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Exam 10: Accounting for Long-Term Debt

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Question 21

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How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

A) Reduces the amount of interest expense each year
B) Increase the amount of interest expense each year
C) Has no effect on interest expense each year
D) Cannot be determined from the information provided

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

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Question 22

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If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

A) True
B) False

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Question 23

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On January 1, Year 1, Mahoney Company borrowed $182,000 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 $45,583. What is the amount of principal repayment included in the payment made on December 31, Year 1?

A line of credit is an agreement that allows a company to borrow a set amount of money for a period of one year or more.

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums. Which of the following statements is true if Wayne issued the bonds for 96?

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.Which of the following shows the effect of the interest payment and amortization on December 31, Year 1?

Jacobs Company issued bonds with a $300,000 face value on January 1, Year 1. The bonds were issued at 102 and carried a 5-year term to maturity. They had a 9% stated rate of interest that was payable in cash on December 31st of each year. Jacobs uses the straight-line method to amortize bond discounts and premiums. Based on this information alone, how does the recognition of interest expense during Year 1 affect the company's accounting equation?

On January 1, Year 1, Weller Company issued bonds with a $380,000 face value, a stated rate of interest of 10.00%, 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 8.00%. Interest is paid annually on December 31. Assuming Weller issued the bond for $430,997, what is the amount of interest expense that will be recognized during Year 3? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

The times-interest-earned ratio is usually calculated as the ratio of net income to interest expense.

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

On January 1, Year 1, Mayberry Company borrowed cash from Central Bank by issuing a $75,000 face value 3-year installment note payable that carried a 9% interest rate. The note is to be repaid by making annual cash payments of $29,629.11, which includes both principal and interest. The payments are to be made on December 31 of each year.Required:a)Prepare an amortization schedule for the term of the loan, showing the amounts to be paid on principal and interest for Year 1, Year 2, and Year 3 and the loan balance at the end of each year. (Round your answers to two decimal points.)b)What amount of interest expense will be shown on the Year 2 income statement?c)What amount of liability for the note will be shown on the balance sheet as of December 31, Year 2?

King Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on King's statements?

Johansen Company issued a bond at a discount. Which of the following shows how the issuance of the bonds affects the financial statements?

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, Morris Comapny issued $100,000 of bonds at face value.

On January 1, Year 1, Victor Company issued bonds with a $600,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 96. 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 carrying value of the bond liability at December 31, Year 3?

Company A and Company B are identical in all regards except that during Year 1 Company A borrowed $24,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $24,000 from sale of common stock. Company B agreed to pay a $2,400 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of Year 1, and by what amount?

The after-tax interest cost of debt equals total interest expense multiplied by the tax rate.

Which of the following shows how the cash payment and recognition of interest expense affects the financial statements when a bond is issued at a discount?

Rodgers Equipment Company sold a ten-year, 6% bond issue at 102.5. Rodgers received proceeds of $256,250 from the sale of these bonds.Required:Determine the face value of these bonds.

A line of credit typically has an interest rate that is fixed (constant)for the length of the agreement.