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Exam 9: Long-Term Liabilities

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Question 41

Multiple Choice

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THA issued the bonds:

A) At par.
B) At a premium.
C) At a discount.
D) Cannot be determined from the given information.

E) A) and D)
F) None of the above

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Question 42

Multiple Choice

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What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 3%.
B) 4%.
C) 6%.
D) 8%.

E) B) and D)
F) A) and C)

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Question 43

Multiple Choice

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Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?

Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily.

Given the information below, which bond(s) will be issued at a discount? $\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \text { Stated Rate of Return } & 10 \% & 8 \% & 12 \% & 12 \% \\\hline \text { Market Rate of Return } & 12 \% & 8 \% & 15 \% & 10 \% \\\hline\end{array}$

Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:

Unsecured bonds are not backed by a specific asset.

Which of the following leases is just like a rental?

X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would X2 record on this date?

X2 issued the bonds:

Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2012.

Which of the following definitions describes a term bond?

Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

On January 1, 2012, Julee Enterprises borrows $30,000 to purchase a new Toyota Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2012. Record the issuance of the note payable and the first two monthly payments.

On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968. 1. Complete the first three rows of an amortization table. 2. Record the bond issue on January 1, 2012, and the first two semi-annual interest payments on June 30, 2012, and December 31, 2012.

As a company's level of debt increases, bankruptcy risk increases.

Presented below is a partial amortization schedule for Discount Foods: $\begin{array} { c c c c c } ( 1 ) & ( 2 ) & ( 3 ) & ( 4 ) & ( \mathbf { 5 } ) \\\text { Period } & \text { Cash } & \begin{array} { c } \text { Interest } \\\text { Paid }\end{array} & \begin{array} { c } \text { Increase in } \\\text { Carpense }\end{array} & \begin{array} { c } \text { Carrying } \\\text { Value }\end{array} \\\text { Issue date } & & & & \$ 74,564 \\1 & \$ 2,800 & \$ 2,983 & \$ 183 & 74,747 \\2 & 2,800 & 2,990 & 190 & 74,937\end{array}$ 1. Record the bond issue. 2. Record the first interest payment.

Magic Mountain retires its 8% bonds for $125,000 before their scheduled maturity. At the time, the bonds have a carrying value of $118,000. Record the early retirement of the bonds.

A bond issued at a premium indicates that at the date of issue: