Chapter 14: Accounting for Long-Term Liabilities

Bond Certificate

A __________ includes specifics such as the issuer's name, the par value, the contract interest rate, and the maturity date. Many companies reduce costs by not issuing paper versions to bondholders.

Bond

A __________ is its issuer's written promise to pay an amount identified as the par value of the bond with interest.

B. and C.

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 $9,642. The journal entry to record this transaction will include a debit to which of the following accounts and for how much? (Check all that apply.) A. Cash; $15,142 B. Notes Payable; $9,542 C. Interest Expense; $5,600 D. Interest Payable; $5,600

$4,800

A company borrows $80,000 by signing an $80,000, 6%, 5-year note that requires equal payments of $18,992 at the end of each year. The first payment will record interest expense of __________.

A. Interest Expense, $2,5000

A company issues $100,000 of 5%, 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 issuer records the first semi-annual interest payment with a debit to which of the following accounts and in what amount? A. Interest Expense, $2,5000 B. Cash, $2,500 C. Interest Payable, $2,500 D. Interest Payable, $5,000 E. Cash, $5,000 F. Interest Expense, $5,000

Term Bonds

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

Mortgage

A __________ is a legal agreement that helps protect a lender if the borrower fails to make required payments on notes or bonds. It gives the lender a right to be paid from the cash proceeds of the sale of a borrower's assets identified in the agreement.

A. note payable

A __________ is similar to a bond payable but is normally transacted with a single lender such as a bank. A. note payable B. account payable C. note receivable D. account receivable

Discount on Bonds Payable

A __________ occurs when a company issues bonds with a contract rate less than the market rate. This means that the issue price is less than par value. It is a contra liability account.

Interest Expense

A bond discount is actually added __________ (the difference between what a company borrows and the total repayment).

Market Rate

A bond's __________ of interest is the rate that borrower's are willing to pay and lenders are willing to accept for a particular bond and it's risk level.

$8,179

A company borrows $60,000, by signing a 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 interest principal by __________.

Credit and $800,000

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 Bond Payable in the amount of __________.

$100

A company issues $50,000 of 5%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $48,000. Using the straight-line amortization method, the company will amortize the discount by __________ on each semiannual interest payment. (Hint: Semiannual Interest Payment Amount = Discount / Total Number of Payments)

Cash and $2,000

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 issuer records the semi-annual interest payment with a credit to __________ in the amount of __________.

B. $1,000

A company issues $500,000 of 9%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $480,000, yielding a discount of $20,000. Using the straight-line amortization method, the company will amortize the discount by __________ on each semiannual interest payment. A. $23,500 B. $1,000 C. $2,000 D. $48,000

Decrease and $2,000

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 the bonds payable will __________ (increase/decrease) total interest expense recognized over the life of the bond by __________.

Cash and $75,000

A company issues $75,000 of 6%, 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 issuer records the payment of principal at maturity with a credit to __________ in the amount of __________.

Credit and Premium

A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31. 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.

Carrying Value of Bonds

A discount is deducted from the par value of bonds to yield the __________.

C. installment note

A(n) __________ is an obligation requiring a series of payments to the lenders. A. term note B. registered note C. installment note D. secured note

Installment Note

An __________ is an obligation requiring a series of payments to the lender. They are common for franchises and other businesses when lenders and borrowers agree to spread payments over several periods.

Fair Value Option

Both U.S. GAAP and IFRS allow companies to account for bonds and notes using fair value (different form the amortized value). This method is referred to as the __________.

$930

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 __________.

Annuity

Sometimes payments follow an __________, which is a series of equal payments at equal time intervals.

B. contract rate

The __________ is the interest rate specified in the indenture—sometimes referred to as the coupon rate, stated rate, of nominal rate. A. market rate B. contract rate C. par value

Straight-Line Bond Amortization

The __________ method allocates an equal portion of the total bond interest expense to each interest period.

Effective Interest Method

The __________, or simple interest method, allocates total bond interest expense over the bonds' life in a way that yields a constant rate of interest.

Contract Rate

The bond issuer pays the interest rate specified in the indenture, the _________, also referred to as the coupon rate, stated rate, or nominal rate.

Bond Indenture

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the __________, which is the legal contract between the issuer and the bondholders (and specifies how often interest is paid).

Market Rate

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 __________.

Interest Expense

The straight-line bond amortization method allocates an equal portion of the total bond __________ to each interest period.

Advantages of Bonds

The three __________ in regards to financing are: 1. Bonds do not affect owner control. 2. Interest on bonds is tax deductible. 3. Bonds can increase return on equity.

Disadvantages of Bonds

The two main __________ in regards to financing are: 1. Bonds can decrease return on equity. 2. Bonds require payment of both periodic interest and the par value at maturity.

Bonds Payable

When bonds mature and are paid back, the issuer records its payment with a debit to __________.

Premium on Bonds

When the contract rate of bonds is higher than the market rate, the bonds will sell at a price higher than par value. The amount by which the bond price exceeds par value is the __________.

Premium

When the current market rate is less than the bond contract rate on the date of issuance, the bond will be sold at a(n) __________.

Debit and $50,000

When the market rate is 10%, a company issues $50,000 of 12%, 10-year bonds dated January 1, 2009, that mature on December 31, 2018, 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 __________.

A. Bonds Payable; $50,000

When the market rate is 12%, a company issues $50,000 of 9%, 10-year bonds dated January 1, 2017, that mature on December 31, 2026, and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a debit to __________ in the amount of __________. A. Bonds Payable; $50,000 B. Bonds Payable; $95,000 C. Cash; $50,000 D. Cash; $95,000

Discount

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

Convertible Bonds

__________ (and notes) can be exchanged for a fixed number of shares of the issuing corporation's common stock. Exchangeable debt offers holders the potential to participate in future increases in stock price.

Callable Bonds

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

Serial Bonds

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