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Exam 9: Long-Term Liabilities

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Question 71

Multiple Choice

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If a company's bonds are callable,

A) the bondholder has the right to sell an option on the bond.
B) the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%.
C) the bonds are never allowed to remain outstanding until the maturity date.
D) the investor never knows what the redemption price will be until the bonds are actually called.

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Question 72

Multiple Choice

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The Kaplan Group sold $200,000 of 10-year bonds for $190,000. The face rate on the bonds was 8% and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)

A) Interest Expense Cash
B) Interest Expense Discount on Bonds Payable
Cash.
C) Interest Expense Discount on Bonds Payable
Cash
D) Interest Expense Bonds Payable
Cash.

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Question 73

Multiple Choice

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Long-term debt generally includes

The market value of a bond is determined by calculating its present value, which is based on the face amount, the number of periods, and the market rate of interest.

-Refer to King Cotton Company. Which long-term liability would also be listed in the short-term liability section? Why?

Keller Company issued $1,000,000, 8%, 7 year bonds with interest payable semiannually when the yield rate was 8%. The bonds issued at

A company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the financial press are likely to report the bond issue price as

The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.

"You Decide" Essay You own a thriving book store in a major college town. You have been talking with your CPA about borrowing $5,000,000 to finance a larger and more modern building. One option is to issue 20-year bonds with a fixed rate of 8% while another option is to issue 20-year bonds with a variable rate of one-year LIBOR (London Interbank Offered Rate)plus 5%. For the first year, this will result in a 6.2% rate, but the rate will be adjusted annually. The current market interest rate is 8%. What things should you consider in making the decision about which borrowing option is better for your company?

A(n)____________________ lease is recorded on the lessee's balance sheet as an asset and related liability.

On January 1, 2013, Kitchen Concepts, Inc. issued five-year, $10,000,000, 9 percent notes at 98 ($9,800,000). The discount at the time of issuance was $200,000. Interest is paid semiannually on June 30, and December 31. Required:

The bond issue price is determined by calculating the

____________________ is the amortization method of transferring the same amount from the bond discount or premium each time period to adjust interest expense.

Refer to Kalahari Limited. At the maturity date, besides an interest payment, the company would repay the bondholders

For a capital lease, the lessee must record both an asset and a liability. The amount of the asset is subsequently reduced by the process of ____________________.

When each payment reduces the outstanding loan balance, which, in turn, reduces the interest expense in the subsequent period, it is call an ____________________ debt.

Refer to Kalahari Limited. The interest expense on the bonds at June 30, 2013 is

The result of using the effective interest method of amortization for bond discounts is that the

On January 2, 2013, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. The company properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2013?

-Refer to Korn Business Solutions. Write the journal entries that would be used to record each type of lease described in the previous question.