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Exam 10: Accounting for Long-Term Debt

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Question 21

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If a bond discount is amortized using the effective interest method,the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

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Question 22

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On January 1,Year 1,Jack Incorporated borrows $38,000 to purchase a new company car by agreeing to a 6%,5-year note with the bank.Payments of $734.65 are due at the end of each month with the first installment due on January 31,Year 1.What are the amounts of interest and principal,respectively,that will be paid in the first month?

A) $544.65 and $190.00
B) $190.00 and $544.65
C) $2,280.00 and $544.65
D) $190.00 and $734.65

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Question 23

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Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?

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?

[The following information applies to the questions displayed below.] On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. -Assuming Wayne issued the bonds for 102.5,what is the carrying value of the bonds on the December 31,Year 1 balance sheet?

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

Gates,Inc.and Markham,Inc.each had the same financial position on January 1,Year 2.The following is a summary of each of their balance sheets on that date: Gates is about to raise $200,000 in cash by issuing bonds.Markham is going to raise $200,000 on the same day by issuing common stock.Immediately after these transactions,which of the following statements will be correct?

[The following information applies to the questions displayed below.] On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. -Which of the following statements is true regarding the straight-line method of amortizing discounts and premiums on bonds?

[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 bond issuance on January 1,Year 1?

Which of the following describes the characteristics of a convertible bond?

Why are bonds sometimes issued at a discount?

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

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

[The following information applies to the questions displayed below.] On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. -What is the amount of cash flow from operating activities on the statement of cash flows for the year ending December 31,Year 3?

Indicate whether each of the following statements about bonds payable is true or false.

[The following information applies to the questions displayed below.] On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method. -What is the amount of cash outflow from operating activities shown on Jones' statement of cash flows for the year ending December 31,Year 2?

Amortization of a discount on bonds payable is an asset use transaction.

[The following information applies to the questions displayed below.] On January 1, Year 1, Echols Company borrowed $100,000 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 $25,045.65. -What is the amount of principal repayment included in the payment made on December 31,Year 1?

Indicate whether each of the following statements about bonds payable is true or false.

Which of the following conditions indicate a company has a relatively high level of financial risk?