M3 - Long-Term Liabilities

Question 1

Bought machine, Nov 1 Y1
Don’t have to pay for it until Nov 1 Y3
Payment will include principal and interest
Assuming 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?

Answer 1

Present Value of 1

The cost of the machine would be the total payment (principal and interest due in two years in the future) multiplied by the present value of 1 (at a 10% rate)

Question 2

Rule: Bonds or notes are due within one year are shown as “noncurrent” if the issuer has the intent and ability to refinance with a new issuance of long-term debt. (true or false)

Answer 2

True

This intent and ability must usually be demonstrated through refinancing of the debt after the balance sheet date, but before the issuance of the financial statements. Separate disclosure of the refinancing is required.

Question 3

Although the discount is a separate account from the note payable account, the note payable is reported on the balance sheet at the net of the note payable face value less the unamortized discount. (true or false)

Answer 3

True

Question 4

Normally interest is imputed when no (or an unreasonably low) rate is stated. An exception exists for receivables and payables arising from transactions with customers or suppliers in the normal course of business when the trade terms do not exceed one year. (true or false)

Answer 4

True, the note would be reported at the face value .

Question 5

Which of the following is reported as interest expense?

• Pension Cost Interest
• Interest incurred to finance construction of machinery for own use
• Postretirement healthcare benefits interest
• Imputed interest on non-interest bearing note

Answer 5

Imputed interest on non-interest bearing not is reported as interest expense

• Pension cost interest is a component of pension plan expense
• Post retirement healthcare benefits interest is part of post retirement benefit expense
• Interest incurred to finance construction of machinery for own use is capitalized as part of the cost of the machinery

Question 6

The PV of the remaining monthly payments discounted at the interest rate equals the installment note receivable balance at any time. (true or false)

Answer 6

True

Question 7

Effective Interest Rate Formula

Answer 7

100 % Face of N/P - Loan Origination Fee

Question 8

Effective Interest Rate Formula

Answer 8

100 % Face of N/P - Loan Origination Fee

If the loan origination fee was taken out up front, the company’s effective interest rate is more than the interest rate + loan orig fee due to the loss to the company of the time value of the money involved.