamortizingbonddiscountandbondpremium.
TRUE-FALSESTATEMENTS
1. Eachbondholdermayvotefortheboardofdirectorsinproportiontothenumberofbonds held.
2. Bondinterestpaidbyacorporationisanexpense,whereasdividendspaidarenotan expense of thecorporation.
3. RegisteredbondsarebondsthataredeliveredtoownersbyU.S.registeredmailservice.
4. Adebenturebondisanunsecuredbondwhichisissuedagainstthegeneralcreditofthe borrower.
5. Bondsareaform of
interest-bearingnotespayable.
6. Neithercorporatebond interestnordividendsaredeductiblefor
taxpurposes.
7. A10%stockdividendistheequivalentofa$1,000parvaluebondpayingannualinterest
of10%.
8. Theholderofaconvertiblebondcanconvertaninterestpaymentreceivedintoacash dividend paidoncommonstock if thedividendisgreaterthantheinterestpayment.
9. Theboardof
directorsmayauthorizemorebondsthanare issued.
10. Thecontractualinterestrateisalwaysequaltothemarketinterestrateonthedatethat
bonds areissued.
11. If$150,000face valuebondsareissuedat
102,theproceedsreceivedwill
be$102,000.
12. Discountonbondsisanadditionalcostofborrowingandshouldberecordedasinterest
expense
overthe lifeofthebonds.
13. Ifacorporationissuedbondsatanamountlessthanfacevalue,itindicatesthatthe corporation
hasaweakcreditrating.
Long-TermLiabilities 15-5
14. Acorporationthatissuesbondsatadiscountwillrecognizeinterestexpenseatarate
which
is greaterthanthemarketinterestrate.
15. Ifbondsareissuedatadiscount,theissuingcorporationwillpayaprincipalamountless
thantheface amountof thebondsonthematuritydate.
16. Ifbondsareissuedatapremium, thecarryingvalueofthebondswillbegreaterthanthe
facevalueof thebondsfor allperiodspriortothebondmaturitydate.
17. Ifthemarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsellata discount.
18. If$800,000,8%bondsareissuedonJanuary1,andpayinterestsemiannually,the amount of interestpaidon July1
willbe$32,000.
19. Ifbonds
sell atapremium, theinterestexpenserecognizedeach
yearwillbegreaterthan thecontractualinterestrate.
20. The
carryingvalue
ofbondsiscalculatedbyadding thebalanceoftheDiscountonBonds Payableaccountto
thebalance intheBondsPayableaccount.
21. Thelossonbondredemptionisthedifferencebetweenthecashpaidandthecarrying
value
of thebonds.
22. If$200,000parvalue bondswithacarrying value of$190,400
areredeemedat97,aloss on redemptionwill berecorded.
23. Gainsandlossesarenotrecognizedwhenconvertiblebondsareconvertedintocommon
stock.
24. Generally,convertiblebondsdonotpayinterest.
25. Eachpaymentonamortgagenotepayableconsistsofinterestontheoriginalbalanceof
theloan andareductionoftheloanprincipal.
26. Along-term
notethatpledgestitletospecificpropertyassecurityforaloanisknown
asa mortgagepayable.
27. A capitalleaserequiresthelesseetorecordthe leaseasapurchaseof anasset.
28. Thetimesinterestearnedratiois computed bydividingnetincome byinterestexpense.
a29. Thepresentvalueofabondisafunctionoftwovariables:(1)thepaymentamountsand
(2)theinterest(discount)rate.
a30. Theeffective-interestmethodofamortizationresultsinvaryingamountsofamortization and interestexpenseperperiodbut
aconstantinterestrate.
Additional True-FalseQuestions
31. Bondsthatmatureat
asinglespecifiedfuturedatearecalledtermbonds.
15-6
32. Thetermsofthebondissuearesetforthinaformallegaldocumentcalledabond indenture.
33. Thecarryingvalueof
bondsatmaturityshouldbe
equaltotheface valueof
thebonds.
34. PremiumonBondsPayableisacontraaccounttoBondsPayable.
35. Whenbondsareconvertedintocommonstock,thecarryingvalueofthebondsis transferredto paid-incapital
accounts.
36. Operatingleasesareleasesthatthelesseemustcapitalizeonitsbalancesheetasan asset.
37. Underacapitallease,thelease/assetisreportedonthebalancesheetunderplant assets.
38. Long-termliabilitiesarereportedinaseparatesectionofthebalancesheetimmediately followingcurrent liabilities.
MULTIPLECHOICEQUESTIONS
39. Eachof
thefollowingiscorrectregarding bondsexcepttheyare
a.aformofinterest-bearingnotespayable.
b.attractivetomanyinvestors.
c.issuedbycorporations
andgovernmentalagencies.
d.soldin largedenominations.
40. Fromthestandpointoftheissuingcompany,adisadvantageofusingbondsasameans oflong-termfinancingisthat
a.bondinterestis deductiblefortaxpurposes.
b.interestmustbepaidonaperiodicbasisregardlessofearnings.
c.incometo stockholdersmayincreaseasaresultof tradingonthe equity. d.thebondholdersdonothavevotingrights.
41. Ifacorporationissued$2,000,000inbondswhichpay10%annualinterest,whatisthe
annual netcashcostof thisborrowingif theincometaxrateis30%?
a.$2,000,000 b.$60,000
c.$200,000 d.$140,000
Long-TermLiabilities 15-7
42. Securedbondsarebondsthat
a.areinthepossessionof abank.
b.areregisteredinthenameof theowner.
c.havespecificassetsof
the issuerpledged
ascollateral. d.havedetachableinterestcoupons.
43. Alegaldocumentwhichsummarizestherightsandprivilegesofbondholdersaswellas theobligationsandcommitmentsof
theissuingcompanyiscalled
a.a bondindenture. b.abonddebenture.
c.tradingonthe equity. d.atermbond.
44. Stockholdersofacompanymaybereluctanttofinanceexpansionthroughissuingmore
equitybecause
a.leveragingwithdebtisalwaysa betteridea.
b.theirearningspersharemaydecrease.
c.thepriceofthestockwillautomaticallydecrease. d.dividendsmust bepaidonaperiodicbasis.
45. Whichofthefollowingisnot anadvantageof
issuingbondsinsteadof commonstock?
a.Stockholdercontrolisnot affected.
b.Earningsper
shareoncommonstockmaybelower.
c.Incometocommonshareholdersmayincrease.
d.Taxsavingsresult.
46. Bondsthataresecuredbyrealestate aretermed
a.mortgagebonds.
b.serialbonds.c.debentures.d.bearerbonds.
47. Bondsthatmatureat asinglespecifiedfuturedate
arecalled a.couponbonds.
b.termbonds. c.serialbonds. d.debentures.
48. Bondsthatmaybeexchangedforcommonstockattheoptionofthebondholdersare called
a.options.
b.stockbonds.
c.convertiblebonds. d.callablebonds.
49. Bondsthataresubjecttoretirementatastateddollaramountpriortomaturityatthe
option of theissuerarecalled
a.callablebonds.
b.earlyretirementbonds. c.options.
d.debentures.
15-8
50. Investorswhoreceivechecksintheirnamesfor interestearnedonbondsmusthold
a.registeredbonds.
b.couponbonds. c.bearerbonds.
d.directbonds.
51. A bondholderthatsendsina coupontoreceiveinterestpaymentsmusthavea(n)
a.unsecuredbond.
b.bearerbond.
c.mortgagebond. d.serialbond.
52. Bondsthatmaybedirectlytransferredtoanotherpartybydeliveryare a.couponbonds.
b.debentures.
c.registeredbonds.
d.transportablebonds.
53. Bondsthatmustbecancelledandreissuedasnewbondsinordertohaveownership interest
transferred
are
a.couponbonds. b.bearerbonds.
c.serialbonds.
d.registeredbonds.
54. Corporationsaregrantedthepowertoissuebondsthrough
a.taxlaws.
b.statelaws.
c.federalsecuritylaws. d.bonddebentures.
55. Thepartywhohastherighttoexerciseacalloptionon bondsisthe a.investmentbanker.
b.bondholder. c.bearer.
d.issuer.
56. A majordisadvantageresultingfromtheuseofbonds isthat
a.earningspersharemaybe lowered.
b.interestmustbepaidonaperiodicbasis. c.bondholdershave votingrights.
d.taxesmayincrease.
57. Bondswillalwaysfall intoallbut which oneof
thefollowingcategories? a.Callableorconvertible
b.Termor serial
c.Registeredor bearerd.Securedor unsecured
Long-TermLiabilities 15-9
58. Whichof thefollowingstatements
concerningbonds is notatruestatement?
a.Bondsaregenerallysoldthroughaninvestmentcompany.
b.Thebondindentureispreparedafterthebondsare printed.
c.Thebondindenture
and bondcertificateare separatedocuments.
d.Thetrusteekeepsrecords of eachbondholder.
59. A bondtrusteedoesnot a.issuethebonds.
b.keeparecord of
eachbondholder.
c.holdconditionaltitletopledgedproperty.
d.maintaincustody of unsoldbonds.
60. Thecontractualinterestrate is
alwaysstatedasa(n) a.monthlyrate.
b.dailyrate.
c.semiannualrate. d.annualrate.
61. Whenauthorizingbondsto be issued,theboardof directorsdoesnotspecifythe a.totalnumberof
bondsauthorizedtobe sold.
b.contractualinterestrate.
c.sellingprice.
d.totalfacevalueof thebonds.
Usethefollowing
exhibitforquestions62–63.
Bonds Close Kmart83/8 17 100¼
Yield Volume 8.4 35
NetChange +7/8
62. Thecontractualinterestrateof
theKmartbonds is a.greaterthanthemarketinterestrate.
b.lessthanthemarketinterestrate.
c.equaltothemarketinterestrate. d.notdeterminable.
63. Onthedayof tradingreferred toabove, a.noKmartbondsweretraded.
b.bondswithmarketpricesof $3,500weretraded.
c.at closing,thesellingpriceof thebondwashigherthanthe previousday'sprice. d.thebondsoldfor $100.25
64. A $1,000face valuebondwitha quotedpriceof98issellingfor
a.$1,000.
b.$980. c.$908.
d.$98.
65. A bondwithafacevalueof$100,000andaquotedpriceof102¼
hasasellingpriceof
a.$120,225.
b.$102,025.
c.$100,225. d.$102,250.
15-10
66. PremiumonBondsPayable a.hasadebitbalance.
b.isacontraaccount.
c.isconsideredto
beareduction inthecostofborrowing.
d.is deductedfrombondspayableon thebalancesheet.
67. If themarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsell
a.at apremium.
b.atfacevalue.
c.at adiscount.
d.onlyafterthestatedinterestrate
is
increased.
68. OnJanuary1,2008,GrantCorporationissued$3,000,000,10-year,8%bondsat102. InterestispayablesemiannuallyonJanuary1andJuly1.Thejournalentrytorecordthis transactiononJanuary1, 2008is
a.Cash....................................................................................3,000,000
BondsPayable............................................................ 3,000,000
b.Cash.................................................................................... BondsPayable............................................................
c.PremiumonBondsPayable................................................
Cash.................................................................................... BondsPayable............................................................
d.Cash....................................................................................
BondsPayable............................................................ PremiumonBondsPayable.......................................
3,060,000
60,000 3,000,000
3,060,000
3,060,000
3,060,000
3,000,000 60,000
69. Thetotalcost of
borrowingis increasedonlyifthe
a.bondswereissuedatapremium.
b.bondswereissuedatadiscount.
c.bondsweresoldatface value.
d.marketinterestrateislessthanthecontractualinterestrateonthat date.
70. Ifthemarketinterestrateis10%,a$10,000,12%,10-yearbond,thatpaysinterest
semiannually wouldsellat
anamount
a.lessthanfacevalue.
b.equaltofacevalue.
c.greaterthanfacevalue.
d.thatcannotbedetermined.
71. Thepresentvalueofa$10,000,5-yearbond,willbelessthan$10,000if
the a.contractualinterestrate is lessthanthemarketinterestrate.
b.contractualinterestrate isgreaterthanthemarketinterestrate. c.bondis
convertible.
d.contractualinterestrate isequaltothemarket interestrate.
72. GomezCorporationissues1,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at
98.Thejournalentryto recordtheissuancewillshowa
a.debitto Cashof$1,000,000.
b.creditto DiscountonBondsPayablefor
$20,000. c.creditto BondsPayablefor$980,000.
d.debitto Cashfor $980,000.
Long-TermLiabilities 15-11
73. Themarketinterestrate isoftencalledthe a.statedrate.
b.effectiverate. c.couponrate.
d.contractualrate.
74. Ifbonds areissuedat
adiscount,itmeansthatthe
a.financialstrengthof theissuerissuspect.
b.marketinterestrateishigher thanthecontractualinterestrate.
c.marketinterestrateis lower thanthecontractualinterestrate.
d.bondholderwillreceiveeffectivelylessinterestthanthecontractualinterestrate.
75. Eachof thefollowingaccountsis
reportedas long-term liabilitiesexcept a.BondInterestPayable.
b.BondsPayable.
c.Discounton BondsPayable.
d.Premiumon BondsPayable.
76. Thestatementthat"Bondpricesvaryinverselywithchangesinthemarketinterestrate"
meansthatif the
a.marketinterestrateincreases,thecontractualinterest
rate
willdecrease. b.contractualinterest rate
increases, thenbondpriceswillgo
down.
c.marketinterestratedecreases,thenbond priceswillgo up.
d.contractualinterestrate increases,themarketinterestratewilldecrease.
77. Thecarryingvalueofbondswillequalthemarketprice
a.at thecloseof everytrading day.
b.attheendofthefiscalperiod.
c.onthedateof issuance.
d.everysixmonthsonthedateinterestispaid.
78. Thesaleof
bondsabovefacevalue a.isa rareoccurrence.
b.willcausethetotalcostof
borrowingto belessthanthebondinterestpaid.c.will causethe totalcostof borrowingtobemorethanthebondinterestpaid. d.willhaveno
net effectonInterestExpensebythetimethebondsmature.
79. Inthebalancesheet,theaccount,Premium on BondsPayable, is
a.addedtobondspayable.
b.deductedfrom bondspayable.
c.classifiedasastockholders'equityaccount. d.classifiedasarevenueaccount.
80. Twothousandbondswithafacevalueof$1,000each,aresoldat103.Theentryto
record theissuanceis
a.Cash....................................................................................2,060,000
BondsPayable........................................................... 2,060,000
b.Cash....................................................................................2,000,000 PremiumonBondsPayable................................................ 60,000
BondsPayable........................................................... 2,060,000
15-12
c.Cash...................................................................................2,060,000
PremiumonBondsPayable......................................
BondsPayable...........................................................
60,000 2,000,000
d.Cash...................................................................................2,060,000
DiscountonBondsPayable.......................................
BondsPayable...........................................................
60,000 2,000,000
81. Bondinterestpaidis
a.higherwhenbondssellat
a discount. b.lower whenbondssellat
apremium.
c.thesame whetherbondssellat
adiscountorapremium.
d.higherwhenbondssellat a discountandlowerwhenbondssellata premium.
82. MendezCorporationissues2,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at 103.Thejournalentrytorecordtheissuancewillshowa
a.debitto Cashof$2,000,000.
b.creditto Premium
onBonds Payablefor $60,000.
c.creditto BondsPayablefor$2,030,000.
d.creditto Cashfor$2,060,000.
Usethefollowing
informationforquestions83–86.
GoldenCompanyreceivedproceedsof$94,250on10-year,8%bondsissuedonJanuary1,
2007.Thebondshadafacevalueof$100,000,payinterestsemi-annuallyonJune30and December31, andhavea
call price of 101.Goldenusesthestraight-linemethodof amortization.
83. Whatisthe
amountof interestGoldenmustpaythebondholdersin2007?
a.$7,540
b.$8,000 c.$8,575 d.$7,425
a84. WhatistheamountofinterestexpenseGoldenwillshowwithrelationtothesebondsfor
theyearendedDecember31,2008?
a.$8,000
b.$7,540 c.$8,575 d.$7,425
a85. Whatisthecarryingvalueof
thebonds onJanuary1,
2009?
a.$100,000
b.$95,400
c.$98,850 d.$94,825
86. GoldenCompanydecidedtoredeemthebondsonJanuary1, 2009.Whatamountofgain orlosswouldGoldenreportonits2009incomestatement?
a.$4,600gain b.$5,600gain c. $5,600loss d.$4,600loss
Long-TermLiabilities 15-13
87. Bryce Companyhas$500,000ofbondsoutstanding.Theunamortizedpremiumis$7,200.
Ifthecompanyredeemedthebondsat101,whatwouldbethegainorlossonthe redemption?
a.$2,200gain b.$2,200loss c.$5,000gain d.$5,000loss
88. ThecurrentcarryingvalueofJensen’s$600,000facevaluebondsis$597,750.Ifthe
bonds are retiredat102, what wouldbetheamountJensenwouldpayits
bondholders?a.$597,750
b.$600,000
c.$603,000 d.$612,000
89. LaheyCorporationretiresits$500,000facevaluebondsat105onJanuary1,following thepaymentofannual
interest.The carryingvalueofthebondsatthe
redemptiondateis
$518,725.Theentrytorecordtheredemptionwillincludea
a.creditof $18,725toLosson BondRedemption.
b.debitof $18,725toPremiumon BondsPayable.
c.credit of $6,275toGainon BondRedemption.d.debitof $25,000toPremiumon BondsPayable.
90. A$900,000bondwasretiredat103whenthecarryingvalueofthebondwas$933,000. Theentrytorecordtheretirement
wouldincludea
a.gainonbondredemptionof $27,000.
b.losson bondredemptionof$6,000.c.lossonbondredemptionof$27,000. d.gainonbondredemptionof
$6,000.
91. Ifforty$1,000
convertiblebondswitha
carrying value of$46,000areconvertedinto6,000
shares of$5parvaluecommonstock,thejournalentrytorecordtheconversionis
a.BondsPayable.................................................................... 46,000
CommonStock........................................................... 46,000
b.BondsPayable.................................................................... 40,000
PremiumonBondsPayable................................................
6,000
CommonStock........................................................... 46,000
c.BondsPayable.................................................................... 40,000
PremiumonBondsPayable................................................
6,000
CommonStock........................................................... 30,000 Paid-inCapitalin Excess ofPar................................. 16,000
d.BondsPayable.................................................................... 46,000
DiscountonBondsPayable....................................... 6,000 CommonStock........................................................... 30,000 Paid-inCapitalin Excess ofPar................................. 10,000
92. A corporationrecognizesagainorloss
a.onlywhenbondsareconverted intocommonstock. b.onlywhenbondsareredeemedbeforematurity.
c.whenbondsareredeemedat orbeforematurity.
d.whenbondsareconvertedintocommonstockandwhentheyareredeemedbefore
maturity.
15-14
93. If thereisa lossonbondsredeemedearly,it is
a.debiteddirectlyto RetainedEarnings.
b.reportedasan"OtherExpense"onthe incomestatement.
c.reportedas an"ExtraordinaryItem"ontheincomestatement.
d.debitedtoInterest Expense,asa cost offinancing.
94. Ifbondscanbeconvertedintocommonstock,
a.theywill sellat
a lower pricethancomparablebondswithoutaconversionfeature.
b.theywillcarryahigherinterestratethancomparablebondswithouttheconversion feature.
c.theywillbeconvertedonlyif the issuercallsthem inforconversion.
d.thebondholdermaybenefitifthemarketpriceofthecommonstockincreases substantially.
95. Whenbondsareconvertedintocommonstock,
a.themarketpriceofthestockonthedateofconversioniscreditedtotheCommon Stockaccount.
b.themarketpriceofthebondsonthedateofconversioniscreditedtotheCommon Stockaccount.
c.themarketpriceof thestock
andthebondsisignoredwhenrecordingtheconversion.
d.gainsor lossesontheconversionarerecognized.
96. Ifbonds
withafacevalueof$90,000areconvertedintocommonstockwhenthecarrying
value
of thebondsis $81,000,theentrytorecordtheconversionwillinclude adebitto
a.BondsPayablefor
$90,000. b.BondsPayablefor $81,000.
c.Discounton BondsPayablefor$9,000.
d.BondsPayableequaltothemarketpriceof thebonds onthedateofconversion.
97. A$900,000bondwasretiredat98whenthecarryingvalueofthebondwas$888,000.
Theentrytorecordtheretirement
wouldincludea
a.gainonbondredemptionof
$12,000. b.losson bondredemptionof$6,000.c.lossonbondredemptionof$12,000.
d.gainonbondredemptionof $6,000.
98. Twenty$1,000bondswithacarryingvalueof$25,600areconverted into2,000sharesof $5parvaluecommonstock.Thecommonstockhadamarketvalueof$9pershareon thedate
of conversion.Theentrytorecordtheconversion is
a.BondsPayable................................................................... 25,600
CommonStock.......................................................... 10,000 Paid-inCapitalin Excess ofPar.................................. 15,600
b.BondsPayable................................................................... 20,000 PremiumonBondsPayable............................................... 5,600
CommonStock.......................................................... 18,000 Paid-inCapitalin Excess ofPar................................. 7,600
c.BondsPayable................................................................... 20,000
Premiumon BondsPayable............................................... 5,600
CommonStock.......................................................... 10,000 Paid-inCapitalin Excess ofPar.................................. 15,600
d.BondsPayable................................................................... 25,600 CommonStock.......................................................... 18,000 Paid-inCapitalin Excess ofPar.................................. 7,600
Long-TermLiabilities 15-15
99. Which
oneofthefollowingamounts
increaseseachperiod
whenaccountingforlong-term
notes payable?
a.Cashpaymentb.Interestexpense
c.Principalbalance
d.Reductionofprincipal
100. Inthebalancesheet,mortgagenotespayablearereportedas
a.acurrentliability only.
b.a long-termliabilityonly.
c.bothacurrentanda long-term liability.
d.a currentliability
exceptfor
thereductioninprincipalamount.
101. Amortgagenotepayablewithafixedinterestraterequirestheborrowertomake installmentpaymentsoverthetermoftheloan.Eachinstallmentpaymentincludes interestontheunpaidbalanceoftheloanandapaymentontheprincipal.Witheach
installmentpayment,indicatetheeffectontheportionallocatedtointerestexpenseand
theportionallocatedtoprincipal.
PortionAllocatedto InterestExpense
a. Increases b. Increases c. Decreases d. Decreases
PortionAllocatedtoPaymentof
Principal
Increases Decreases Decreases Increases
102. Theentrytorecordaninstallment paymentona long-term
notepayableis a.MortgageNotesPayable
Cash
b.InterestExpense Cash
c.MortgageNotesPayable InterestExpense
Cash
d.BondsPayable Cash
Usethefollowing
informationforquestions103–104.
DelmarCompanypurchasedabuildingonJanuary2bysigningalong-term$840,000mortgage with
monthlypaymentsof$7,700.Themortgagecarriesan interestrateof
10percent.
103. Theentrytorecordthefirstmonthlypaymentwill includea
a.debittotheCashaccountfor$7,700.
b.creditto theCashaccountfor$7,000.
c.debittotheInterestExpenseaccountfor $7,000.d.creditto the MortgagePayableaccountfor$7,700.
104. Theamountowedonthemortgageafterthefirstpayment will
be a.$840,000.
b.$839,300. c.$833,000.
d.$832,300.
15-16
Usethefollowing
informationforquestions105–106.
Diamond Companyborrowed$500,000fromBankTwoonJanuary1,2007inordertoexpandits
miningcapabilities.Thefive-yearnoterequiredannualpaymentsof$130,218andcarriedan annual interest rate
of 9.5%.
105. Whatisthe amountof
expenseDiamondmustrecognizeonits2008income statement?
a.$47,500
b.$39,642 c.$35,129 d.$31,037
106. Whatisthebalanceinthenotespayable
accountat December31,2008? a.$500,000
b.$326,706 c.$417,282
d.$405,000
107. The lesseehassubstantiallyall
of thebenefitsand
risksof ownership
ina(n) a.apartmentlease.
b.capitallease.
c.operatinglease.
d.operatingleaseandacapitallease.
108. Aleasewheretheintentistemporaryuseofthepropertybythelesseewithcontinued
ownership of thepropertybythe lessoris called
a.off-balancesheetfinancing.
b.anoperatinglease.
c.acapitallease.
d.a purchaseofproperty.
109. Whichofthefollowingisnotaconditionwhichwouldrequiretherecordingofalease
contractasa capitallease?
a.The leasetransfers
ownershipof
thepropertytothelessee.
b.Theleasecontainsabargainpurchaseoption.
c.Theleaseterm
islessthan75% oftheeconomiclife
oftheleasedproperty.
d.Thepresentvalueoftheleasepaymentsequalsorexceeds90%ofthefairmarket value of
theleasedproperty.
110. Inaleasecontract,
a.theowner of thepropertyiscalledthe
lessee.
b.thepresenceof abargainpurchaseoptionindicatesthatit
is acapitallease. c.therenterof
the propertyiscalledthe lessor.
d.thereisalwaysatransferof ownershipat the end oftheleaseterm.
111. Whichofthefollowingstatements
concerningleases istrue?
a.Capitalleasesarefavoredbylessees.
b.Theappearanceoftheaccount,LeasedAsset,onthebalancesheet,signifiesan
operatinglease.
c.Theportionofaleaseliabilityexpectedtobepaidinthenextyearisreportedasa currentliability.
d.Presentvalueisirrelevantinaccountingfor leases.
Long-TermLiabilities 15-17
112. Ifthepresentvalueofleasepaymentsequalsorexceeds90%ofthefairmarketvalueof
theleasedproperty, the
a.conditionsaremetfortheleasetobeconsideredacapitallease.
b.leaseis uneconomical andshouldnot
beenteredinto.
c.leasemaybeclassifiedasanoperatinglease.
d.recordingofaleaseliabilityisoptional—that
is,theoff-balancesheet
approachcan be elected.
113. Eachof thefollowingmaybe shownin asupportingscheduleinsteadofthe balancesheet exceptthe
a.currentmaturitiesof long-term debt. b.conversionprivileges.
c.interestrates.d.maturitydates.
114. Thetimesinterestearnedratiois computed
bydividing a.netincomebyinterestexpense.
b.incomebeforeincometaxesbyinterestexpense.
c.incomebeforeinterestexpensebyinterestexpense.
d.incomebeforeincometaxesandinterestexpensebyinterestexpense.
115. Thediscountonbondspayableorpremiumonbondspayableisshownonthebalance sheetasanadjustmenttobondspayabletoarriveatthecarryingvalueofthebonds. Indicatetheappropriateadditionor
subtractiontobondspayable:
Premiumon
Bonds Payable
a. Addb. Deduct c. Addd. Deduct
Discounton Bonds Payable AddAddDeductDeduct
116. InarecentyearDartCorporationhadnetincomeof$140,000,interestexpenseof $30,000,andtaxexpenseof$20,000.WhatwasDartCorporation’s
timesinterestearned ratiofor theyear?
a.6.33 b.4.66
c.5.33 d.6.00
117. InarecentyearDayCorporationhadnetincomeof$150,000,interestexpenseof $30,000,andatimesinterestearnedratioof9.WhatwasDayCorporation’sincome beforetaxesfortheyear?
a.$300,000
b.$270,000 c.$240,000
d.Noneof theabove.
15-18
118. TheadjustedtrialbalanceforLifesaverCorp.attheendofthecurrentyear,2008, containedthefollowingaccounts.
5-yearBondsPayable8%
BondInterestPayable
PremiumonBondsPayable NotesPayable(3mo.)NotesPayable(5yr.)
MortgagePayable($15,000duecurrently)
SalariesPayable
TaxesPayable(due3/15 of2009)
$1,000,000
50,000 100,000 40,000 165,000 200,000 18,000 25,000
Thetotallong-term liabilitiesreportedonthebalancesheetare
a.$1,365,000.
b.$1,350,000. c.$1,465,000. d.$1,450,000.
119. The2008financialstatementsofShadowCo.containthefollowingselecteddata(in
millions).
CurrentAssets $75
TotalAssets 120 CurrentLiabilities 40 TotalLiabilities 85 Cash 8
Thedebttototalassetsratiois
a.70.8%.
b.53.3%. c.29.2%.
d.1.41%.
a120.Thepresentvalueofa bondisalsoknownasits
a.facevalue.
b.marketprice.c.futurevalue.d.deferredvalue.
a121.$3million,10%,10-yearbondsareissuedatfacevalue.Interestwillbepaidsemi-annually.Whencalculatingthemarketpriceof the bond,thepresentvalueof
a.$300,000receivedfor10periodsmustbecalculated.
b.$3 millionreceived in10periodsmustbecalculated. c.$3millionreceived in
20periodsmustbecalculated.
d.$150,000receivedfor
10periodsmustbecalculated.
a122.Eitherthestraight-linemethodortheeffective-interestmethodofamortizationwillalways resultin
a.thesameamountof
interestexpensebeingrecognizedovertheterm of
thebonds. b.thesameamountof interestexpensebeingrecognizedeachyear.
c.moreinterestexpensebeingrecognizedthanifpremiumordiscountswerenot
amortized.
d.thesamecarrying valueeachyearduringtheterm
of thebonds.
Long-TermLiabilities 15-19
a123.Acorporationissued$300,000,10%,5-yearbondsonJanuary1,2008for$324,333,
whichreflectsaneffective-interestrateof8%.InterestispaidsemiannuallyonJanuary1
andJuly1.Ifthecorporationusestheeffective-interestmethodofamortizationofbond premium, theamountofbondinterestexpensetoberecognizedonJuly1,2008,is
a.$15,000. b.$12,000.
c.$16,217. d.$12,973.
a124.A bonddiscountmust
a.alwaysbeamortizedusingstraight-lineamortization.
b.alwaysbeamortizedusingtheeffective-interestmethod.
c.beamortizedusingtheeffective-interestmethodifityieldsannualamountsthatare materiallydifferentthanthe straight-linemethod.
d.beamortizedusingthestraight-linemethodifityieldsannualamountsthatare materiallydifferentthantheeffective-interestmethod.
a125.Whenthe effective-interestmethodof bonddiscountamortizationis used,
a.theapplicableinterestrateusedtocomputeinterestexpenseistheprevailingmarket
interest rateonthedateofeachinterestpaymentdate.
b.thecarrying valueof
thebondswilldecreaseeachperiod.
c.interestexpensewillnotbeaconstantdollar amountoverthelife ofthebond.
d.interestpaidtobondholderswillbeafunction
oftheeffective-interestrateonthedate
thebondsare issued.
a126.Whentheeffective-interestmethodofbondpremiumamortizationisused,the a.amountofpremiumamortizedwillgetlargerwithsuccessive amortization. b.carrying valueof
thebondswill increasewithsuccessive amortization.
c.interestpaidto
bondholderswillincreaseaftereach interestpayment
date. d.interestrateusedtocalculate interestexpensewillbethecontractualrate.
Usethefollowing
informationforquestions127–129.
SilconCompanyissued$800,000of6%,10-yearbondsononeofitsinterestdatesfor$690,960
toyieldaneffectiveannualrateof8%.Theeffective-interestmethodofamortizationistobe
used.
a127.Whatamountofdiscount(tothenearestdollar)shouldbeamortizedforthefirstinterest
period?
a.$22,542 b.$10,904 c.$14,554 d.$7,277
a128.Thejournalentryonthe firstinterestpaymentdate,torecordthepaymentofinterestand
amortization ofdiscountwillincludea
a.debitto BondInterestExpensefor$48,000.
b.creditto Cashfor$55,277.
c.credittoDiscountonBonds Payablefor $7,277. d.debitto BondInterestExpensefor$64,000.
15-20
a129.Howmuchbond interestexpense(tothenearestdollar)
should be reported on
theincome statementfortheend of thefirst year?
a.$55,422 b.$55,277 c.$55,131 d.$48,000
a130.OnJanuary1,JeanLopteinInc.issued$3,000,000,9%bondsfor$2,817,000.The marketrateofinterest
forthesebonds is10%.Interestispayableannually onDecember 31.JeanLopteinusestheeffective-interestmethodofamortizingbonddiscount.Atthe end of thefirst
year,JeanLopteinshouldreportunamortizedbonddiscountof
a.$164,700.
b.$171,300. c.$154,830. d.$153,000.
a131.OnJanuary1,CleopatraCorporationissued$2,000,000,14%,5-yearbondswithinterest payableonDecember31.Thebondssoldfor$2,144,192.Themarketrateofinterestfor
thesebondswas12%.Onthefirstinterestdate,usingtheeffective-interestmethod,the debitentryto
BondInterest Expenseisfor
a.$240,000.
b.$251,162. c.$257,304. d.$280,000.
a132.OnJanuary1,HurleyCorporationissues$1,000,000,5-year,12%bondsat96with
interestpayableonJuly1andJanuary1.TheentryonDecember31torecordaccrued
bondinterestandtheamortizationofbonddiscountusingthestraight-linemethodwill
include a
a.debitto Interest Expense,$60,000.b.debittoInterest
Expense,$120,000.
c.credittoDiscountonBonds Payable,$4,000.
d.creditto DiscountonBonds
Payable,$8,000.
133. OnJanuary1,2008,$1,000,000,10-year,10%bonds,wereissuedfor$970,000.Interest
ispaidannuallyonJanuary1.Iftheissuingcorporationusesthestraight-linemethodto amortize discountonbonds payable,themonthlyamortizationamountis
a.$9,700. b.$3,000. c.$808.d.$250.
134. Acorporationissues$100,000,10%,5-yearbondsonJanuary1,2008,for$95,800.
InterestispaidannuallyonJanuary1.Ifthecorporationusesthestraight-linemethodof
amortizationofbonddiscount,theamountofbondinterestexpensetoberecognizedin
December 31, 2008’sadjusting
entryis
a.$10,840. b.$10,000.
c.$9,160. d.$840.
Long-TermLiabilities 15-21
a135.RomanCompanyissued
$400,000 of6%,5-yearbondsat98,withinterestpaidannually. Assumingstraight-line
amortization,
whatisthetotalinterestcost ofthe
bonds?
a.$120,000
b.$128,000 c.$112,000 d.$116,000
a136.SunwoodCompanyissued$500,000of6%,5-yearbondsat98,withinterestpaid annually.Assumingstraight-line amortization,whatisthecarryingvalueofthebondsafter
one year?
a.$490,000
b.$491,000 c.$492,000 d.$494,000
a137.TerranceCompanyissued$200,000of8%,5-yearbondsat106.Assumingstraight-line
amortizationandannualinterestpayments,howmuchbondinterestexpenseisrecorded on thenext interestdate?
a.$16,000
b.$18,400 c.$13,600 d.$2,400
a138.GarciaCompanyissued$800,000of8%,
5-yearbondsat106,withinterestpaidannually.
Assumingstraight-lineamortization,whatisthecarryingvalueofthebondsafterone year?
a.$848,000
b.$843,200 c.$838,400 d.$852,800
a139.OnJanuary1,2008,$5,000,000,5-year,10%bonds,wereissuedfor$4,850,000.Interest
ispaidsemiannuallyonJanuary1andJuly1.Iftheissuingcorporationusesthestraight-line methodtoamortizediscountonbondspayable,themonthlyamortizationamountis
a.$29,040. b.$30,000.
c.$2,420. d.$2,500.
a140.Acorporationissues$300,000,10%,5-yearbondsonJanuary1,2008for$287,400. Interest
ispaidsemiannuallyonJanuary1andJuly1.Ifthecorporation
usesthestraight-linemethodofamortizationofbonddiscount,theamountofbondinterestexpensetobe
recognized onJuly1,
2008is
a.$31,260. b.$15,000.
c.$16,260. d.$13,740.
a141.Overthetermof thebonds,thebalanceintheDiscountonBonds Payableaccountwill a.fluctuateupanddownif themarketis
volatile.
b.decrease.
c.increase.
d.be unaffecteduntilthebondsmature.
15-22
a142.Bonddiscountshouldbeamortizedtocomplywith
a.thehistoricalcostprinciple.
b.thematchingprinciple.
c.therevenuerecognitionprinciple. d.conservatism.
a143.Ifbondshavebeenissued at
adiscount,overthe life of
thebonds,the a.carryingvalueof thebondswilldecrease.
b.carryingvalueof thebondswill increase.
c.interestexpensewillincrease,ifthediscountisbeingamortizedonastraight-line basis.
d.unamortizeddiscountwill increase.
Additional
MultipleChoiceQuestions
144. Themarketvalue(presentvalue) of abondisafunctionofallof
thefollowingexceptthe a.dollaramountstobereceived.
b.lengthoftimeuntiltheamounts
arereceived. c.marketrate
of interest.
d.lengthoftimeuntilthe bondissold.
145. Onthedateofissue,ChudzickCorporationsells$2millionof5-yearbondsat97.The entry torecordthesale willincludethefollowingdebitsandcredits:
Bonds Payable a.$1,940,000Cr.
b.$2,000,000Cr. c.$2,000,000Cr. d.$2,000,000Cr.
Discount onBondsPayable $0 Dr.
$60,000Dr. $500,000Dr.
$6,000Dr.
146. Themarketrateofinterestfora
bondissue whichsellsformorethanitsfacevalueis
a.independentoftheinterestratestatedonthebond.
b.higherthanthe
interestrate statedonthebond. c.equaltotheinterestratestatedonthebond.
d.lessthanthe
interestratestatedonthebond.
147. Whenacompanyretiresbondsbeforematurity,thegainorlossonredemptionisthe differencebetween thecashpaidandthe
a.carryingvalueof
thebonds. b.facevalueof thebonds.
c.originalselling priceofthebonds.
d.maturityvalueof thebonds.
148. Hoffman
Corporationretiresitsbondsat106onJanuary1,followingthepaymentofsemi-annualinterest.Thefacevalueofthebondsis$400,000.Thecarryingvalueofthebonds at theredemptiondateis$419,800.Theentryto recordtheredemptionwillincludea
a.creditof $19,800to LossonBondRedemption. b.debit of $24,000toPremiumonBondsPayable.
c.creditof $4,200toGainon BondRedemption.d.debitof $19,800toPremiumon BondsPayable.
Long-TermLiabilities 15-23
149. Eachpaymentonamortgagenotepayable consistsof a.interestonthe originalbalance
of theloan.
b.reductionof loanprincipalonly.
c.interestontheoriginalbalance of
the
loanandreduction of loanprincipal.
d.interestonthe unpaidbalance ofthe loanandreductionof loanprincipal.
150. Whichofthefollowingisnotaconditionunderwhichthelesseemustrecordtheleaseof
an asset?
a.The leasecontainsabargainpurchaseoption.
b.The leasetransfers
ownershipof
thepropertytothelessee.
c.Theleaseterm
isequalto
60%
of theeconomiclife
oftheleaseproperty.
d.Thepresent
valueofthelease paymentsis90%ofthefairmarketvalueoftheleased
property.
151. Thelesseemustrecorda leaseasanassetifthelease a.transfersownershipof
thepropertytothelessor.
b.containsapurchaseoption.
c.termis75%ormoreof theusefullifeoftheleasedproperty.
d.paymentsequalorexceed90%
ofthefairmarketvalueof
the leasedproperty.
152. BuffonElectronicsCompanyissuesan$800,000,10%,20-yearmortgagenoteon
January1.Thetermsprovideforsemiannualinstallmentpayments,exclusiveofreal
estatetaxesandinsurance,of$46,621.Afterthefirstinstallmentpayment,theprincipal
balance is
a.$800,000. b.$786,427. c.$793,379. d.$779,125.
153. Thedebttototalassetsratioiscomputedbydividing a.long-termliabilities
bytotalassets.
b.totaldebtbytotalassets.
c.totalassetsbytotal debt.
d.totalassetsbylong-termliabilities.
a154.Themarketpriceof abond
isthe
a.presentvalueofitsprincipalamountatmaturityplusthepresentvalueofallfuture
interest payments.
b.principalamount
plusthepresentvalueofallfutureinterestpayments. c.principalamount plusallfutureinterestpayments.
d.presentvalueof
its principalamountonly.
BRIEFEXERCISES
BE155
ShafferInc.isconsideringtwo
alternativestofinance itsconstructionofanew$5millionplant. (a)Issuanceof 500,000sharesof commonstockatthemarketpriceof $10 per
share.
(b)Issuanceof $5million,8%bondsatpar.
Instructions
Completethefollowingtable.
Incomebeforeinterestandtaxes
Issue Stock $1,400,000
IssueBonds $1,400,000
Interestexpensefrombonds
Incomebeforeincometaxes $ $
Incometaxexpense(30%)
Netincome $ $
Outstandingshares 700,000
Earningspershare
BE156
OnJanuary1,2008,BeltwayEnterprisesissued11%,5-yearbondswithafaceamountof
$900,000atpar.Interestis payablesemiannuallyonJune30andDecember31.
Instructions
Preparetheentriestorecordtheissuanceofthebondsandthefirstsemiannualinterest payment.
BE157
OnJanuary1,2008,KentwoodCompany issuedbondswith afacevalue of$500,000.Thebonds carryastatedinterestof7% payableeachJanuary1 andJuly1.
Instructions
a. Preparethejournalentryfortheissuanceassumingthebondsareissuedat 97.b. Preparethejournalentryfortheissuanceassumingthebondsareissuedat
102.
BE158
OnJuly1,2008,FrodoCorporationissued$800,000,
6%, 10-yearbondsatfacevalue. Interestis payable semiannuallyon January1 andJuly1.Frodo
Corporationhasacalendaryearend.
Instructions
Prepareallentriesrelatedtothebond
issuefor2008.
BE159
OnJanuary1,2008,ZoolandEnterprisessold12%,10-yearbondswithafaceamountof
$1,000,000for$970,000.InterestispayablesemiannuallyonJuly1 andJanuary1.
Instructions
Calculatethecarryingvalue of
thebondat December31,2008and2009.
BE160
DeltaCompanyissuedbondswithafaceamountof$1,000,000in2003.AsofJanuary1,2008,
thebalanceinDiscount onBondsPayableis$4,800.Atthattime,Deltaredeemed
thebondsat 102.
Instructions
Assumingthatnointerestispayable,maketheentrytorecordtheredemption.
BE161
NicholsonInc.issuesan$800,000,10%,10-yearmortgagenoteonDecember31,2008,to obtainfinancingforanewbuilding.Thetermsprovideforsemiannualinstallmentpaymentsof $64,194.
Instructions
PreparetheentrytorecordthemortgageloanonDecember31,2008,andthefirstinstallment
payment.
BE162
FrancoCorporationreportsthefollowingselectedfinancialstatementinformationatDecember
31,2008:
TotalAssets $89,000
TotalLiabilities 65,000 NetIncome
27,000 InterestIncome 1,600 InterestExpense 900 TaxExpense
300
Instructions
Calculatethe debttototalassetsandtimesinterest
earnedratios.
BE163
OnJanuary1,2008,FabianEnterprisesissued9%,10-yearbondswithafaceamountof
$700,000at96. InterestispayablesemiannuallyonJune
30and December31.Thebondswere
issued foran effectiveinterestrateof 10%.
Instructions
Preparetheentriesto recordthe issuanceofthebonds andthefirst semiannualinterestpayment
assumingthatthecompanyuseseffective-interestamortization.
BE164
OnJanuary1,2008,HalstonEnterprisesissued8%,20-yearbondswithafaceamountof $3,000,000at 101.Interest ispayablesemiannuallyonJune30andDecember31.
Instructions
Preparetheentriesto
recordthe
issuanceofthebonds andthefirst semiannualinterestpayment
assumingthatthecompanyusesstraight-line amortization.
EXERCISES
Ex.165
BanksCompanyisconsideringtwoalternativestofinanceitspurchaseofanew$4,000,000
office building.
(a)Issue400,000sharesof
commonstockat $10per
share. (b)Issue8%,10-year
bondsatpar($4,000,000).
Incomebefore interestand taxes
isexpectedtobe$2,000,000.Thecompanyhasa30%tax rate and has 600,000sharesofcommonstockoutstanding priortothenewfinancing.
Instructions
Calculateeachofthefollowingforeachalternative: (1)Netincome.
(2)Earningsper
share.
Long-TermLiabilities 15-29
Ex.166
The board ofdirectorsofFinleyCorporationisconsideringtwoplans forfinancing
thepurchase of newplantequipment.Plan#1wouldrequiretheissuanceof$4,000,000,6%,20-yearbondsat facevalue.Plan#2wouldrequiretheissuanceof100,000sharesof$5parvaluecommonstock
whichissellingfor$40pershareontheopenmarket.FinleyCorporationcurrentlyhas100,000 sharesofcommonstockoutstandingandtheincometaxrateisexpectedtobe30%.Assume
thatincomebeforeinterestandincometaxesisexpectedtobe$700,000ifthenewfactory equipmentispurchased.
Instructions
Prepareaschedulewhichshowstheexpectednetincomeaftertaxesandtheearningspershare
on commonstockundereach of
theplansthattheboardof directorsisconsidering.
Ex.167
UnitedHealthisconsideringtwoalternativesforthefinancingofsomehightechnologymedical
equipment.Thesetwoalternativesare:
1.Issue50,000sharesof$10par
valuecommonstockat
$50pershare. 2.Issue$2,500,000,10%,10-yearbondsat
par.
15-30
Ex.167 (cont.)
Itisestimatedthatthecompanywillearn$800,000beforeinterestandtaxesasaresultof
acquiringthemedicalequipment.Thecompanyhasanestimatedtaxrateof30%andhas 100,000shares of commonstockoutstanding
priortothenewfinancing.
Instructions
Determinethe effectonnet incomeandearningsper
shareforthesetwomethodsoffinancing.
Ex.168
Threeplansforfinancinga$20,000,000corporationareunderconsiderationbyitsorganizers.
Undereachofthe followingplans, thesecurities
willbeissuedattheirparorfaceamount
andthe incometaxrateisestimated
at30%.
Plan1 Plan2 Plan3
9%Bonds — — $10,000,000 6%PreferredStock,$100par — $10,000,000
5,000,000 CommonStock,$10par $20,000,00010,000,000 5,000,000Total
$20,000,000$20,000,000 $20,000,000
Itisestimatedthatincomebeforeinterestandtaxes willbe$4,000,000.
Instructions
Determineforeachplan,the
expectednet incomeandtheearningspershareoncommonstock.
Long-TermLiabilities 15-31
Ex.169
TaylorCorporationissued$3million,10-year,6%bondsonJanuary1,
2008.
Instructions
Preparetheentrytorecordthesaleof thesebonds, assumingtheywereissuedat (a)98.
(b)103.
Ex.170
OnJanuary1,2008,KohlCorporationissued$700,000,8%,10-yearbondsatfacevalue.
InterestispayablesemiannuallyonJuly1andJanuary1.KohlCorporationhasacalendaryear end.
Instructions
Prepareallentriesrelatedtothebond issuefor2008.
Ex.171
OnJanuary1,
PorterCorporationissued$800,000,6%, 5-yearbondsatfacevalue.Interestis payable semiannuallyon July1
andJanuary1.
Instructions
Preparejournalentriestorecordthe
(a)Issuanceofthebonds.
(b)Paymentof interestonJuly1,
assumingnopreviousaccrualofinterest.
(c)Accrualof intereston December31.
Ex.172
WoodCompanyretired$300,000facevalue, 9%bondsonJune30,2008at
98.Thecarrying
value
of thebondsattheredemptiondate was$305,000.
Instructions
Preparethejournalentrytorecordtheredemptionof thebonds.
Ex.173
Presentedbelowarethreeindependentsituations:
(a)HowellCorporationpurchased$250,000ofitsbondsonJune30,2008,at102and immediatelyretiredthem.Thecarryingvalueofthebondsontheretirementdatewas $229,500.ThebondspaysemiannualinterestandtheinterestpaymentdueonJune30,
2008,hasbeenmadeandrecorded.
(b)Justice,Inc.purchased$200,000ofitsbondsat97onJune30,2008,andimmediately retiredthem.Thecarryingvalueofthebondsontheretirementdatewas$196,500.The bondspaysemiannualinterestandtheinterestpaymentdueonJune30,2008,hasbeen
made andrecorded.
(c)StarrCompanyhas$80,000,10%,12-yearconvertiblebondsoutstanding.Thesebonds weresoldatfacevalueandpaysemiannualinterestonJune30andDecember31ofeach
year.Thebondsareconvertibleinto40sharesofStarr$5parvalue commonstockforeach
$1,000parvaluebond.OnDecember31,2008,afterthebondinteresthasbeenpaid,
$30,000parvalue ofbonds
wereconverted.The marketvalueofStarr'scommonstockwas
$38pershare onDecember31,2008.
Instructions
Foreachoftheindependentsituations,preparethejournalentrytorecordtheretirementor
conversion ofthebonds.
Ex.174
RileyCompanyissueda$1,500,000,10%,10-yearmortgagenotepayabletofinancethe
constructionofabuildingatDecember31,2008.Thetermsprovideforsemiannualinstallment
paymentsof$120,365.
Instructions
Preparetheentrytorecord:
(a)themortgageloanonDecember31,2008.
(b)thefirst installmentpayment.
Ex.175
DowneyCorporationissuesa$2,000,000,12%,20-yearmortgagenotepayableonDecember 31,2008,toobtain neededfinancingfortheconstructionofa building addition.The
terms provide
for semiannualinstallmentpaymentsof $132,924onJune30and December31.
Instructions
(a)Prepare thejournal entries torecord themortgageloanonDecember 31,2008,andthefirst
installment payment.
(b)Willtheamountofprincipalreductioninthesecondinstallmentpaymentbemoreorless than with thefirst
installment payment?
Ex.176
PresentedbelowarethreedifferentaircraftleasetransactionsthatoccurredforMidwestAirways
in2008.AlltheleasesstartonJanuary1,2008.InnocasedoesMidwestreceivetitletothe aircraftduring oratthe
end of theleaseperiod;noristhereabargainpurchaseoption.
Lessor
Typeof property Yearlyrental
Leaseterm
Estimatedeconomiclife Fairmarketvalueof
leasedasset Presentvalueoflease
rentalpayments
VannoyInsurance
747Aircraft
$7,445,064 15years25years
$69,300,000
$63,000,000
MarkLeasing
727Aircraft
$5,449,423 15years25years
$54,000,000
$46,000,000
Gregg Leasing
L-1011Aircraft $2,851,861
20years 25years
$32,000,000
$28,000,000
Instructions
(a)Whichoftheaboveleasesareoperatingleasesandwhicharecapitalleases?Explainyour answer.
(b)Howshouldthe
leasetransactionwith VannoyInsuranceberecordedin2008?
(c)Howshouldthe leasetransactionwith MarkLeasingberecordedin2008?
Ex.177
LeyCorporationenteredintothefollowing
transactions:
1.GantCarRentalleasedacartoLeyCorporationforoneyear.Termsoftheoperatinglease callfor monthlypaymentsof$750.
2.OnJanuary1,2008,LeyCorporationenteredintoanagreementtolease20machinesfrom
WeissCorporation.Thetermsoftheleaseagreementrequireaninitialpaymentof$300,000
andthenthreeannualrentalpaymentsof$360,000beginningonDecember31,2008.The present valueofthethree rentalpaymentsis$895,265.Theleaseisacapitallease.
Instructions
Prepare theappropriatejournalentriestobemadebyLeyCorporationinJanuaryrelatedtothe
lease transactions.
Ex.178
OnJanuary1,2008,RileeInc.enteredintoanagreementtoleaseequipmentfromFinley
Corporation.Theleaseagreementrequiresfiveannualrentalpaymentsof$70,000beginning December31,2008.Thepresentvalueoftherentalpaymentsis$265,356.Theleasetransfers substantiallyallthe benefitsandrisksof
ownershipto Rilee.
Instructions
Preparetheentrytorecordtheleaseagreementonthebooksof
RileeInc.onJanuary1, 2008.
Ex.179
TheadjustedtrialbalanceforPayneCorporationattheendofthecurrentyearcontainedthe followingaccounts:
Bondspayable,10%............................................................. Bondinterestpayable...........................................................
Discountonbondspayable..................................................
Leaseliability........................................................................ Mortgagenotespayable,9%,due2011...............................
Accountspayable.................................................................
$800,000 20,000 40,000 60,000 80,000 120,000
Instructions
(a)Preparethelong-termliabilitiessectionofthebalancesheet.
(b)Indicatetheproperbalancesheetclassificationfortheaccountslistedabovethatdonot belonginthe long-termliabilitiessection.
Ex.180
OnJanuary1,2008,QuayleCorporationissued$400,000,9%,5-yearbondsfor$384,556.The
bondsweresoldtoyieldaneffective-interestrateof10%.InterestispaidsemiannuallyonJune 30andDecember31.Thecompanyusesthe
effective-interestmethodofamortization.
Instructions
(a)Prepareabonddiscountamortizationschedulewhichshowstheamortizationofdiscountfor
the first
twointerestpaymentdates.(Roundtothenearestdollar.)
(b)Prepare the journal entries thatQuayleCorporation wouldmakeonJanuary1,June30,and December31, 2008,relatedtothe
bondissue.
Ex.181
On June 30, 2008,Wayne,Inc. sold
$2,000,000(face value)ofbonds.Thebondsare datedJune 30,2008,payinterestsemiannuallyonDecember31andJune30,andwillmatureonJune30, 2011.Thefollowingschedulewaspreparedbytheaccountantfor2008.
Semi-Annual
Interest Period
1
Interestto
bePaid
$80,000
Interest Expense
$87,750
Amortization
$7,750
Unamortized
Amount
$50,000 42,250
Bond CarryingValue
$1,950,000 1,957,750
Instructions
Onthebasisof theabove
information,answerthefollowingquestions.(Round
your
answerto the nearest dollar
or percent.)
1.Whatisthestatedinterestrateforthisbondissue?
2.Whatisthemarketinterestrateforthis bondissue?
3.Whatwasthesellingpriceof
thebondsasapercentageof theface value?
4.Preparethejournalentrytorecordthesaleof
thebondissueonJune30,2008.
5.Preparethe
journalentry torecordthepaymentofinterest and amortizationonDecember31, 2008.
Ex.182
OnJanuary1,2008,LesterCorporationissued$2,000,000,9%,5-yearbondsdatedJanuary1, 2008,at96.Thebonds paysemiannualinterestonJanuary 1andJuly1.Thecompany usesthe straight-linemethodof
amortizationandhasacalendaryearend.
Instructions
PrepareallthejournalentriesthatLesterCorporationwouldmakerelatedtothisbondissue throughJanuary1, 2009.Besuretoindicatethe dateonwhichtheentrieswouldbemade.
Ex.183
UnruhCompanyissued$900,000,10%,20-yearbondsonJanuary1,2008,at104.Interestis payablesemiannuallyonJuly1andJanuary1.Unruhusesthestraight-linemethodof
amortization and hasa calendaryearend.
Instructions
Preparealljournalentriesmadein2008relatedto
thebondissue.
Ex.184
KarlyCompanyissued$250,000,11%,10-yearbondsonDecember31,2008,for$230,000.
InterestispayablesemiannuallyonJune30andDecember31.Karlyusesthestraight-line methodofamortizationand hasacalendaryear end.
Instructions
Preparetheappropriatejournalentrieson (a) December31,2008.
(b) June30,2009.
COMPLETIONSTATEMENTS
185.Bondsthatmatureatasinglespecifiedfuturedatearecalled bonds, whereas
bondsthatmatureininstallmentsarecalledbonds.
186.Thetermsofabondissuearesetforthinaformallegaldocumentcalledabond
.
187.Unsecuredbondsthatareissuedagainstthegeneralcreditoftheborrowerarecalled
bonds.
188.Ifbondswereissuedatapremium,thenthecontractualinterest ratewas
thanthemarketinterestrate.
189.DiscountonBondsPayableis (from)(to)bondspayableonthe balancesheet.PremiumonBondsPayableis (from)(to)bonds payableonthebalancesheet.
190.Ifbondsareissuedatfacevalue(par),itindicatesthatthe interest rate mustbeequaltothe interestrate.
191.Ifa$1million,10%,10-yearbondissuewassoldat96,thecashproceedsfromthe issuance
ofthebondsamountedto$ .
192.Whenbondsareconvertedintocommonstockandtheconversionisrecorded,the
of thebondsis transferredtopaid-incapitalaccounts.
193.Aleasemaybeclassifiedasan leaseorasa
lease.
a194.Themarketpriceofabondisobtainedbydiscountingtoitspresentvaluethe
paidatmaturity,andall paymentstobemadeover
thetermof thebond.
a195.Whenthereisa differencebetweenthestraight-lineandeffective-interestmethodsofamortization,the methodisrequiredunder GAAP.
a196.Amethodofamortizingbonddiscountorpremiumthatallocatesanequalamounteach
period isthe method.
a197.Thestraight-linemethodofamortizationallocatesthesameamountto
ineachinterestperiod.
MATCHING
198.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Serialbonds
B.Debenturebonds C.Bondindenture
D.Premiumonbondspayable
E.Discountonbondspayable
F.Effective-interestmethodofamortization
G.Straight-linemethodofamortization H.Bonds
I. Debtto
totalassetsratio J. Capitallease
K.OperatingleaseL. Registeredbonds
1.Acontractualarrangementwhichis ineffecta purchaseofproperty.
2.A legaldocumentthat
setsforththetermsofa bondissue.
3.Bondsthatmatureininstallments.
a4.Producesaperiodicinterestexpenseequaltoaconstantpercentageofthecarrying value ofthebonds.
5.Bondsissuedin
thename oftheowner.
6.Aform ofinterest-bearingnotespayableusedbycorporations.
7.Occurswhenthecontractualinterestrateisgreaterthanthemarketinterestrate.
8.Unsecuredbondsissuedagainstthegeneralcredit oftheborrower.
9.Acontractualarrangementthatgivesthelesseetemporaryuseof
property.
10.Asolvencymeasurethatindicatesthepercentageof
assetsprovidedbycreditors.
11.Occurswhenthecontractualinterestrateis lessthanthemarketinterestrate.
a12.Producesaperiodicinterest expensethat isthesameamounteachinterest
period.
SHORT-ANSWERESSAYQUESTIONS
S-AE199
Bondsarefrequentlyissuedatamounts
greaterorlessthanfacevalue.Describehowthemarket interestrate,relativetothecontractualinterestrate,affectsthesellingpriceofbonds.Also explaintherationaleforrequiringaninvestortopayaccruedinterestwhenabondispurchased between interest paymentdates.
S-AE200
Acompanydesirestoreplaceitscurrentplantequipmentwithnewequipmentthatcosts
$10,000,000.Onepossibilitywouldbeforthecompanytoissue$10,000,000ofbondsanduse
theproceedstopurchasetheequipment.Anotherpossibilityistoacquiretheuseofthe
equipmentbysigningalong-termcapitalleasewithaleasingcompany.Describeandcompare the financialstatementeffectsofthesetwoalternatives.
S-AE201
Whenabondsellsatadiscount,whatisprobablytrueaboutthemarketinterestrateversusthe stated interestrate?Discuss.
S-AE202
Bondsmayberedeemed(retired)beforematuritybytheissuingcorporation.Explainwhya
companywoulddecidetoretirebondsbeforematurityandthenecessarystepstorecordthe redemption.
S-AE203(Ethics)
JeffWeaver,a26-year-oldentrepreneur,startedBells&Whistles(B&W),Inc.,afirmthat
specializesintop-of-the-lineadd-onsforcomputersystems.Thefirmhasacapitalstructureof approximately60%debt.ThiswasnecessitatedbytherapidgrowthofB&W,andMr.Weaver's lackofpersonalfundstosustainthegrowth.The60%debtamountisquitehighforfirmsinthis field,andinfactslightlyexceedsthedebtcovenantsnegotiatedwiththebank.B&Wrecently receivednoticethatthebankconsidersthecompany'sdebttobeexcessive,andthatsome
acceleratedrepaymentschedulewillbeadopted.Thenoticecameataparticularlybadtime.
B&Wisinthemidstofamajorupgradeofitsowncomputersystem.Thehardwarewastohave
been purchasedoutright,financedbytheseller,Mike
Bogg,longtimefriendofMr.Weaver.
Mr.BoggreallyneedsMr.Weaver’sbusiness.Bothbelieveinthelong-termstrengthofB&W.He
thereforesuggeststoMr.Weaverthattheequipmentbepurchasedbymeansofashort-term
lease.Mr.Weaver
couldrenewthe leaseannually.
Required:
1.Is Mr.Bogg'ssuggestionethical?Explain.
2.IfMr.Weaveracceptsthesuggestion,is hebehavingethically?Explain.
S-AE204(Communication)
BettyJonesworksforTrendPress,afairlylargebookpublishingfirm.Herbestfriendandrival, Rita,worksforWaldenBooks,asmallerpublisher.Bothcompaniesissue$100,000inbondson
July1.Trend'sbondswereissuedatadiscount,whileWalden'swereissuedatapremium.Rita sentBettyafaxthenextday.ShetoldBettythatitwasobviouswhothebetterpublisherwas— themarkethadshownitspreference!SheremindedBettyagainofherrecentincreaseinsalary
asfurtherproofofthesuperiority ofWaldenBooks.
Required:
DraftashortnoteforBettytosendto
Rita.Explainhowsucharesultcouldoccur.
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