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Exam 9: Long-Term Liabilities

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Question 61

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How would the carrying value of bonds payable change over time for bonds issued at a $\begin{array} { l c c } & \text { Discount } & \text { Premium } \\\text { a. } & \text { No effect } & \text { No effect } \\\text { b. } & \text { No effect } & \text { Increase } \\\text { c. } & \text { Increase } & \text { Decrease } \\\text { d. } & \text { Decrease } & \text { Increase }\end{array}$

A) Option a
B) Option b
C) Option c
D) Option d

E) A) and B)
F) A) and D)

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Question 62

Multiple Choice

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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: $\begin{array}{lllll} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 10 & & & & \$ 104,212 \\12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\\12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \\12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \\12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000\end{array}$ -What is the annual market interest rate on the bonds?

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

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

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Question 63

Multiple Choice

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When bonds are issued at a premium and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

The times interest earned ratio is calculated as

Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

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 9% interest.The current market rate of interest is 8%.Which of the following is correct?

Contrast the following types of bonds: (a)Secured and unsecured. (b)Term and serial. (c)Callable and convertible.

Convertible bonds:

Unsecured bonds are not backed by a specific asset.

Given the information below,which bond(s) will be issued at a premium? $\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \text { Stated Rate of Return } & 7 \% & 12 \% & 10 \% & 8 \% \\\hline \text { Market Rate of Return } & 8 \% & 10 \% & 10 \% & 9 \% \\\hline\end{array}$

Financial leverage is best measured by which of the following ratios?

On January 1,2012,Ripstick Park issues $800,000 of 8% bonds,due in ten years,with interest payable semiannually on June 30 and December 31 each year.Assuming the market interest rate on the issue date is 9%,the bonds will issue at $747,968. 1.Complete the first three rows of an amortization table. 2.Record the bond issue on January 1,2012,and the first two semi-annual interest payments on June 30,2012,and December 31,2012.

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: $\begin{array}{llccc} & \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 194,758 \\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370\\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & 200,000\end{array}$ -What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.

Pizza Pier retires its 7% bonds for $70,000 before their scheduled maturity.At the time,the bonds have a carrying value of $74,937.Record the early retirement of the bonds.

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

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 8%.These bonds will sell at a price that is:

We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.

The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million,but the market value of the bonds is $36 million.The entry to record the retirement will include:

When bonds are issued at a discount,what happens to the carrying value and interest expense over the life of the bonds?