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Exam 9: Long-Term Liabilities

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Question 71

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Which of the following is true for bonds issued at a discount?

A) The stated interest rate is greater than the market interest rate.
B) The market interest rate is greater than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.
D) The stated interest rate and the market interest rate are unrelated.

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Question 72

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Which of the following is not a primary source of corporate debt financing?

A) Bonds Payable.
B) Common Stock.
C) Leases.
D) Notes Payable.

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Question 73

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Which of the following definitions describes a term bond?

The stated interest rate does not change over time.

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

The market interest rate does not change over time.

A premium occurs when the issue price of a bond is above its face amount.

Bond X and Bond Y are both issued by the same company.Each of the bonds has a face value of $100,000 and each matures in 10 years.Bond X pays 8% interest while Bond Y pays 7% interest.The current market rate of interest is 7%.Which of the following is correct?

Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2012. THA's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{llccc} & \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 194,758 \\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370\\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & 200,000\end{array}$ -What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

Pizza Pier issues 7%,10-year bonds with a face amount of $80,000 on January 1,2012.The market interest rate for bonds of similar risk and maturity is also 7%.Interest is paid semiannually on June 30 and December 31. 1.Record the bond issue. 2.Record the first interest payment on June 30,2012.

Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2012. THA's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{llccc} & \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 194,758 \\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370\\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & 200,000\end{array}$ -THA issued the bonds for:

The market value of bonds moves in the opposite direction of interest rates.

When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense increase over time.

In each succeeding payment on an installment note:

X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{lllll} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 10 & & & & \$ 104,212 \\12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\\12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \\12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \\12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000\end{array}$ -The X2 bonds have a life of:

Which of the following definitions describes a serial bond?

Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily.

Losses have the effect of reducing net income,while gains increase net income.

Discount-Mart issues $10 million in bonds on January 1, 2012. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: $\begin{array}{ccccc} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 8,640,967 \\6 / 30 / 12 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\12 / 31 / 12 & 300,000 & 347,464 & 47,464 & 8,734,070\\6 / 30 / 13 & 300,000 & 349,363 & 49,363 & 8,783,433 \\12 / 31 / 13 & 300,000 & 351,337 & 51,337 & 8,834,770\end{array}$ -What is the interest expense on the bonds in 2012?

For a bond issue that sells for less than the bond face amount,the stated interest rate is: