PCP - Chapter 10: Accounting for Long-Term Liabilities

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 $12,979 - $4,800

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 $15,142 - $5,600

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 $1,000 x 93% =

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 ____ of their par value.

103%

Mortgage

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. Multiple choice question.

Unsecured Bonds (and notes)

Also called debentures, are backed by the issuer's general credit standing.

The 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.

Installment Note

An obligation requiring a series of payments to the lenders.

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

Registered Bonds

Bonds issued in the names and addresses of their holders.

Bearer Bonds or Unregistered Bonds

Bonds payable to whomever holds them.

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 company issues $400,000 of 8%, 10-year bonds dated January 1. 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 a (debit/credit) ____ to Bonds Payable in the amount of $____.

Credit; $400,000

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 to Cash $500,000 Credit to Bonds Payable $500,000

The Bond Carrying Value

Determined by taking the bond par value minus the discount on bonds payable.

Secured Bonds (and notes)

Have specific assets of the issue pledge (or mortgaged) as collateral.

Serial Bonds (and notes)

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

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 in what amount?

Notes Payable; $8,179 Interest Expense; $4,800

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. The journal entry to record this transaction will include a debit to which of the following accounts and for how much?

Notes Payable; $9,542 Interest Expense $5,600

A Discount on Bonds Payble

Occurs when a company issues bonds with a contract rate less than the market rate.

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

Par Value - Discount on Bonds Payable

Term Bonds (and notes)

Scheduled for maturity on one specified date.

Note Payable

Similar to a bond payable but is normally transacted with a single lender such as a bank.

The Contract Rate

The interest rate specified, sometimes referred to as the coupon rate, state rate, or nominal rate.

Bond Indenture

The legal contract between the bondholders and the issuer.

Total Bond Interest Expense

The sum of the interest payments plus the bond discount.

Sinking Fund Bonds

Which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds. (what many bonds are).

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

Most bonds require par value to be repaid _______ and interest to be paid _________.

at the maturity date; semiannual

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

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 $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; $1,000

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 $5,000 premium on bonds payable will

decrease total interest expense recognized over the life of the bond.

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 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)

installment note

A bond discount increases

interest expense at each semi-annual interest payment.

The par value of a bond, also called the face value, is paid at a stated future date, known as the bond's

maturity date.

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

Most bonds require (interest/par) ______ value to be repaid at maturity and (interest/par) ______ to be paid semiannually.

par; interest

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

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

premium on bonds.

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 an notes payable.

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

sinking

The bond contract rate determines the annual interest paid by multiplying

the bond par value by the contract rate.