Chapter 10-Accounting for Long-Term Liabilities Smartbook Assignment
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.
$1,000 Reason: ($500,000-$480,000)=$20,000/20 periods=$1,000.
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.
$1,000; $5,000
A company issues $50,000 of 9%, 10-year bonds dated January 1, 2018, that mature on December 31, 2027, and pay interest semiannually of $2,250. On December 31, 2022, when the bond premium is $2,500, the bonds are called for $55,000. The journal entry to record this transaction would record a _____ to Loss on Bond Retirement of $2,500.
Blank 1: debit
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 _____ o Discount on Bonds Payable in the amount of $ _____.
Blank 1: debit Blank 2: 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 _____ to Discount on Bonds Payable in the amount of $ _____.
Blank 1: debit Blank 2: 5000
When the market rate is 8%, a company issues $50,000 of 9%, 10-year bonds and pay interest semiannually for a selling price of $60,000. When the bonds mature, the issuer records its payment of principal with a _____ to Bonds Payable in the amount of $_____.
Blank 1: debit Blank 2: 50000
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 _____ total interest expense recognized over the life of the bond by $_____.
Blank 1: decrease Blank 2: 2000
A(n) ____ on bonds payable occurs when a company issues bonds with a contract rate less than the market rate.
Blank 1: discount
When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a ____.
Blank 1: discount
When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a _____.
Blank 1: discount
Total bond interest ____ is the sum of the interest payments plus the bond discount.
Blank 1: expense
The legal contract between the bondholders and the issuer is called the bond _____
Blank 1: 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.
Blank 1: installment
The straight-line bond amortization method allocates an equal portion of the total bond _____ _____ to each interest period.
Blank 1: interest Blank 2: expense
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.
Blank 1: market
The par value of a bond, also called the face value, is paid at a stated future date, known as the bond's _____ date.
Blank 1: maturity
Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) _____ 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.
Blank 1: 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
Blank 1: note or notes
The bond carrying value can be determined by taking the bond _____ value minus the discount on bonds payable.
Blank 1: par
Most bonds require _____ value to be repaid at maturity and _____ to be paid semiannually. Listen to the complete question
Blank 1: par Blank 2: interest
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) _____
Blank 1: premium
When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a _____
Blank 1: premium
Many bonds are _____ 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.
Blank 1: sinking
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; and credit to Bond Payable $500,000.
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 bonds are sold at par value, the issuer records the first semi-annual interest payment with which of the following entries? (Check all that apply.)
Debit to Interest Expense for $3,000. Credit to Cash for $3,000. Reason: Interest is paid semiannually; therefore, Cash is credited for $3,000. Interest is paid semiannually; therefore, Interest Expense is debited for $3,000.
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? (Check all that apply.)
Interest Expense $5,600 Notes Payable; $9,542
A company issues $50,000 of 9%, 10-year bonds dated January 1, 2019, that mature on December 31, 2028, and pay interest semiannually for $2,250. On December 31, 2023, when the bond premium is $2,500, the bonds are called for $54,000. The journal entry to record this transaction would record a (Gain/Loss) ______ on Bond Retirement in the amount of ______.
Loss; $1,500 Reason: Book value of bonds = $50,000+2,500=$52,500. Cash paid $54,000 - 52,500=$1,500 loss.
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? (Check all that apply.)
Notes Payable; $8,179 Interest Expense; $4,800
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 _______ on bonds.
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
When a bond is sold at a premium, the carrying value will _______ each period that the premium is amortized.
decrease
The legal contract between the bondholders and the issuer is called the bond ______.
indenture
A(n) _____ note is an obligation requiring a series of payments to the lenders.
installment
A bond discount increases __________ at each semi-annual interest payment.
interest expense
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 Reason: The bond's market 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.
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
A _____ _____ is similar to a bond payable but is normally transacted with a single lender such as a bank.
note payable
The ________ 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 contract rate determines the annual interest paid by multiplying the bond ____ value by the contract rate.
par
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.
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%
A $200,000 4 year bond was issued for $210,000. The semi-annual amortization of the bond premium using the straight-line method equals $____.
Blank 1: 1,250 Reason: Issued Amount - Processed Amount / Time Period x Semi Annual Amortization of Bond Premium 210,000 - 200,000 = 10,000 / 4 x 2 = $1250
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.
Blank 1: 100
A company borrows $50,000 by signing a $50,000, 8% note that requires six equal payments of ______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of six annual payments, discounted at 8% equals 4.6229.)
Blank 1: 10816
A company borrows $100,000 by signing a $100,000, 5% note that requires four equal payments of $_____ (round to the nearest dollar) at the end of each year. (The present value of an annuity of four annual payments, discounted at 5% equals 3.5460.)
Blank 1: 28,201
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 $_____.
Blank 1: 8179
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 first semi-annual interest payment with a credit to _____ in the amount of $____
Blank 1: Cash Blank 2: 2000 $50,000 x .08 = 4000/2 = $2000
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 $_____.
Blank 1: Cash Blank 2: 75000
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 _____ to Bonds Payable in the amount of $_____.
Blank 1: credit Blank 2: 400000
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 payment of principal at maturity with a debit to ______ in the amount of ______.
Bonds Payable; $50,000 Reason: When the bonds mature, Bonds Payable is debited and Cash is credited for the par value of $50,000.
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 Reason: 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 Bonds Payable in the amount of $50,000.
Which of the following statements is an advantage of bond financing?
Bonds do not affect owner control.
Which of the following statements is not an advantage of bond financing?
Bonds require interest payments and payment of par value.
Which of the following statements are disadvantages of bond financing? (Check all that apply.)
Bonds require payment of interest and par value. Bonds can decrease return on equity.
Which of the following is a disadvantage of bond financing?
Bonds require payment of periodic interest and the par value.
_____ bonds (and notes) have an option exercisable by the issuer to retire them at a stated dollar amount before maturity.
Callable
_____ bonds (and notes) can be exchanged for a fixed number of shares of the issuing corporation's common stock.
Convertible
_______ 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
_____ 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
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; semiannually
Bonds payable to whomever holds them are called _____ bonds or unregistered bonds.
bearer
When a bond is sold at a discount, the ________ value will increase at each semi-annual interest payment by the amortization of bond discount.
carrying
A bond _____ is evidence of the company's debt.
certificate
A bond _________ may be issued as evidence of the company's debt.
certificate
The ________ 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 ______ to Bond Payable in the amount of _______.
credit; $100,000
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 Reason: 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 credit to Bond Payable in the amount of $100,000.
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 ______ to ______ on Bonds Payable in the amount of $5,000.
credit; Premium
Bonds issued in the names and addresses of their holders are _______ bonds.
registered
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