Module 14

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 Reason: $15,000 x .08 x (60/360) = $200

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 Reason: use to present value of 20 periods at 4%: $50,000 x 0.4564 = $22,820

A company issues $100,000 of 6%, 5 year bonds dated January 1 that pay interest semi annually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of annuity for 3% at 10 seconds 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; 81109 Reason: Interest payment = $100,000 x 6% x 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 rod periods (10)

A company sells a 5-year, 8% bond with a par value of $100,000 when the market is 10% for $96,454. The bond requires semi-annual interest payments of $4,000. Using the effective interest amortization method, the company will recognize _____ interest expense on the first semi-annual interest payment.

$4,823 Reason: $4,000 is the cash payment. The initial discount is $100,000 - $96,454 = $3,546. Bond interest expense = $96,454 x .05 = $4,823. The discount of $823 is added to the cash payment to determine the Bond Interest Expense ($4,000 + $823 ) = $4,823.

A company sells a 6-year, 6% bond with a par value of $100,000 when the market is 8% for $90,615 The bond requires semi-annual interest payments of $3,000. Using the effective interest amortization method, the company will recognize _____ for the amortization of the discount on the first semi-annual interest payment.

$625 Reason: $3,000 is the semiannual cash payment. Carrying value of $90,615 x semiannual market rate of 4% = bond interest expense of $3,625. Discount amortization = $3,625 - $3,000 = $625

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 _____

$8,179

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 Reason: $15,142-5,600=$9,542.

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 Reason: $15,142 - 5,600 = $9,542

Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is being sold at 93 would be trading at $

930

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

A company enters into an operating lease for a piece of machinery. The company calculates amortization on the equipment of $2000 per year. The entry to record amortization expense the first year will include a credit to:

Accumulated Amortization- Right-of-use Asset

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

Accumulated Amortization-Right-of-Use Asset

A company enters into an operating lease for a piece of machinery. This company calculates amortization on the equipment of $2000 per year. The entry to record amortization expense the first year will include a debit to:

Amortization expense

Bonds payable to whomever holds them are called _____ bonds or unregistered bonds.

Bearer

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

_____ bonds (and notes) have an option exercisable by the issuer to retire them at a stated dollar amount before maturity

Callable

A company enters into a short term operating lease to use construction equipment for $3000 per month. The journal entry to record one months rent would include a credit to the _____ account.

Cash

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

Cash

A company issues $50,000 of 8% 10 year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issues records the first semi-annual interest payment with a credit to _____ in the amount of _____

Cash; 2,000

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

Contract

____ bonds (and notes) can be exchanged for a fixed number of shares of the issuing corporations common stock.

Convertible

A company issues $100,000 of 6% 10 year bonds dates 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 semi annually. When the bonds mature, he issuer records its payment of principal either a (debit/credit) to Cash in the amount of _____

Credit; $60,000

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 $80,000 of 6% 5 year bonds dates 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

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 $5,000 premium on bonds payable will ________ total interest expense recognized over the life of the bond.

Decrease Reason: a premium will reduce total interest expense.

A company issues $60,000 of 6% 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $62,000 for the bonds, the premium on bonds payable will (increase/decrease) total interest expense recognized over the life of the bond by ______

Decrease; $2,000

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

Discount

A finance lease is a long term lease which meets the following criteria:

Has a purchase option that lessee is reasonably certain to exercise Lease term is for major part of assets remaining economic life Transfers ownership to lessee

A ______ note is an obligation requiring a series of payments to the lenders

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

A company borrows $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 by $8,179. The journal entry to record this payment will include a debit to which of the following accounts and in what amount?

Interest expense: $4,800 Notes payable: $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 the year. The first payment will record interest expense of $5,600 and will reduce principal by $9,542. The journal entry to record this transaction will include a debit to which of the following accounts and for how much?

Interest expense: $5,600 Notes payable: $9,542

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

The rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level is called the bond's _____ rate.

Market

A _____ _______ is similar to a bond payable but is normally transacted with a single lender such as a bank

Note payable

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 $8,179. The journal entry to record this payment will include a debit to which of the following accounts and on what amount?

Notes payable: $8,178 Interest Expense: $4,800

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

Operating

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

Par

The bonds carrying value can be determined by the following formula:

Par value - discount on bonds payable

When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a (discount/premium)

Premium

A company enters into a short term operating lease to use construction equipment for $3000 a month. The journal entry to record one months rent would include a debit to the _____ account

Rental expense

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

Secured

Typical examples of assets leased as a finance lease include all of the following:

Store building Rail cars Delivery truck

The following are true of amortizing a premium bond using the effective interest amortization method:

The excess of the cash payment over the interest expense reduces the capital The semiannual cash interest payments is larger than the bond interest expense

Which of the following a true of amortizing w premium bond using the effective interest amortization method:

The semiannual cash interest payment is larger than the bond interest expense The excess of the cash payment over the interest expense reduces the principal

The difference between the cash interest paid and the bond interest expense is the premium ______ under the effective interest of amortization of a bond premium method

amortization

A(n) ___ on bonds payable occurs when a company issues bonds with a contract rate less than the market rate.

discounted

The _______ method allocates total bond interest expense over the bonds life in a way that yields a constant rate of interest

effective interest

Total bond interest ______ is the sum of the interest payments plus the bond discount

expense

Which of the following agreements would require amortization expense?

finance lease

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

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

A bond discount increases __________ at each semi-annual interest payment.

interest expense

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

The _____ is the owner of a lease and the ____ is the tenant of the lease

lessor and lessee

The bond's _______ rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

market

A(n) _______ is a legal agreement that helps to protect a lender if a borrower fails to 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

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

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 _______ on bonds.

premium

Bonds issued in the names and addresses of their holders are _____ bonds

registered

_____ 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 _______, 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

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

term

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

unsecured