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Exam 10: Accounting for Long-Term Debt

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Question 51

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On January 1, Year 1, Jack Incorporated borrows $38,000 to purchase a new company car by agreeing to a 6%, 5-year note with the bank. Payments of $734.65 are due at the end of each month with the first installment due on January 31, Year 1. What are the amounts of interest and principal, respectively, that will be paid in the first month?

A) $544.65 and $190.00
B) $190.00 and $544.65
C) $2,280.00 and $544.65
D) $190.00 and $734.65

E) None of the above
F) All of the above

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Question 52

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Compute the amount of cash a company will receive from the following bond issues.Required:a)________ Issued $200,000 of 5-year, 8% bonds at 98b)________ Issued $800,000 of 4-year, 9% bonds at 95c)________ Issued $400,000 of 10-year, 8% bonds at 102.5c)________ Issued $100,000 of 5-year, 12% bonds at 103

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a)$196,000b)$760,000c)$410,000d)$103,000...

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Question 53

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On January 1, Year 1, Echols Company borrowed $100,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $25,045.65.Which of the following shows how the borrowing of cash from Sun Bank on January 1, Year 1, affects the financial statements?

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter dollar amounts.Increase = I Decrease = D Not Affected = NAOn January 1, Year 1, Flagler Corporation signed a contract with the City Bank for a line of credit that permitted Flagler to borrow up to $50,000.

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. When the bonds mature, Daniels will have to pay the face value of the bonds to the bondholders.

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of cash flow from operating activities on the statement of cash flows for the year ending December 31, Year 3?

Indicate whether each of the following statements about bonds payable is true or false.a)At the time of issue, the effective interest rate of a particular bond is equal to the market rate of interest for bonds with a similar level of risk.b)When bonds are sold at 105, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.c)When bonds are sold at 95, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.d)When bonds are sold at 100, the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.e)When bonds are sold at 101, the bonds were issued at a premium.

On January 1, Year 1, Victor Company issued bonds with a $800,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of cash flow from operating activities on the statement of cash flows for the year ending December 31, Year 3?

Which of the following conditions indicate a company has a relatively high level of financial risk?

The effective interest rate method of amortizing bond discounts and premiums results in a constant amount of interest expense every period.

On January 1, Year 1, Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.Which of the following correctly shows the effects of the December 31, Year 2 payment (rounded to the nearest whole dollar) ?

Discuss the purpose of restrictive covenants included in loan agreements and provide three examples.

On January 1, Year 1, Daniels Company issued bonds with a face value of $500,000, receiving $496,000 cash. These bonds were issued at a discount.

On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to an 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1. What is the interest expense for Year 1 and Year 2, respectively? (Round your final answers to the nearest dollar.)

What is the issue price of $200,000 of bonds that sell at 95.5?

On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31. Assuming Weller issued the bond for $453,681, what is the amount of interest expense that will be recognized during Year 3? (Round the final answer to the nearest dollar.)

Discuss the tax advantage of long-term debt financing.

On January 1, Year 1, Victor Company issued bonds with a $650,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?

Indicate how each event affects the financial statements. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter dollar amounts.Increase = I Decrease = D Not Affected = NAOn December 31, Year 1, Flagler Corporation had a balance of $20,000 on a line-of-credit with City Bank. Flagler made a payment of $11,200, which included $10,000 on the principal and $1,200 interest. Show the effects of this transaction on the financial statements.