Chapter 15: Long-Term Liabilities Flashcards
- The term used for bonds that are unsecured is:
(a) callable bonds.
(b) U.S. Treasury bonds.
(c) debenture bonds.
(d) convertible bonds.
- (c) Debenture bonds are not secured by any collateral
- The market interest rate:
(a) is the contractual interest rate used to determine
the amount of cash interest paid by the borrower.
(b) is listed in the bond indenture.
(c) is the rate investors demand for loaning funds.
(d) More than one of the above is true.
- (c) Market interest rate is the rate investors demand for loaning funds.
- Karson Inc. issues 10-year bonds with a maturity
value of $200,000. If the bonds are issued at a premium, this indicates that:
(a) the contractual interest rate exceeds the market
interest rate.
(b) the market interest rate exceeds the contractual
interest rate.
(c) the contractual interest rate and the market interest rate are the same.
(d) no relationship exists between the two rates.
- (a) When bonds are issued at a premium, this indicates that the contractual interest rate is higher than the market interest rate
- Four-Nine Corporation issued bonds that pay interest every January 1. The entry to accrue bond interest at December 31 includes a:
(a) debit to Interest Payable.
(b) credit to Cash.
(c) credit to Interest Expense.
(d) credit to Interest Payable.
- (d) The adjusting entry to accrue bond interest at December 31 includes a debit to Interest Expense and credit to Interest Payable.
- Gester Corporation redeems its $100,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a:
(a) credit of $3,745 to Loss on Bond Redemption.
(b) debit of $3,745 to Premium on Bonds Payable.
(c) credit of $1,255 to Gain on Bond Redemption.
(d) debit of $5,000 to Premium on Bonds Payable
- (b) The entry to record the retirement of bonds will include a debit to Bonds Payable of $100,000, a debit to Premium on Bonds
Payable of $3,745 ($103,745 - $100,000), a credit to Cash of $105,000 ($100,000 x 1.05) and a debit to Loss on Bond Redemption
of $1,255 ($105,000 - $103,745).
- Colson Inc. converts $600,000 of bonds sold at face
value into 10,000 shares of common stock, par value
$1. Both the bonds and the stock have a market value
of $760,000. What amount should be credited to
Paid-in Capital in Excess of Par—Common Stock as a
result of the conversion?
(a) $10,000. .
(b) $160,000.
(c) $600,000
(d) $590,000.
- (d) First, the market value in this transaction is ignored. Bonds Payable will be debited for $600,000; Common Stock will be credited for $10,000 since this account is always credited for shares issued (10,000) times par value ($1). The remaining amount, $590,000 ($600,000 - $10,000) is credited to Paid-in Capital in Excess of Par–Common Stock.
- Howard Corporation issued a 20-year mortgage note
payable on January 1, 2017. At December 31, 2017,
the unpaid principal balance will be reported as:
(a) a current liability.
(b) a long-term liability.
(c) part current and part long-term liability.
(d) interest payable.
- (c) Howard Corporation reports the reduction in principal for the next year as a current liability, and it classifies the remaining unpaid principal balance as a long-term liability
- Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year?
(a) $16,567.
(b) $49,700.
(c) $34,670.
(d) $346,700.
- (c) In the fi rst year, Andrews will recognize $49,700 of interest expense ($497,000 x 10%). After the first payment is made, the amount remaining on the note will be $346,700 [$497,000 principal -
($200,000 payment - $49,700 interest)]. The remaining
balance ($346,700) is multiplied by the interest rate (10%) to compute the interest expense to be recognized for the second year,
$34,670 ($346,700 x 10%),
- For 2017, Corn Flake Corporation reported net income
of $300,000. Interest expense was $40,000 and income
taxes were $100,000. The times interest earned was:
(a) 3 times.
(b) 4.4 times.
(c) 7.5 times.
(d) 11 times
- (d) Times interest earned = Net income + Interest expense + Income tax expense
($300,000 + $40,000 + $100,000 = $440,000) divided by Interest expense ($40,000), which equals 11 times
- Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A Lease B
(a) Operating lease Capital lease
(b) Operating lease Operating lease
(c) Capital lease Operating lease
(d) Capital lease Capital lease
- (d) Both leases should be classifi ed as capital leases because both lease terms are greater than or equal to 75% of the economic life of the respective assets
