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Exam 10: Accounting for Long-Term Debt

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Question 1

True/False

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The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

A) True
B) False

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Question 2

Multiple Choice

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Company A and Company B are identical in all regards except that during Year 1 Company A borrowed $40,000 at an interest rate of 10%.In contrast,Company B obtained financing by acquiring $40,000 from sale of common stock.Company B agreed to pay a $4,000 cash dividend each year.Both companies are in a 30% tax bracket.Which company would show the greater retained earnings at the end of Year 1,and by what amount?

A) Company A's retained earnings would be higher by $4,000.
B) Company B's retained earnings would be higher by $2,800.
C) Company A's retained earnings would be higher by $1,200.
D) Both would show the same retained earnings.

E) A) and B)
F) A) and C)

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Question 3

Multiple Choice

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A discount or premium on bonds payable can be defined by which of the following statements?

A line of credit typically has an interest rate that is fixed (constant)for the length of the agreement.

The effective interest rate method of amortizing bond discounts and premiums results in a constant amount of interest expense every period.

If a company chooses to call some of its callable bonds before their maturity,generally it will have to pay an amount that is greater than the carrying value of the bonds.

King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?

[The following information applies to the questions displayed below.] On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums. -Which of the following shows the effect of the bond issuance on the elements of the financial statements?

[The following information applies to the questions displayed below.] On January 1, Year 1, the Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. -Which of the following correctly shows the effect of the issuance of the note on Platte's financial statements?

[The following information applies to the questions displayed below.] On January 1, Year 1, Hanover Corporation issued bonds with a $70,500 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year. -How much interest expense will Hanover report on its income statement on December 31,Year 1?

[The following information applies to the questions displayed below.] On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150. -Which of the following shows the effects on the elements of the financial statement of the cash payment on December 31,Year 1?

North Woods Company has a line of credit with Olympia State Bank.North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate.Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month.Borrowing is shown as a positive amount,and repayments are shown as negative amounts indicated by parentheses.Activity to date is given as follows: What is the amount of interest paid at the end of March?

Davis Corporation borrowed $50,000 on January 1,Year 1.The loan is for a 10-year period and has an annual interest rate of 9%.At the end of each year,Davis will make a payment of $7,791,which includes both principal and interest.The amount of the payment for Year 1 that is repayment of principal is $3,587.

The tax deductibility of interest expense on bonds makes the effective cost of borrowing less than the amount of cash paid for interest.

For a long-term note payable,repaying a portion of principal along with interest payments is called loan amortization.

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

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Which of the following statements about installment notes is correct?

[The following information applies to the questions displayed below.] On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. -Niagara records the first year's interest payment on December 31,Year 1.Centennial's prime rate is 4% for Year 1.Which of the following shows the effect of this event on the elements of the financial statements?

[The following information applies to the questions displayed below.] On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums. -Which of the following shows the effect of the interest payment and amortization on December 31,Year 1?