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Exam 14: Long-Term Liabilities

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Question 71

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The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n) :

A) Debenture.
B) Bond indenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.

F) B) and E)
G) C) and D)

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Question 72

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The ____________ concept is the idea that cash paid (or received) in the future has less value now than the same amount of cash paid (or received) today.

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Question 73

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

______________ bonds are bonds that are scheduled for maturity on one specified date.

Hornet Corporation has a loan agreement that provides it with cash today, and the company must pay $25,000 one year from today, $15,000 two years from today, and $5,000 three years from today. Hornet agrees to pay 10% interest. The following are factors from a present value table: What is the amount of cash that Hornet receives today?

A company invests $10,000 at 7% compounded annually. At the end of the second year, the company should have $11,400 in the fund. $10,000 + ($10,000 x 7%) + [($10,000 + ($10,000 x 7%)) x 7%] = $11,449 or $10,000 x 1.07 x 1.07 = $11,449

A discount on bonds payable:

Mortgage bonds are backed only by the good faith and credit of the issuing company.

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

A company purchased two new delivery vans for a total of $250,000 on January 1, Year 1. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December 31, Year 1. Each payment includes interest on the unpaid balance plus principal. (1) Prepare a note amortization table using the format below: (2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the second annual installment payment on December 31, Year 2.

On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay interest each July 1 and January 1. The bonds were sold for $817,860 cash, which provides the holders an annual yield of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage.

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the ___________________________________.

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using straight-line amortization is:

On October 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 at the end of each year on September 30. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment will be:

A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

An advantage of bond financing is:

When the contract rate is above the market rate, a bond sells at a discount.

Harrison Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000. Calculate the company's debt-to-equity ratio.