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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 61

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On January 1,Haymark Corporation leased a truck,agreeing to pay $15,252 every December 31 for the six-year life of the lease.The present value of the lease payments,at 6% interest,is $75,000.The lease is considered a finance lease. (a)Prepare the general journal entry to record the acquisition of the truck with the finance lease. (b)Prepare the general journal entry to record the first lease payment on December 31. (c)Record straight-line depreciation on the truck on December 31,assuming a 6-year life and no salvage value.

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Question 62

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On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the payment on the note on December 31,Year 2 is:

A) Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B) Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C) Debit Interest Expense $6,493; debit Notes Payable $7,745; credit Cash $14,238.
D) Debit Notes Payable $14,238; credit Cash $14,238.
E) Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

F) B) and D)
G) B) and C)

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Question 63

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Finance leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Sinking fund bonds:

Term bonds are scheduled for maturity on one specified date,whereas serial bonds mature at more than one date (often in series).

When the contract rate is above the market rate,a bond sells at a premium.

A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

An annuity is a series of equal payments at equal time intervals.

________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds.

On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The carrying value of the bonds immediately after the second interest payment is:

A bond is issued at par value when:

Premium on Bonds Payable has a normal credit balance,as it increases the carrying value of the bond.

On January 1,Year 1 Cleaver Company borrowed $85,000 cash by signing a 7% installment note that is to be repaid with 4 annual year-end payments of $25,094,the first of which is due on December 31,Year 1. (a)Prepare the company's journal entry to record the note's issuance. (b)Prepare the journal entries to record the first installment payment.

Collateral agreements for a note or bond can:

A bond sells at a discount when the:

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties,is called a(n) :

The use of debt financing ensures an increase in return on equity.

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 #2,50,000 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.

How are bond issue prices determined?