Question 1

Explain the present value concept as it applies to long term liabilities.

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Question 2

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:
A)Accounting for bonds and notes under U.S.GAAP and IFRS is similar.
B)Both U.S.GAAP and IFRS require companies to distinguish between operating leases and capital leases.
C)The criteria for identifying a lease as a capital lease are more general under IFRS.
D)Both U.S.GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
E)Use of the fair value option to account for bonds and notes is not acceptable under U.S.GAAP or IFRS.

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Question 3

Explain the amortization of a bond discount.Identify and describe the amortization methods available.

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Question 4

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the issuance of the bond is:
A)Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.
B)Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
C)Debit Bonds Payable $400,000; debit Interest Expense $16,207; credit Cash $416,207.
D)Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
E)Debit Cash $383,793; credit Bonds Payable $383,793.

Accepted Answer

Discount = $400,000 - $383,793 = $16,207

Question 5

Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

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Question 6

Explain how to record the issuance and sale of a bond between interest payment dates.

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Question 7

On January 1,$300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock.The entry to record the conversion of the bonds includes all of the following entries except:
A)Debit to Bonds Payable $310,000.
B)Debit to Premium on Bonds Payable $10,000.
C)Credit to Common Stock $250,000.
D)Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E)Debit to Bonds Payable $300,000.

Accepted Answer

The entry to record the conversion of bonds to common stock includes debiting Bonds Payable for the face value of the bonds being converted ($300,000), debiting Premium on Bonds Payable for any unamortized premium ($10,000), crediting Common Stock for the par value of the shares issued (50,000 x $5 = $250,000), and crediting Paid-In Capital in Excess of Par Value, Common Stock for the excess of the fair value of the shares issued over the par value (50,000 x [$310,000 - $10,000]/50,000 - $250,000 = $60,000). Therefore, option A is not included in the entry to record the conversion.

Question 8

Describe installment notes and the way in which installment notes are paid.

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Question 9

Identify the advantages and disadvantages of bond financing.

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Question 10

What is a lease?
 Explain the difference between an operating lease and a capital lease.

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 Explain the difference...

Question 11

How are bond issue prices determined?

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Question 12

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 the effective interest method of amortization is:
A)Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash $13,500.00.
B)Debit Interest Payable $13,500; credit Cash $13,500.00.
C)Debit Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00.
D)Debit Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
E)Debit Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

Accepted Answer

Premium Amortization = $13,500 - $12,487.08 = $1,012.92
Interest Expense = $312,177 * .08 * ½ = $12,487.08

Question 13

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the first interest payment using the effective interest method of amortization is:
A)Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
B)Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C)Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
D)Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
E)Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.

Accepted Answer

Discount Amortization = $15,351.72 - $14,000 = $1,351.72; Interest Expense = $383,793 * .08 * ½ = $15,351.72

Question 14

Explain the accounting procedures when a bond's interest period does not coincide with the issuer's accounting period.

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Question 15

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the first interest payment using straight-line amortization is:
A)Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B)Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C)Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
D)Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
E)Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.

Accepted Answer

Discount Amortization = $400,000 - $383,793 = $16,207/10 = $1,620.70
Interest Expense = $400,000 * .07 * ½ = $14,000 + $1,620.70 = $15,620.70

Question 16

On January 1,a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607.While the amount borrowed equals $70,000,the total payments on this note amount to $86,428.Explain.

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Question 17

What is a bond?
 Identify and discuss the different types of bonds.

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 Identify and discuss...

Question 18

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,bonds with a contract rate of interest of 6% would be issued.Under Plan #2,additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding,and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below:
  Comment on the relative effects of each alternative,including when one form of financing is preferred to another.

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Question 19

A company issued 9.2%,10-year bonds with a par value of $100,000.Interest is paid semiannually.The market interest rate on the issue date was 10%,and the issuer received $95,016 cash for the bonds.On the first semiannual interest date,what amount of cash should be paid to the holders of these bonds for interest?

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Question 20

On January 1,a company issued 10-year,10% bonds payable with a par value of $500,000,and received $442,647 in cash proceeds.The market rate of interest at the date of issuance was 12%.The bonds pay interest semiannually on July 1 and January 1.The issuer uses the straight-line method for amortization.Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

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Quiz 14: Long-Term Liabilities

Explain the present value concept as it applies to long term liabilities.

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except: