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Exam 9: Long-Term Liabilities

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Question 61

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Discount-Mart issues $10 million in bonds on January 1,2018.The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year.Below is a partial bond amortization schedule for the bonds: What is the interest expense on the bonds in 2018? $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Increase } \\\text { in } \\\text { Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 8,640,967 \\\hline 6 / 30 / 2018 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\\hline 12 / 31 / 2018 & 300,000 & 347,464 & 47,464 & 8,734,070 \\\hline 6 / 30 / 2019 & 300,000 & 349,363 & 49,363 & 8,783,433 \\\hline 12 / 31 / 2019 & 300,000 & 351,337 & 51,337 & 8,834,770 \\\hline\end{array}$

A) $693,103.
B) $600,000.
C) $345,639.

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

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Question 62

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

A) Bond 1.
B) Bond 3.
C) Bonds 2 and 4.
D) Bonds 1 and 3.

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

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Question 63

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Which of the following statements is correct?

Bonds issued below face amount are said to be issued at a discount.

Given the information below,which bond(s) will be issued at a premium? $\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \begin{array} { l } \text { Stated Rate of } \\\text { Return }\end{array} & 7 \% & 12 \% & 10 \% & 8 \% \\\hline \begin{array} { l } \text { Market Rate of } \\\text { Return }\end{array} & 8 \% & 10 \% & 10 \% & 9 \% \\\hline\end{array}$

When an issuer retires debt of any type before its scheduled maturity date,the transaction is an early extinguishment of debt.

The carrying value,using the effective interest method,would decrease each year:

We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.We can calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments.The market rate of interest is used to calculate the present value.

Which of the following is not true regarding callable bonds?

A premium occurs when the issue price of a bond is above its face amount.

Samson Enterprises issued a ten-year,$20 million bond with a 10% interest rate for $19,500,000.The entry to record the bond issuance would have what effect on the financial statements?

Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are tax-deductible.Interest expense incurred when borrowing money is tax deductible,while dividends paid to stockholders are not tax-deductible.

The stated interest rate does not change over time.

For a bond issue that sells for more than the bond face amount,the stated interest rate is:

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 8%.These bonds will sell at a price that is:

For a five-year installment note signed on January 1,2016,at which of the following dates would the carrying value be the lowest?

X2 issued callable bonds on January 1,2018.The bonds pay interest annually on December 31 each year.X2's accountant has projected the following amortization schedule from issuance until maturity: What is the annual market interest rate on the bonds? $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Decrease } \\\text { in Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 104,212 \\\hline 12 / 31 / 2018 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\\hline 12 / 31 / 2019 & 7,000 & 6,208 & 792 & 102,673 \\\hline 12 / 31 / 2020 & 7,000 & 6,160 & 840 & 101,833 \\\hline 12 / 31 / 2021 & 7,000 & 6,110 & 890 & 100,943 \\\hline 12 / 31 / 2022 & 7,000 & 6,057 & 943 & 100,000 \\\hline\end{array}$

Secured bonds are backed by the federal government.Secured bonds are supported by specific assets the issuer has pledged as collateral.

Which of the following is not a true statement?

X2 issued callable bonds on January 1,2018.The bonds pay interest annually on December 31 each year.X2's accountant has projected the following amortization schedule from issuance until maturity: X2 issued the bonds: $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Decrease } \\\text { in Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 104,212 \\\hline 12 / 31 / 2018 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\\hline 12 / 31 / 2019 & 7,000 & 6,208 & 792 & 102,673 \\\hline 12 / 31 / 2020 & 7,000 & 6,160 & 840 & 101,833 \\\hline 12 / 31 / 2021 & 7,000 & 6,110 & 890 & 100,943 \\\hline 12 / 31 / 2022 & 7,000 & 6,057 & 943 & 100,000 \\\hline\end{array}$