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Exam 10: Accounting for Long-Term Debt

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Question 81

Multiple Choice

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Callable bonds may be:

A) called for early retirement at the option of the bondholder.
B) called for early retirement at the option of the issuer.
C) converted to common stock at the option of the bondholder.
D) converted to common stock at the option of the issuer.

E) A) and B)
F) None of the above

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Question 82

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Terra Company reported income before taxes of $90,000. The company is in a 30% income tax bracket. Also, Terra's income statement contained a charge for interest expense amounting to $30,000. Based on this information alone, the company's times interest ratio would be:

A) 2.1.
B) 3.0.
C) 3.1.
D) 4.0.

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

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Question 83

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Marvin Company issued $100,000 of 5-year, 8% bonds at 92 on July 1, 2013. Interest is payable semiannually on January 1, and July 1. The company uses straight-line amortization for premium or discount on bonds payable. Required: a) Prepare all necessary journal entries related to the bonds for 2013 and 2014. b) What amount of interest expense will be shown on the 2013 and 2014 income statements? c) What amount of interest payments will be shown on the statement of cash flows for 2013 and 2014?

Show the effect on the accounting equation of the issuance of $100,000, 8% ten-year bonds at 103 ½.

Bonds payable are usually classified on the balance sheet as:

When the stated interest rate of a bond is lower than the market interest rate, will the bond sell at a premium or at a discount?

Which of the following shows the effect of the December 31, 2013 payment? (Figures rounded to nearest dollar)

If a company uses the effective interest method of amortizing a bond discount, does the interest expense increase, decrease, or stay the same over time? Explain.

Which of the following answers shows the effect of the first interest payment and amortization of premium or discount?

When bonds are issued at a premium, which will be higher each year, the interest expense or the interest payment amount?

If Winfield issued the bonds for 96,

Discuss the purpose of a sinking fund.

On 12/31/18, Wise Corporation makes the final entry to record interest and amortization. Immediately after that, Wise pays off the bonds as scheduled. Which of the following answers shows the effect of the bond pay-off on the financial statements?

Johnston Equipment Company sold a ten-year, 8% bond issue at 104. Johnston received proceeds of $156,000 from the sale of these bonds. Calculate the face amount of these bonds.

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

On January 1, 2013, O'Hara Co. issued bonds with a face value of $200,000 and a stated interest rate of 10%. The bonds have a life of ten years and were sold at 108. O'Hara uses the straight-line method to amortize bond discounts and premiums. On December 31, 2016, O'Hara called the bonds at 106. Indicate whether each of the following statements is true or false. _____ a) The interest expense for 2013 was $20,000. _____ b) The balance in the bonds payable account on December 31, 2016 was $200,000. _____ c) The carrying value of bonds payable on December 31, 2016 was $209,600. _____ d) When O'Hara repurchased the bonds, it had to recognize a gain in the amount of $2,400. _____ e) When O'Hara repurchased the bonds, it had to recognize a loss in the amount of $2,400.

The Barden Company called in bonds at a price that was above the carrying value of the bond liability. Which of the following choices accurately reflects how this event will affect Barden's financial statements?

Indicate whether each of the following statements about bonds payable is true or false. _____ a) At the time of issue, the effective interest rate of a particular bond is equal to the market rate of interest for bonds with a similar level of risk. _____ b) When bonds are sold at 105, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ c) When bonds are sold at 95, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ d) When bonds are sold at 100, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ e) When bonds are sold at 101, the bonds were issued at a premium.