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Exam 9: Long-Term Liabilities

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Question 21

True/False

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Losses/gains on the early extinguishment of debt are reported as part of operating income in the income statement.

A) True
B) False

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Question 22

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The price of a bond is equal to:

A) the future value of the face amount only.
B) the present value of the interest only.
C) the present value of the face amount plus the present value of the stated interest payments.
D) the future value of the face amount plus the future value of the stated interest payments.

E) All of the above
F) A) and B)

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Question 23

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Stealth Fitness Center issues 7%,15-year bonds with a face amount of $200,000.The market interest rate for bonds of similar risk and maturity is 6%.Interest is paid semiannually.At what price will the bonds be issued?

Return on assets is calculated as net income divided by the ending balance for total assets.

Pizza Pier issues 7%,10-year bonds with a face amount of $80,000 for $74,564 on January 1,2012.The market interest rate for bonds of similar risk and maturity is 8%.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.

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.

Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2012. THA's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{llccc} & \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 194,758 \\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370\\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & 200,000\end{array}$ -THA issued the bonds:

Serial bonds are:

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

The advantages of obtaining long-term funds by issuing bonds,rather than issuing additional common stock,include which of the following?

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 7%,the bonds will issue at $856,850. 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.

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

Given the information below,which bond(s) will be issued at a discount? $\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 5 \% & 7 \% & 12 \% & 10 \% \\\hline \text { Market Rate of Return } & 7 \% & 8 \% & 12 \% & 9 \% \\\hline\end{array}$

Term bonds are:

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

For bonds issued at a premium,the difference between interest expense and the cash paid increases the carrying value of the bonds.

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Which of the following leases is essentially the purchase of an asset with debt financing?

Serial bonds require payment of the full principal amount of the bond at a single maturity date.

A private placement is when a company chooses to sell the debt securities directly to a single investor.