Chapter 10 Smartbook

A company issued $50,000 of 8%, 10-year bonds on January 1. The bonds pay semi annual interest. The present value factor of a single amount of 20 periods at 8% is 0.2145.The present value of 10 periods at 4% is 0.6756. The present value of 20 periods at 4% is 0.4564. Determine the present value of the par value of the bonds.

$22,820 Use the present value of 20 periods at 4% $50,000*0.4564 = $22,820

A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and for 4% at 10 periods is 8.1109. To find the present value of the interest payments, multiply ______ by the present value factor ______.

$3,000; 8.1109 $100,000*6%*1/2 = $3,000 Interest payments are discounted at bonds' market value. Present value = 1/2 of the market rate (4%) and double the number of periods (10).

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $

$8,170 12,979-4,800 = 8,179

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by:

$9,542 15142-5600=9542

A finance lease is a long-term lease which meets one or more of the following criteria:

- lease term is for major part of asset's remaining economic life - has a purchase option that lessee is resonably certain to exercise - transfers ownership to lessee ALL OTHER OPTIONS NOT INCLUDED IN ANSWER: - (1) lease transfers ownership of lease asset to lessee. - (2) lease has a purchase option that lessee is resonably certain to exercise. - (3) lease term is for major part of the lease asset's remaining economic life. - (4) present value of lease payments equals or exceeds substantially all of the lease asset's fair value. - (5) the lease asset is specialized and expected to have no alternative use to lessor at lease-end.

Sheldon has a $15,000 liability for a machine that has an interest rate of 10%. The interest expense for one year is?

1,500 15,000*10%

Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of ______ or ______ and is sold to many different lenders

1000 or 5000

Bond market values are expressed as a percentage of their par (face) value. For example, a company's bonds might be trading at 103, which means that they can be bought or sold for Blank______ of their par value.

103%

Winn Co. signs a 60 day note payable for a $15,000 copy machine with an interest rate of 8%. Winn will record total interest expense of

200 $15,000*8%*(60.360)=200 If you're given the number of days, you'll always multiply it by that number divided by 360 days.

Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is sold at 93 will trade at

930 93=93% so, 93% of 1,000 is 930

When the market rate is 12%, a company issues $50,000 of 9%, 10-year bonds and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a debit to ______ in the amount of ______.

Bonds Payable; $50,000

A company issues $75,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $69,000 for the bonds, the issuer will record the sale with a debit to which of the following accounts?

Cash and Discount on Bonds Payable

A(n) ______ note is an obligation requiring a series of payments to the lenders.

Installment

Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a(n) _____ payable

Notes

_____ bonds (and notes) are scheduled for maturity on one specified date.

Term

Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at:

a discount the market rate is greater than the contract rate

The journal entry for a right-of-use asset to record the periodic amortization includes a credit to:

accumulated amortization-right-of-use Asset

Bilos Co. enters into a 6-year finance lease for a copy machine. The lease requires six annual payments of $25,000. Interest expense is recorded with a credit to the following account:

cash

A company issues $100,000 of 5%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If the bonds are sold at par value, the issuer records the sale with a debit to ______ in the amount of _____.

cash; 100,000

______ rate is the interest rate specified, sometimes referred to as the coupon rate, stated rate, or nominal rate.

contract

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a (debit/credit) _____ to Bond Payable in the amount of _____

credit; 100,000

When the market rate is 10%, a company issues $60,000 of 12%, 10-year bonds and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a (debit/credit) _____ to Cash in the amount of _____

credit; 60,000

A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $84,000 for the bonds, the issuer will record the sale with a (debit/credit) _____ to (Discount/Premium) _____ on Bonds Payable in the amount of $4,000

credit; Premium Its a premium whenever the issuer accepts more money than the company issues.

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to (Discount/Premium) ______ on Bonds Payable in the amount of $5,000.

credit; premium

A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?

debit cash 500,000 credit bond payable 500,000

A company issues $60,000 of 5%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $59,000 for the bonds, the issuer will record the sale with a (debit/credit) _____ to Discount on Bonds Payable in the amount of ____-

debit; 1000

A company issues $90,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $85,000 for the bonds, the issuer will record the sale with a (debit/credit) _____ to Discount on Bonds Payable in the amount of _____

debit; 5,000 90,000-85,000

a _____ on bonds payable occurs when a company issues bonds with a contract rate less than the market rate

discount

Which of the following agreements would require amortization expense?

finance lease

The legal contract between the bondholders and the issuer is called the bond

indenture

A company borrows $60,000 from a bank to purchase equipment. It signs an 8% note requiring six annual payments of principal plus interest. This is an example of a(n) _____ note

installment.

Bilos Co. enters into a 6-year finance lease for a copy machine. The lease requires six annual payments of $25,000. Interest expense is recorded with a debit to the following accounts:

interest expense lease liability

While the straight-line method of amortizing bond premium or discounts keeps the amortization equal over the life of the bond, the effective interest method keeps the ______ equal over the life of the bond.

interest rate

A _____ is a contractual agreement between a lessor (asset owner) and a lessee (asset renter or tenant) that grants the lessee the right to use the asset for a period of time in return for cash (rent) payments.

lease

A(n) ______ is a legal agreement that helps to protect a lender if a borrower does not make required payments on notes or bonds. This agreement gives the lender the right to be paid from the cash proceeds of the sale of the borrower's assets, as identified in the agreement.

mortgage

Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) _____ (mortgage/installment/bond) note payable, which allows the bank to be paid by the cash proceeds of the sale of the building if Brown fails to pay on the note.

mortgage

Typical examples of asset's leased as a finance lease include all of the following except:

office supplies

_____ lease is a long-term lease in which the present value of the lease payments is less than the asset's fair value.

operating

_____ lease is a long-term lease that does not meet any of the five criteria for a finance lease

operating

Lessor

owner of a lease

The bond carrying value can be determined by taking the bond _____ value minus the discount on bonds payable.

par

The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate.

par

______ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date.

par

The bond carrying value can be determined by which of the following formulas?

par value - discount on bonds payable

When the contract rate of the bonds is higher than the market rate, the bond sells at a higher price than par value. The amount by which the bond price exceeds par value is the Blank______ on bonds

premium

_____ bonds (and notes) have specific assets of the issuer pledged (or mortgaged) as collateral.

secured

_____ bonds (and notes) mature at more than one date (often in series) and, thus, are usually repaid over a number of periods.

serial

Many bonds are (sinking/secured) _____ fund bonds, which reduces the holders risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking

Many bonds are _____ which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking fund bonds

lessee

tenant of a lease

______ bonds (and notes), also called debentures, are backed by the issuer's general credit standing.

unsecured