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Exam 14: Long-Term Liabilities

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Question 31

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On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity for 10 periods at $3 \%$$\quad$$\quad$ 8.5302 Present value of an annuity for 10 periods at $4 \%$ Present value of 1 due in 10 periods at $3 \%$$\quad$$\quad$$\quad$$\quad$ 0.7441 Present value of 1 due in 10 periods at $4 \%$$\quad$$\quad$$\quad$$\quad$ 0.6756 What is the issue (selling) price of the bond?

A) $402,362
B) $300,010
C) $420,000
D) $308,107
E) $325,592

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Question 32

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All of the following statements regarding leases are true except:

A) For a capital lease the lessee records the leased item as its own asset.
B) For an operating lease the lessee reports the lease payments as rental expense.
C) For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.
D) Capital leases create a long-term liability on the balance sheet, but operating leases do not.
E) Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.

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Question 33

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When the contract rate of a bond is greater than the market rate on the date of issuance, the bond sells at a discount.

Secured bonds:

On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The present value of a single sum factor for 3 years at 6% is 0.8396. The payment each July 31 will be:

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330.The present value of a single sum factor for 7 years at 9% is 0.5470. The present value of the loan is:

The Discount on Bonds Payable account is:

The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

A contract pledging title to assets as security for a note or bond is known as a(an) :

When a bond sells at a premium:

When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.

Bonds that give the issuer an option of retiring them before they mature are:

Premium on Bonds Payable is an adjunct liability account, as it increases the carrying value of the bond.

On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30 and December 31. The market rate is 5%. Using the present value factors below, the issue (selling) price of the bonds is: $\begin{array}{llll}&&\text { Present Value of an }\\n=&i=&\text { Annuity }&\text { Present value of } \mathbb{\$1}\\3 & 4.0 \% & 2.7751 & 0.8890 \\6 & 2.0 \% & 5.6014 & 0.8880 \\3 & 5.0 \% & 2.7232 & 0.8638 \\6 & 2.5 \% & 5.5081 & 0.8623\end{array}$

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

A bond sells at a discount when the: