Chapter 10 - Accounting for Long-Term Liabilities

Question 1

Discount Bonds Payable

Answer 1

A CONTRA liability account

Reduces the value of a liability

Normal DEBIT balance

Question 2

When a bond sells at a discount

Answer 2

Bond Interest Expense is GREATER than the amount of the Cash payment

Question 3

Interest Expense

Answer 3

Equals the amount repaid minus the amount borrowed

Question 4

Contract rate

Answer 4

The interest rate specified in a bond note.

Annual interest paid is calculated by bond par value x contract rate.

Usually stated in annual basis

Question 5

Market rate

Answer 5

Interest rate borrowers are willing to pay and lenders willing to accept

Question 6

Contract rate > Market rate

Answer 6

Bond sells at premium

Question 7

Contract rate = Market rate

Answer 7

Bond sells at par

Question 8

Contract rate < Market rate

Answer 8

Bond sells at discount

Question 9

Carrying value

Answer 9

Calculated as bond par value - discounts on bonds payable

Always held in two accounts

1. Bonds Payabale - Par value
2. Discounts of Bonds Payable - discount

Question 10

Bond

Answer 10

A contract to pay the bond’s pr value plus interest at the stated contract rate.

Question 11

Total bond interest expense

Answer 11

Equals all bond interest payments plus the bond discount

Question 12

Calculate the discount of a bond issued:

Answer 12

Par value - issue price

Question 13

Formula for total bond interest

Answer 13

Par value x semi annual contract rate (annual contract rate / 2)

Question 14

Ordinary annuity

Answer 14

A series of equal payments spread out evenly over time