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Exam 14: Long-Term Liabilities

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Question 31

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Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

A) True
B) False

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Question 32

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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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Plan #1 provides a slightly higher retur...

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Question 33

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Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

The effective interest amortization method:

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

The market value or issue price of a bond is equal to the present value of all future cash payments provided by the bond.

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

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

_________________________ leases are short-term or cancelable leases in which the lessor retains the risks and rewards of ownership.

Return on equity _______________ when the expected rate of return from the acquired assets is greater than the rate of interest on the bonds used to finance the asset acquisition.

A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

Which of the following statements is True?

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

A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by:

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

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity for 7 years at 9% is 5.0330. The present value of the loan is: