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Exam 10: Accounting for Long-Term Debt

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Question 1

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Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On December 31,2016,Ravenwood Company made an annual payment on a long-term installment note payable.Show how this annual payment affected Ravenwood's financial statements.

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(D)(D)(D)(N)(I)(D)(D)

Question 2

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A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

A) True
B) False

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Question 3

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Use the following to answer questions On January 1,2016,Pierce Corporation issued $25,000 in 8%,5-year bonds payable at 102.Interest payments are due each December 31.Potter uses the straight-line method of amortization. -Which of the following shows the effect of the interest payment and amortization on 12/31/16?

Explain the difference between the straight-line and the effective interest method of amortization of bond premiums and discounts.

Issuing bonds payable when the market interest rate is less than the stated interest rate:

Explain the special feature that makes callable bonds attractive to an issuing corporation.

Indicate whether each of the following statements about bonds payable is true or false. _____ a)At the time of issue,the effective interest rate of a particular bond is equal to the market rate of interest for bonds with a similar level of risk. _____ b)When bonds are sold at 105,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ c)When bonds are sold at 95,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ d)When bonds are sold at 100,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk. _____ e)When bonds are sold at 101,the bonds were issued at a premium.

Pace Company issued at 97 bonds with a face value of $200,000.As a result of the issue:

What is the issue price of $200,000 in bonds that sell at 95.5?

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On January 1,2016,Ravenwood Company issued a long-term installment note.Show how the issuance of the note affected the financial statements.

When bonds are issued at a premium,which will be higher each year,the interest expense or the interest payment amount?

Use the following to answer questions Victor Company issued bonds with a $250,000 face value and a 6% stated rate of interest on January 1,2016.The bonds carried a 5-year term and sold for 95.Victor uses the straight-line method of amortization.Interest is payable on December 31 of each year. -The amount of cash flow from operating activities on the December 31,2018 statement of cash flows would be:

Why would some bonds be classified as "secured bonds"? Provide an example of a common type of secured bond.

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.Use only one letter for each element.You do not need to enter amounts. -On January 1,2016,Kirkland Co.issued $200,000 of bonds payable at 101 ½.Indicate the effects of issuing these bonds.

Does United States tax law encourage debt financing or equity financing of a corporation? Why?

Bonds sold as separate components of a single issue may have different maturity dates.

The effective rate of interest for a particular bond issue is the market rate of interest for other investments with similar levels of risk.

Hanover Corporation issued $300,000 in bonds payable on January 1,2016 when the market interest rate at the time was 7%.Assume that the 10-year bonds were issued at 103.5,and the annual interest payment was $22,495.(Round your answers to the nearest dollar. ) a)What was the amount of premium on the bonds when they were issued? b)Hanover Corporation uses the effective interest method to amortize premium or discount on bonds payable.What was the amount of interest expense for 2016? What was the amount of premium amortization for 2016? c)What was the carrying value of the bond liability on January 1,2017? What was the amount of interest expense for 2017?

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note.Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042.Based on this information,the amount of the interest expense associated with the second payment would be: (round your answer to the nearest dollar)

Use the following to answer questions Jones Company issued bonds with a $200,000 face value on January 1,2016.The five-year term bonds were issued at 97 and had a 7 ½ % stated rate of interest that is payable in cash on December 31st of each year.Jones amortizes the bond discount using the straight-line method.Based on this information: -The amount of interest expense shown on Jones's December 31,2016 income statement would be: