ACC 206 Week 7 Quiz StrayerClick on the Link Below to Purchase
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"aterialhtt#$%%www&hw'ala&co(%ACC)206)Accountin')Princi#les)**)Week)7)Quiz)Strayer)26+&ht(C,AP-./0+L12)-./"L*AB*L*-*.SC,AP-./
S-345 1B6.C-*7.S1.Explain why bonds are issued. 2.Prepare
theentries forthe issuance ofbondsandinterestexpense.
3.Describetheentrieswhenbondsareredeemedorconverted.
4.Describetheaccountingforlong-termnotespayable.
5.Contrasttheaccountingforoperatingandcapitalleases.
6.Identifythemethodsforthepresentationandanalysisoflong-termliabilities.
7.Compute the market price of a bond. 8.Apply the
effective-interestmethod ofamortiing bond discount and bond
premium.
a9.Applythestraight-linemethodofamortiingbonddiscountandbondpremium.
-/3.)8ALS. S-A-.".2-S1. Each bondholder may vote for the board of
directors in proportion to thenumber of bonds held.2.
ondinterestpaidbyacorporationisane!pense"#hereasdividendspaidarenotan
e!pense of the corporation.3. $e%istered bonds are bonds that are
delivered to o#ners by &.'. re%istered mail service.4. (
debenture bond is an unsecured bond #hich is issued a%ainst the
%eneral credit of the borro#er.5. onds are a form of
interest)bearin% notes payable.6. *either corporate bond interest
nor dividends are deductible for ta! purposes.7. ( 1+, stoc-
dividend is the e.uivalent of a /1"+++ par value bond payin% annual
interest of 1+,.8. 0heholderofaconvertible bondcanconvert
aninterestpayment receivedintoacash dividend paid on common stoc-
if the dividend is %reater than the interest payment.9. 0he board
of directors may authori1e more bonds than are issued.1+.
0hecontractual interest rate isal#ays e.ual tothe mar-et interest
rate onthedatethat bonds are issued.11. 2f /15+"+++ face value
bonds are issued at 1+2" the proceeds received #ill be /1+2"+++.12.
3iscount on bonds is anadditional cost of borro#in%and should be
recorded as interest e!pense over the life of the bonds.13.
2facorporationissuedbondsatanamountlessthanfacevalue"it
indicatesthatthe corporation has a #ea- credit ratin%.4on%)0erm
4iabilities0+ ) +14.
(corporationthatissuesbondsatadiscount#illreco%ni1einterest
e!penseatarate #hich is %reater than the mar-et interest rate.15.
2f bonds are issued at a discount" the issuin% corporation #ill pay
a principal amount less than the face amount of the bonds on the
maturity date.16. 2f bonds are issued at a premium" the carryin%
value of the bonds #ill be %reater than the face value of the bonds
for all periods prior to the bond maturity date.17. 2f the mar-et
interest rate is %reater than the contractual interest rate" bonds
#ill sell at a discount.18.
2f/8++"+++"8,bondsareissuedon5anuary1"andpayinterest
semiannually"the amount of interest paid on 5uly 1 #ill be
/32"+++.19. 2f bonds sell at a premium" the interest e!pense
reco%ni1ed each year #ill be %reater than the contractual interest
rate.2+. 0he carryin% value of bonds is calculated by addin% the
balance of the 3iscount on onds 6ayable account to the balance in
the onds 6ayable account.21. 0helossonbondredemptionisthedifference
bet#een thecashpaid andthecarryin% value of the bonds.22. 2f
/2++"+++ par value bonds #ith a carryin% value of /19+"4++ are
redeemed at 97" a loss on redemption #ill be recorded.23. 7ains and
losses are not reco%ni1ed #hen convertible bonds are converted into
common stoc-.24. 7enerally" convertible bonds do not pay
interest.25. Each payment on a mort%a%e note payable consists of
interest on the ori%inal balance of the loan and a reduction of the
loan principal.26. ( lon%)term note that pled%es title to specific
property as security for a loan is -no#n as a mort%a%e payable.27.
( capital lease re.uires the lessee to record the lease as a
purchase of an asset.28. 0he times interest earned ratio is
computed by dividin% net income by interest e!pense.a29. 0he
present value of a bond is a function of t#o variables8 91: the
payment amounts and 92: the interest 9discount: rate.a3+.
0heeffective)interestmethodofamorti1ation resultsinvaryin%
amountsofamorti1ation and interest e!pense per period but a
constant interest rate.(d di tio n al 0 rue);a lse< u esti o
ns31. onds that mature at a sin%le specified future date are called
term bonds.0+ ) 632.
0hetermsofthebondissuearesetforthinaformalle%al documentcalledabond
indenture.33. 0he carryin% value of bonds at maturity should be
e.ual to the face value of the bonds.34. 6remium on onds 6ayable is
a contra account to onds 6ayable.35.
=henbondsareconvertedintocommonstoc-"thecarryin%value ofthebondsis
transferred to paid)in capital accounts.36.
>peratin%leasesareleasesthatthelessee mustcapitali1e onits
balancesheetasan asset.37.
&nderacapitallease"thelease?assetisreportedonthebalance
sheetunderplant assets.38. 4on%)term liabilitiesare reported
inaseparate section ofthebalance sheetimmediately follo#in% current
liabilities."3L-*PL. C,1*C. Q3.S-*12S39. Each of the follo#in% is
correct re%ardin% bonds except they are a.a form of
interest)bearin% notes payable.b.attractive to many
investors.c.issued by corporations and %overnmental a%encies.
d.sold in lar%e denominations.4+. ;rom the standpoint of the
issuin% company" a disadvanta%e of usin% bonds as a means of
lon%)term financin% is thata.bond interest is deductible for ta!
purposes.b.interest must be paid on a periodic basis re%ardless of
earnin%s.c.income to stoc-holders may increase as a result of
tradin% on the e.uity. d.the bondholders do not have votin%
ri%hts.41. 2facorporation issued /2"+++"+++inbonds#hichpay1+,annual
interest"#hatisthe annual net cash cost of this borro#in% if the
incometa! rate is 3+,@a. /2"+++"+++ b. /6+"+++c. /2++"+++ d.
/14+"+++4on%)0erm 4iabilities0+ ) 742. 'ecured bonds are bonds
thata.are in the possession of a ban-.b.are re%istered in the name
of the o#ner.c.have specific assets of the issuer pled%ed as
collateral. d.have detachable interest coupons.43. (le%al document
#hich summari1es the ri%htsandprivile%es of bondholders as#ellas
the obli%ations and commitments of the issuin% company is calleda.a
bond indenture. b. a bonddebenture.c. tradin% on the e.uity. d.a
term bond.44. 'toc-holders ofacompany may bereluctant to finance
e!pansion throu%h issuin% more e.uity becausea.levera%in% #ith debt
is al#ays a better idea. b.their earnin%s per share may
decrease.c.the price of the stoc- #ill automatically decrease.
d.dividendsmust be paid on a periodic basis.45. =hich of the
follo#in% is not an advanta%e of issuin% bonds instead of common
stoc-@ a.'toc-holder control is not affected.b.Earnin%s per share
on common stoc-may be lo#er. c.2ncome to common shareholders may
increase.d.0a! savin%s result.46. onds that are secured by real
estate are termed a.mort%a%e bonds.b.serialbonds. c. debentures.
d.bearerbonds.47. onds that mature at a sin%le specified future
date are called a.coupon bonds.b. term bonds. c. serial bonds. d.
debentures.48. ondsthatmaybee!chan%edforcommonstoc-attheoptionofthe
bondholdersare calleda.options.b.stoc- bonds.c. convertible
bonds.d. callable bonds.49.
ondsthataresubAecttoretirementatastateddollaramountpriorto
maturityatthe option of the issuer are calleda.callable
bonds.b.early retirement bonds. c. options.d.debentures.0+ ) 95+.
2nvestors #ho receive chec-s in their names for interest earned
onbonds must hold a.re%istered bonds.b. coupon bonds. c. bearer
bonds. d. direct bonds.51. ( bondholder that sends in a coupon to
receive interest payments must have a9n: a.unsecured bond.b.bearer
bond.c. mort%a%ebond. d. serial bond.52. onds that may be directly
transferred to another party by delivery are a.coupon
bonds.b.debentures.c.re%istered bonds.d.transportable bonds.53.
ondsthatmustbecancelledandreissuedasne#bondsinorderto haveo#nership
interest transferred area. coupon bonds. b. bearer bonds. c. serial
bonds.d.re%istered bonds.54. Borporations are %ranted the po#er to
issue bonds throu%h a.ta! la#s.b.state la#s.c. federal security
la#s. d. bond debentures.55. 0he party #ho has the ri%ht to
e!ercise a call option on bonds is the a.investment ban-er.b.
bondholder. c. bearer.d.issuer.56. ( maAor disadvanta%e resultin%
from the use of bonds is that a.earnin%s per share may be
lo#ered.b.interest must be paid on a periodic basis. c. bondholders
have votin% ri%hts.d.ta!es may increase.57. onds #ill al#ays fall
into all but #hich one of the follo#in% cate%ories@ a.Ballable or
convertibleb.0erm or serialc. $e%istered or bearer d. 'ecuredor
unsecured4on%)0erm 4iabilities0+ ) :58. =hich of the follo#in%
statements concernin% bonds is not atrue statement@ a.onds are
%enerally sold throu%h an investment company.b.0he bond indenture
is prepared after the bonds are printed.c.0he bond indenture and
bond certificate are separate documents. d.0he trustee -eeps
records of each bondholder.59. ( bond trustee does not a. issue the
bonds.b.-eep a record of each bondholder.c.hold conditional title
to pled%ed property. d. maintain custody of unsold bonds.6+. 0he
contractual interest rate is al#ays stated as a9n: a.monthly
rate.b.daily rate.c. semiannual rate. d. annual rate.61. =hen
authori1in% bonds to be issued" the board of directors does not
specify the a.total number of bonds authori1ed to be sold.b.
contractualinterest rate. c. sellin% price.d.total face value of
the bonds.&se the follo#in% e!hibit for .uestions 62C63.o n ds
Bl ose D mart 8 3?8 171++EF ie ld Go lume 8.4 35* et Bh a n %e
H7?862. 0he contractual interest rate of theD mart bonds is
a.%reater than the mar-et interest rate.b.less than the mar-et
interest rate. c.e.ual to the mar-et interest rate. d.not
determinable.63. >n the day of tradin%referred to above" a.no
Dmart bonds #ere traded.b.bonds #ith mar-et prices of /3"5++ #ere
traded.c.at closin%" the sellin% price of the bond #as hi%her than
the previous dayIs price. d.the bond sold for /1++.2564. ( /1"+++
face value bond #ith a .uoted price of 98 is sellin% for
a./1"+++.b. /98+. c. /9+8. d. /98.65. ( bond #ith a face value of
/1++"+++ and a .uoted price of 1+2E has a sellin% price of
a./12+"225.b. /1+2"+25. c. /1++"225. d. /1+2"25+.0+ ) 00 66.
6remium on onds 6ayable a.has a debit balance.b.is a contra
account.c.is considered to be a reduction in the cost of borro#in%.
d.is deducted from bonds payable on the balance sheet.67. 2f the
mar-et interest rate is %reater than the contractual interest rate"
bonds #ill sell a.at a premium.b. at face value. c. at a
discount.d.only after the stated interest rate is increased.68.
>n5anuary1"2++8"7rantBorporation issued /3"+++"+++"1+)year"
8,bondsat1+2. 2nterest is payable semiannually on 5anuary 1 and
5uly 1. 0he Aournal entry to record this transaction on 5anuary 1"
2++8 isa.Bash
....................................................................................3"+++"+++onds
6ayable............................................................3"+++"+++b.Bash....................................................................................
onds6ayable............................................................c.6remiumon
onds 6ayable ................................................Bash
....................................................................................
onds6ayable............................................................d.Bash....................................................................................
onds6ayable............................................................
6remiumononds6ayable
.......................................3"+6+"+++6+"+++
3"+++"+++3"+6+"+++3"+6+"+++3"+6+"+++3"+++"+++ 6+"+++69. 0he total
cost of borro#in% is increased only if the a.bonds #ere issued at a
premium.b.bonds #ere issued at a discount. c. bonds #ere sold
atface value.d.mar-et interest rate is less than the contractual
interest rate on that date.7+.
2fthemar-etinterestrateis1+,"a/1+"+++"12,"1+)yearbond"
thatpaysinterest semiannually #ould sell at an amounta. less than
face value.b. e.ual to face value.c.%reater than face value.d.that
cannot be determined.71. 0he present value of a /1+"+++" 5)year
bond" #ill be less than /1+"+++ if the a.contractual interest rate
is less thanthe mar-et interest rate.b.contractual interest rate is
%reater than the mar-et interest rate. c.bond is
convertible.d.contractual interest rate is e.ual to the mar-et
interest rate.72. 7ome1 Borporation issues 1"+++" 1+)year" 8,"
/1"+++ bonds dated 5anuary 1"2++8"at 98. 0he Aournal entry to
record the issuance #ill sho# aa.debit to Bash of
/1"+++"+++.b.credit to 3iscount on onds 6ayable for /2+"+++.
c.credit to onds 6ayable for /98+"+++.d.debit to Bash for
/98+"+++.4on%)0erm 4iabilities0+ ) 0073. 0he mar-et interest rate
is often called the a.stated rate.b.effective rate.c.coupon
rate.d.contractual rate.74. 2f bonds are issued at a discount" it
means that the a.financial stren%th of the issuer is
suspect.b.mar-et interest rate is hi%her than the contractual
interest rate. c.mar-et interest rate is lo#er than the contractual
interest rate.d.bondholder #ill receive effectively less interest
than the contractual interest rate.75. Each of the follo#in%
accounts is reported as lon%)term liabilities except a.ond 2nterest
6ayable.b.onds 6ayable.c.3iscount on onds 6ayable. d.6remium on
onds 6ayable.76. 0hestatement that Jond prices vary inversely
#ithchan%es in the mar-et interest rateJ means that if thea.mar-et
interest rate increases" the contractual interest rate #ill
decrease. b.contractual interest rate increases" then bond prices
#ill %o do#n.c.mar-et interest rate decreases" then bond prices
#ill %o up.d.contractual interest rate increases" the mar-et
interest rate #ill decrease.77. 0he carryin% value of bonds #ill
e.ual the mar-et price a.at the close of every tradin% day.b.at the
end of the fiscal period. c.on the date of issuance.d.every si!
months on the date interest is paid.78. 0he sale of bonds above
face value a. is a rare occurrence.b.#ill cause the total cost of
borro#in% to be less than the bond interest paid.c.#ill cause the
total cost of borro#in% to be more than the bond interest paid.
d.#ill have no net effect on 2nterest E!pense by the time the bonds
mature.79. 2n the balance sheet" the account" 6remium on onds
6ayable" is a.added to bonds payable.b.deducted from bonds
payable.c.classified as a stoc-holdersI e.uity account.
d.classified as a revenue account.8+.
0#othousandbonds#ithafacevalueof/1"+++each"aresoldat1+3.0heentryto
record the issuance
isa.Bash....................................................................................2"+6+"+++onds
6ayable...........................................................2"+6+"+++b.Bash....................................................................................2"+++"+++
6remiumononds6ayable................................................6+"+++onds
6ayable...........................................................2"+6+"+++0+
) 02
c.Bash...................................................................................2"+6+"+++
6remiumon onds 6ayable......................................onds
6ayable
...........................................................6+"+++
2"+++"+++d.Bash...................................................................................2"+6+"+++
3iscount on onds 6ayable
.......................................onds 6ayable
...........................................................6+"+++
2"+++"+++81. ond interest paid isa.hi%her #hen bondssell at a
discount. b.lo#er #hen bonds sellat a premium.c.the same #hether
bonds sell at a discount or a premium.d.hi%her #hen bonds sell at a
discount and lo#er #hen bonds sell at a premium.82. Kende1
Borporation issues 2"+++" 1+)year" 8," /1"+++ bonds dated 5anuary
1" 2++8" at 1+3. 0he Aournal entry to record the issuance #ill sho#
aa.debit to Bash of /2"+++"+++.b.credit to 6remium on onds 6ayable
for /6+"+++. c.credit to onds 6ayable for /2"+3+"+++.d.credit to
Bash for /2"+6+"+++.&se the follo#in% information for .uestions
83C86.7oldenBompanyreceivedproceedsof/94"25+on1+)year"8,bondsissuedon5anuary1"
2++7.0hebondshadafacevalueof/1++"+++"payinterestsemi)annuallyon5une3+and
3ecember 31" and have a call price of1+1. 7olden uses the
strai%ht)line method of amorti1ation.83. =hat is the amount of
interest 7olden must pay the bondholders in 2++7@ a./7"54+b. /8"+++
c. /8"575 d. /7"425a84. =hat is the amount of interest e!pense
7olden #ill sho# #ith relation to these bonds for the year ended
3ecember 31" 2++8@a. /8"+++ b. /7"54+ c. /8"575 d. /7"425a85. =hat
is the carryin% value of the bonds on5anuary 1" 2++9@ a./1++"+++b.
/95"4++ c. /98"85+ d. /94"82586. 7olden Bompany decided to redeem
the bonds on 5anuary 1" 2++9. =hat amount of %ain or loss #ould
7olden report on its 2++9 income statement@a. /4"6++ %ain b. /5"6++
%ain c./5"6++ loss d. /4"6++ loss4on%)0erm 4iabilities0+ ) 0;87.
ryce Bompany has /5++"+++ of bonds outstandin%. 0he unamorti1ed
premium is /7"2++. 2fthecompanyredeemedthebondsat1+1"#hat
#ouldbethe%ainorlossonthe redemption@a. /2"2++ %ain b. /2"2++ loss
c. /5"+++ %ain d. /5"+++ loss88.
0hecurrentcarryin%valueof5ensenLs/6++"+++ facevaluebondsis
/597"75+.2fthe bonds are retired at 1+2" #hat #ould be the amount
5ensen #ould pay its bondholders@a./597"75+b. /6++"+++ c. /6+3"+++
d. /612"+++89. 4aheyBorporationretiresits/5++"+++
facevaluebondsat1+5on 5anuary1"follo#in% the payment of annual
interest.0he carryin% value ofthe bonds at the redemption date is
/518"725.0he entry to record the redemption #ill include aa.credit
of /18"725 to 4oss on ond $edemption. b.debit of /18"725 to 6remium
on onds 6ayable. c.credit of /6"275 to 7ain on ond $edemption.d.
debit of /25"+++ to 6remium on onds 6ayable.9+. ( /9++"+++ bond #as
retired at 1+3 #hen the carryin% value of the bond #as /933"+++.
0he entry to record the retirement #ould include aa.%ain on bond
redemption of /27"+++. b.loss on bond redemption of /6"+++.c.loss
on bond redemption of /27"+++. d.%ain on bond redemption of
/6"+++.91. 2f forty /1"+++ convertible bonds #ith a carryin% value
of /46"+++ are converted into 6"+++ shares of /5 par value common
stoc-" the Aournal entry to record the conversion isa.onds
6ayable....................................................................46"+++
Bommon
'toc-...........................................................46"+++b.onds6ayable....................................................................4+"+++
6remiumononds6ayable................................................6"+++Bommon
'toc-...........................................................46"+++c.onds6ayable....................................................................4+"+++
6remiumononds6ayable................................................6"+++Bommon
'toc-...........................................................3+"+++
6aid)inBapitalinE!cessof6ar.................................16"+++d.onds
6ayable....................................................................
46"+++3iscountononds6ayable.......................................6"+++Bommon
'toc-...........................................................3+"+++
6aid)inBapitalinE!cessof6ar.................................1+"+++92.
( corporation reco%ni1es a %ain or lossa.only #hen bonds are
converted into common stoc-. b.only #hen bonds are redeemed before
maturity.c.#hen bonds are redeemed at or before
maturity.d.#henbondsareconvertedintocommonstoc-and#hentheyare
redeemedbefore maturity.0+ ) 0< 93. 2f there is a loss on bonds
redeemed early" it is a. debited directly to $etained
Earnin%s.b.reported as an J>ther E!penseJ on the income
statement.c.reported as an JE!traordinary 2temJ on the income
statement. d.debited to 2nterest E!pense" as a cost of
financin%.94. 2f bonds can be converted into common stoc-"a.they
#ill sell at a lo#er price than comparable bonds #ithout a
conversion feature.b.they#illcarryahi%herinterestratethancomparable
bonds #ithouttheconversion feature.c.they #ill be converted only if
the issuer calls them in for
conversion.d.thebondholdermaybenefitifthemar-etpriceofthe
commonstoc-increases substantially.95. =hen bonds are converted
into common
stoc-"a.themar-etpriceofthestoc-onthedateofconversioniscreditedtotheBommon
'toc-
account.b.themar-etpriceofthebondsonthedateofconversioniscreditedtotheBommon
'toc- account.c.the mar-et price of the stoc- and the bonds is
i%nored #hen recordin% the conversion. d.%ains or losses on the
conversion are reco%ni1ed.96. 2f bonds #ith a face value of /9+"+++
are converted into common stoc- #hen the carryin% value of the
bonds is /81"+++" the entry to record the conversion #ill include a
debit toa.onds6ayablefor/9+"+++. b.onds6ayablefor/81"+++.c.3iscount
on onds 6ayable for /9"+++.d.onds 6ayable e.ual to the mar-et price
of the bonds on the date of conversion.97. (/9++"+++
bond#asretiredat98#henthecarryin%valueofthe bond#as/888"+++. 0he
entry to record the retirement #ould include aa.%ain on bond
redemption of /12"+++. b.loss on bond redemption of /6"+++.c.loss
on bond redemption of /12"+++. d.%ain on bond redemption of
/6"+++.98.
0#enty/1"+++bonds#ithacarryin%valueof/25"6++areconvertedinto2"+++sharesof
/5parvaluecommonstoc-.0hecommonstoc-hadamar-etvalueof/9pershareonthedateofconversion.0heentry
to record the conversion isa.onds
6ayable...................................................................25"6++
Bommon
'toc-..........................................................1+"+++
6aid)in Bapital in E!cess of
6ar..................................15"6++b.onds6ayable...................................................................2+"+++
6remiumononds6ayable...............................................
5"6++Bommon
'toc-..........................................................18"+++
6aid)inBapitalinE!cessof6ar.................................
7"6++c.onds6ayable...................................................................2+"+++
6remiumon
onds6ayable...............................................
5"6++Bommon
'toc-..........................................................1+"+++
6aid)inBapitalinE!cessof6ar..................................15"6++d.onds
6ayable...................................................................25"6++
Bommon
'toc-..........................................................18"+++
6aid)in Bapital in E!cess of
6ar..................................7"6++4on%)0erm 4iabilities0+ )
0+99. =hich one of the follo#in% amounts increases each period #hen
accountin% for lon%)term notes payable@a. Bash payment b.
2ntereste!pensec.6rincipal balanced.$eduction of principal1++. 2n
the balance sheet" mort%a%e notes payable are reported as a.a
current liability only.b.a lon%)term liability only.c.both a
current and a lon%)term liability.d.a current liability e!cept for
the reduction in principal amount.1+1.
(mort%a%enotepayable#ithafi!edinterestratere.uirestheborro#ertoma-e
installmentpaymentsoverthetermoftheloan.Eachinstallmentpaymentincludesinterestontheunpaidbalanceoftheloanandapaymentontheprincipal.=itheachinstallmentpayment"indicatetheeffectontheportionallocatedtointereste!penseand
the portion allocated to principal.6ortion (llocatedto 2nt e restE
! p e nsea. 2ncreases b. 2ncreases c. 3ecreases d. 3ecreases6ortion
(llocatedto 6a y mento f 6 rinc ip a l2ncreases 3ecreases 3ecreases
2ncreases1+2. 0he entry to record an installment payment on a
lon%)term note payable is a.Kort%a%e *otes
6ayableBashb.2nterestE!penseBashc. Kort%a%e *otes 6ayable2nterest
E!penseBashd.onds6ayableBash&se the follo#in% information for
.uestions 1+3C1+4.3elmar Bompany purchased a buildin% on 5anuary 2
by si%nin% a lon%)term /84+"+++ mort%a%e #ith monthly payments of
/7"7++. 0he mort%a%e carries an interest rate of 1+ percent.1+3.
0he entry to record the first monthly payment #ill include a
a.debit to the Bash account for /7"7++.b.credit to the Bash account
for /7"+++.c.debit to the 2nterest E!pense account for
/7"+++.d.credit to the Kort%a%e 6ayable account for /7"7++.1+4. 0he
amount o#ed on the mort%a%e after the firstpayment #ill be
a./84+"+++.b. /839"3++. c. /833"+++. d. /832"3++.0+ ) 06 &se
the follo#in% information for .uestions 1+5C1+6.3iamond
Bompanyborro#ed/5++"+++froman-0#oon5anuary1"2++7inordertoe!pandits
minin%capabilities.0hefive)yearnotere.uiredannualpaymentsof/13+"218andcarriedan
annual interest rate of 9.5,.1+5. =hat is the amount of e!pense
3iamond must reco%ni1e on its 2++8 income statement@ a./47"5++b.
/39"642 c. /35"129 d. /31"+371+6. =hat is the balance in the notes
payable account at 3ecember 31" 2++8@ a./5++"+++b. /326"7+6 c.
/417"282 d. /4+5"+++1+7. 0he lessee has substantially all of the
benefits and ris-s of o#nership in a9n: a.apartment lease.b.capital
lease.c.operatin% lease.d.operatin% lease and a capital lease.1+8.
(lease#heretheintentistemporary useofthepropertybythe
lessee#ithcontinued o#nership of the property by the lessor is
calleda.off)balance sheetfinancin%. b. an operatin% lease.c.a
capital lease.d.a purchase of property.1+9.
=hichofthefollo#in%isnotacondition#hich#ouldre.uirethe
recordin%ofalease contract as a capital [email protected] lease transfers
o#nership of the property to the lessee. b.0he lease contains a
bar%ain purchase option.c.0he lease term is less than 75, of the
economic life of the leased
property.d.0hepresentvalueoftheleasepaymentse.ualsore!ceeds9+,ofthefairmar-et
value of the leased property.11+. 2n a lease contract"a.the o#ner
of the property is called the lessee.b.the presence of a bar%ain
purchase option indicates that it is a capital lease. c.the renter
of the property is called the lessor.d.there is al#ays a transfer
of o#nership at the end of the lease term.111. =hich of the
follo#in% statements concernin% leases is true@ a.Bapital leases
are favored by
lessees.b.0heappearanceoftheaccount"4eased(sset"onthebalance
sheet"si%nifiesan operatin%
lease.c.0heportionofaleaseliabilitye!pectedtobepaidinthene!t
yearisreportedasa current liability.d.6resent value is irrelevant
in accountin% for leases.4on%)0erm 4iabilities0+ ) 07112. 2fthe
present value oflease payments e.uals or e!ceeds 9+, ofthe fair
mar-et value of the leased property" thea.conditions are met for
the lease to be considereda capital lease. b.lease is uneconomical
and should not be entered into.c.lease may be classified as an
operatin% lease.d.recordin% of a lease liability is optionalMthat
is" the off)balance sheet approach can be elected.113. Each of the
follo#in% may be sho#n in a supportin% schedule instead of the
balance sheet except thea.current maturities of lon%)term debt. b.
conversion privile%es.c.interestrates. d.maturity dates.114. 0he
times interest earned ratio is computed by dividin% a.net income by
interest e!pense.b.income before income ta!es by interest
e!pense.c.income before interest e!pense by interest
e!pense.d.income before income ta!es and interest e!pense by
interest e!pense.115.
0hediscountonbondspayableorpremiumonbondspayableissho#nonthebalance
sheetasanadAustmenttobondspayabletoarriveatthecarryin%valueofthebonds.
2ndicatetheappropriate additionorsubtraction to bonds
payable86remiumon o n ds 6a y ab lea. (ddb.3educt c.
(ddd.3educt3iscount on o n ds 6a y ab le (dd(dd3educt3educt116.
2narecentyear3artBorporationhadnetincomeof/14+"+++"
intereste!penseof /3+"+++" and ta! e!pense of /2+"+++. =hat #as
3artBorporationLs times interest earned ratio for the year@a. 6.33
b. 4.66 c. 5.33 d. 6.++117.
2narecentyear3ayBorporationhadnetincomeof/15+"+++"
intereste!penseof /3+"+++"andatimesinterestearnedratioof9.
=hat#as3ayBorporationLsincome before ta!es for the year@a. /3++"+++
b. /27+"+++ c. /24+"+++d.*one of the above.0+ ) 09 118.
0headAustedtrialbalancefor4ifesaverBorp.attheendofthe
currentyear"2++8" contained the follo#in% accounts.5)year onds
6ayable 8, ond 2nterest 6ayable 6remiumon onds 6ayable *otes
6ayable 93 mo.: *otes6ayable 95 yr.:Kort%a%e 6ayable 9/15"+++ due
currently: 'alaries 6ayable0a!es 6ayable 9due 3?15 of
2++9:/1"+++"+++ 5+"+++ 1++"+++ 4+"+++ 165"+++ 2++"+++18"+++
25"+++0he total lon%)term liabilities reported on thebalance sheet
are a./1"365"+++.b. /1"35+"+++. c. /1"465"+++. d. /1"45+"+++.119.
0he2++8financialstatementsof'hado#Bo.containthefollo#in%
selecteddata9in
millions:.Burrent(ssets/750otal(ssets12+Burrent4iabilities4+0otal4iabilities85Bash80he
debt to total assets ratio is a. 7+.8,.b. 53.3,. c. 29.2,. d.
1.41,.a12+.0he present value of a bond isalso -no#n as its a.face
value.b.mar-etprice.c.future value.d.deferred
value.a121./3million"1+,"1+)yearbondsareissuedatfacevalue.2nterest
#illbepaidsemi)annually. =hen calculatin% the mar-et price of the
bond" the present value ofa./3++"+++ received for 1+ periods must
be calculated. b./3 million received in 1+ periods must be
calculated. c./3 million received in 2+ periods must be calculated.
d. /15+"+++ received for 1+ periods must be calculated.a122.Either
the strai%ht)line method or the effective)interest method of
amorti1ation #ill al#ays result ina.the same amount of interest
e!pense bein% reco%ni1ed over the term of the bonds. b.the same
amount of interest e!pense bein% reco%ni1ed each
year.c.moreintereste!pensebein%reco%ni1edthanifpremiumor
discounts#erenot amorti1ed.d.the same carryin% value each year
durin% the term of the bonds.4on%)0erm 4iabilities0+ )
0:a123.(corporationissued/3++"+++"1+,"5)yearbondson5anuary1"
2++8for/324"333" #hich reflects an effective)interest rate of8,.
2nterest ispaid semiannually on5anuary 1 and5uly1.2fthecorporation
usestheeffective)interest methodofamorti1ationofbond premium" the
amount of bond interest e!pense to be reco%ni1ed on 5uly 1" 2++8"
isa. /15"+++. b. /12"+++. c. /16"217. d. /12"973.a124.( bond
discount musta.al#ays be amorti1ed usin% strai%ht)line
amorti1ation.b.al#ays be amorti1ed usin% the effective)interest
method.c.beamorti1edusin%theeffective)interest
methodifityieldsannual amounts thatare materially different than
the strai%ht)line
method.d.beamorti1edusin%thestrai%ht)linemethodifityieldsannual
amountsthatare materially different than the effective)interest
method.a125.=hen the effective)interest method of bond discount
amorti1ation is used"a.the applicable interest rate used to compute
interest e!pense is the prevailin% mar-et interest rate on the date
of each interest payment date.b.the carryin% value of the bonds
#ill decrease each period.c.interest e!pense #ill not be a constant
dollar amount over the life of the bond.d.interest paid to
bondholders #ill be a function of the effective)interestrate on the
date the bonds are
issued.a126.=hentheeffective)interestmethodofbondpremiumamorti1ationisused"the
a.amountofpremiumamorti1ed#ill%etlar%er#ithsuccessiveamorti1ation.
b.carryin%value of the bonds #ill increase #ith successive
amorti1ation.c.interestpaidto
bondholders#illincreaseaftereachinterestpaymentdate.
d.interestrateusedtocalculateinterest e!pense #ill be the
contractual rate.&se the follo#in% information for .uestions
127C129.'ilconBompanyissued/8++"+++of6,"1+)yearbondsononeofitsinterestdatesfor/69+"96+toyieldaneffectiveannualrateof8,.0heeffective)interestmethodofamorti1ationistobe
used.a127.=hatamountofdiscount9tothenearestdollar:shouldbeamorti1ed
for thefirstinterest period@a. /22"542 b. /1+"9+4 c. /14"554 d.
/7"277a128.0he Aournal entry on the first interest payment date" to
record the payment of interest and amorti1ation of discount #ill
include aa.debit to ond 2nterest E!pense for /48"+++. b. credit to
Bash for /55"277.c.credit to 3iscount on onds 6ayable for /7"277.
d.debit to ond 2nterest E!pense for /64"+++.0+ ) 20 a129.No# much
bond interest e!pense 9to the nearest dollar: should be reported on
the income statement for the end of the first year@a. /55"422 b.
/55"277 c. /55"131 d.
/48"+++a13+.>n5anuary1"5ean4optein2nc.issued/3"+++"+++"9,bondsfor
/2"817"+++.0he mar-et rate of interest for these bonds is
1+,.2nterest is payable annually on 3ecember
31.5ean4opteinusestheeffective)interest
methodofamorti1in%bonddiscount.(tthe end of the first year" 5ean
4optein should report unamorti1ed bond discount ofa. /164"7++. b.
/171"3++. c. /154"83+. d. /153"+++.a131.>n5anuary 1"Bleopatra
Borporation issued /2"+++"+++" 14,"5)year bonds #ith interest
payable on3ecember 31. 0he bonds sold for /2"144"192. 0he mar-et
rate ofinterest for thesebonds#as12,.>n
thefirstinterestdate"usin%theeffective)interest method"the debit
entry to ond 2nterest E!pense is fora. /24+"+++. b. /251"162. c.
/257"3+4. d.
/28+"+++.a132.>n5anuary1"NurleyBorporationissues/1"+++"+++"5)year"12,
bondsat96#ith interestpayableon5uly1and5anuary1.0heentry
on3ecember31torecordaccrued bondinterestandtheamorti1ation
ofbonddiscountusin%thestrai%ht)linemethod#ill include aa.debit to
2nterest E!pense" /6+"+++. b. debit to 2nterest E!pense"
/12+"+++.c.creditto3iscountononds 6ayable"/4"+++.
d.creditto3iscountononds6ayable" /8"+++.133.
>n5anuary1"2++8"/1"+++"+++"1+)year"1+,bonds"#ereissuedfor/97+"+++.2nterestispaidannuallyon5anuary1.2ftheissuin%corporationusesthestrai%ht)linemethodto
amorti1e discount on bondspayable" the monthly amorti1ation amount
isa. /9"7++. b. /3"+++. c. /8+8. d. /25+.134.
(corporationissues/1++"+++"1+,"5)yearbondson5anuary1"
2++8"for/95"8++. 2nterest ispaidannuallyon5anuary 1.2fthe
corporationuses thestrai%ht)line method of amorti1ationofbond
discount"theamountofbondintereste!pensetobereco%ni1edin 3ecember
31" 2++8Ls adAustin% entry isa. /1+"84+. b. /1+"+++. c. /9"16+. d.
/84+.4on%)0erm 4iabilities0+ ) 20a135.$oman Bompany issued /4++"+++
of 6," 5)year bonds at 98" #ith interest paid annually. (ssumin%
strai%ht)line amorti1ation" #hat is the total interest cost of the
bonds@a. /12+"+++ b. /128"+++ c. /112"+++ d.
/116"+++a136.'un#oodBompanyissued/5++"+++of6,"5)yearbondsat98"#ithinterestpaid
annually.(ssumin% strai%ht)line amorti1ation" #hatisthe carryin%
value of the bonds after one year@a. /49+"+++ b. /491"+++ c.
/492"+++ d.
/494"+++a137.0erranceBompanyissued/2++"+++of8,"5)yearbondsat1+6.(ssumin%strai%ht)line
amorti1ationandannualinterestpayments"ho#much bond intereste!pense
is recorded on the ne!t interest date@a. /16"+++ b. /18"4++ c.
/13"6++ d. /2"4++a138.7arcia Bompany issued /8++"+++ of 8," 5)year
bonds at 1+6" #ith interest paid annually.
(ssumin%strai%ht)lineamorti1ation"#hatisthe
carryin%valueofthebondsafterone year@a. /848"+++ b. /843"2++ c.
/838"4++ d.
/852"8++a139.>n5anuary1"2++8"/5"+++"+++"5)year"1+,bonds"#ereissuedfor/4"85+"+++.2nterest
ispaidsemiannually on5anuary
1and5uly1.2ftheissuin%corporationusesthestrai%ht)line
methodtoamorti1e discountonbonds payable" the monthly amorti1ation
amount isa. /29"+4+. b. /3+"+++. c. /2"42+. d.
/2"5++.a14+.(corporationissues/3++"+++"1+,"5)yearbondson5anuary1"2++8
for/287"4++. 2nterest is paid semiannually on 5anuary 1 and 5uly 1.
2f thecorporation uses the strai%ht)linemethod ofamorti1ation
ofbond discount" theamount ofbond interest e!pense tobe reco%ni1ed
on 5uly 1"2++8 isa. /31"26+. b. /15"+++. c. /16"26+. d.
/13"74+.a141.>ver the term of the bonds" the balance in the
3iscount on onds 6ayable account #ill a.fluctuate up and do#n if
the mar-et is volatile.b. decrease. c. increase.d.be unaffected
until the bonds mature.0+ ) 22 a142.ond discount should be
amorti1ed to comply #ith a. the historical cost principle.b.the
matchin% principle.c.the revenue reco%nition principle. d.
conservatism.a143.2f bonds have been issued at a discount" over the
lifeof the bonds" the a.carryin% value of the bonds #ill
decrease.b.carryin% value of the bonds #ill
increase.c.intereste!pense#illincrease"ifthediscountisbein%amorti1ed
onastrai%ht)line basis.d.unamorti1ed discount #ill increase.A! !i
tio n al " ult i# leC ho iceQuestio n s144. 0he mar-et value
9present value: of a bond is a function of all of the follo#in%
except the a.dollar amounts to be received.b.len%th of time until
the amounts are received. c. mar-et rate of interest.d.len%th of
time until the bond is sold.145.
>nthedateofissue"Bhud1ic-Borporationsells/2millionof5)year
bondsat97.0he entry to record the sale #ill include the follo#in%
debits and credits8o n ds 6a y ab le a./1"94+"+++ Br. b./2"+++"+++
Br. c./2"+++"+++ Br. d./2"+++"+++ Br.3i scount on o n ds6 a y able
/+ 3r./6+"+++ 3r. /5++"+++ 3r. /6"+++ 3r.146. 0he mar-et rate of
interest for a bond issue #hich sells for more than its face value
is a.independent of the interest rate stated on the bond.b.hi%her
than the interest rate stated on the bond. c.e.ual to the interest
rate stated on the bond.d.less than the interest rate stated on the
bond.147. =henacompanyretiresbondsbeforematurity"the%ainorlosson
redemptionisthe difference bet#een the cash paid and thea.carryin%
value of the bonds. b. face value ofthe bonds.c.ori%inal sellin%
price of the bonds. d.maturity value of the bonds.148. Noffman
Borporationretiresitsbondsat1+6on5anuary1"follo#in%thepaymentofsemi)annualinterest.0hefacevalueofthebondsis/4++"+++.0hecarryin%valueofthebondsat
theredemptiondateis/419"8++. 0he entry to record the redemption
#ill include aa.credit of /19"8++ to 4oss on ond $edemption.
b.debit of /24"+++ to 6remium on onds 6ayable. c.credit of /4"2++
to 7ain on ond $edemption.d. debit of /19"8++ to 6remium on onds
6ayable.4on%)0erm 4iabilities0+ ) 2;149. Each payment on a mort%a%e
note payable consists of a.interest on the ori%inal balance of the
loan.b.reduction of loan principal only.c.interest on the ori%inal
balance of the loan and reductionof loan principal. d.interest on
the unpaid balance of theloan and reduction of loan principal.15+.
=hich of the follo#in% is not a condition under #hich the lessee
must record the lease of an [email protected] lease contains a bar%ain
purchase option.b.0he lease transfers o#nership of the property to
the lessee.c.0he lease term is e.ual to 6+, of the economic life of
the lease property.d.0he present value of the lease payments is 9+,
of the fair mar-et value of the leased property.151. 0he lessee
must record a lease as an asset if the lease a.transfers o#nership
of the property to the lessor.b.contains a purchase option.c.term
is 75, or more of the useful life of the leased property.d.payments
e.ual or e!ceed 9+, of the fair mar-et value of the leased
property.152. uffonElectronicsBompanyissuesan/8++"+++"1+,"2+)year
mort%a%enoteon 5anuary1.0hetermsprovideforsemiannual
installmentpayments"e!clusiveofreal estateta!esandinsurance"of
/46"621.(fterthefirstinstallmentpayment"theprincipal balance isa.
/8++"+++. b. /786"427. c. /793"379. d. /779"125.153. 0he debt to
total assets ratio is computed by dividin% a.lon%)termliabilities
by total assets.b.totaldebtbytotalassets.c.totalassetsbytotal
debt.d.total assets by lon%)term liabilities.a154.0he mar-et price
of a bond is thea.presentvalueofitsprincipal amountatmaturity
plusthepresent valueofallfuture interest payments.b.principal
amount plus the present value of all future interest payments.
c.principal amount plus all future interest payments.d.present
value of its principal amount only.B/*.8 .=./C*S.S B. 0++'haffer
2nc. is considerin% t#o alternatives to finance its construction of
a ne# /5 million plant. 9a:2ssuance of 5++"+++ shares of common
stoc- at the mar-et price of /1+ per share.9b:2ssuance of /5
million" 8, bonds at par.*nstructionsBomplete the follo#in%
table.2ncome before interest and ta!es2ssue 'to c - /1"4++"+++2ssue
o n ds /1"4++"+++2nterest e!pense from bonds2ncome before income
ta!es / /2ncome ta! e!pense 93+,:*et income // >utstandin%
shares7 + +"+++Earnin%s per shareB.
0+6>n5anuary1"2++8"elt#ayEnterprisesissued11,"5)yearbonds#itha
faceamountof /9++"+++ at par.2nterest is payable semiannually on
5une 3+ and 3ecember
31.*nstructions6reparetheentriestorecordtheissuanceofthebondsandthefirst
semiannualinterest payment.B. 0+7>n 5anuary 1" 2++8" Dent#ood
Bompany issued bonds #ith a face value of /5++"+++. 0he bonds carry
a stated interest of 7, payable each 5anuary 1 and 5uly
1.*nstructionsa. 6repare the Aournal entry for the issuance
assumin% the bonds areissued at 97. b.6repare the Aournal entry for
the issuance assumin% the bonds are issued at 1+2.B. 0+9>n 5uly
1" 2++8" ;rodo Borporation issued /8++"+++" 6," 1+)year bonds at
facevalue. 2nterest is payable semiannually on 5anuary 1 and 5uly
1. ;rodo Borporation has a calendar year end.*nstructions6repare
all entries related to the bond issue for 2++8.B.
0+:>n5anuary1"2++8"OoolandEnterprisessold12,"1+)yearbonds#itha
faceamountof /1"+++"+++ for /97+"+++.2nterest is payable
semiannually on 5uly 1 and 5anuary 1.*nstructionsBalculate the
carryin% value of the bond at 3ecember 31" 2++8 and 2++9.B.
0603elta Bompany issued bonds #ith a face amount of /1"+++"+++ in
2++3. (s of5anuary1"2++8" the balance in 3iscount on onds 6ayable
is /4"8++.(t thattime" 3elta redeemed the bonds at
1+2.*nstructions(ssumin% that no interest is payable" ma-e the
entry to record the redemption.B.
060*icholson2nc.issuesan/8++"+++"1+,"1+)yearmort%a%enoteon3ecember31"2++8"toobtainfinancin%forane#buildin%.0hetermsprovideforsemiannual
installment paymentsof /64"194.*nstructions6repare theentrytorecord
the mort%a%e loan on3ecember 31"2++8"andthe firstinstallment
payment.B. 062;ranco Borporation
reportsthefollo#in%selectedfinancialstatement informationat3ecember
31" 2++880otal(ssets/89"+++0otal4iabilities65"+++*et2ncome27"+++
2nterest 2ncome1"6++
2nterestE!pense9++0a!E!pense3++*nstructionsBalculate the debt to
total assets and times interest earned ratios.B.
06;>n5anuary1"2++8";abianEnterprisesissued9,"1+)yearbonds#itha
faceamountof /7++"+++ at 96. 2nterest is payable semiannually on
5une 3+ and 3ecember 31.0he bonds #ere issued for an effective
interest rate of 1+,.*nstructions6repare the entries to record the
issuance of the bonds and the first semiannual interest payment
assumin% that the company uses effective)interest amorti1ation.B.
06n5anuary1"2++8"NalstonEnterprisesissued8,"2+)yearbonds#itha
faceamountof /3"+++"+++ at 1+1.2nterest is payable semiannually on
5une 3+ and 3ecember 31.*nstructions6repare the entries to record
the issuance of the bonds and the first semiannual interest payment
assumin% that the company uses strai%ht)line amorti1ation..=./C*S.S
.>&
06+an-sBompanyisconsiderin%t#oalternativestofinanceitspurchaseofane#/4"+++"+++
office buildin%.9a:2ssue 4++"+++ shares of common stoc- at /1+ per
share. 9b:2ssue 8," 1+)year bonds at par 9/4"+++"+++:.2ncome before
interest and ta!es is e!pected to be /2"+++"+++. 0he company has a
3+, ta! rate and has 6++"+++ shares of common stoc- outstandin%
prior to the ne# financin%.*nstructionsBalculate each of the
follo#in% for each alternative8 91:*et income.92:Earnin%s per
share.4on%)0erm 4iabilities0+ ) 2:.>& 0660he
boardofdirectorsof;inleyBorporationisconsiderin%t#oplansforfinancin%thepurchaseof
ne#plante.uipment.6lanP1#ouldre.uiretheissuanceof/4"+++"+++"6,"2+)yearbondsat
face value. 6lan P2 #ould
re.uiretheissuanceof1++"+++sharesof/5parvaluecommonstoc-
#hichissellin%for/4+pershareontheopenmar-et.;inleyBorporation
currentlyhas1++"+++sharesofcommonstoc-outstandin%andtheincometa!rateise!pectedtobe3+,.(ssume
thatincomebeforeinterestandincometa!esise!pectedtobe/7++"+++ifthene#factory
e.uipment is purchased.*nstructions6repare a schedule #hich sho#s
the e!pected net income after ta!es and the earnin%s per share on
common stoc- under each of the plans that the board of directors is
considerin%..>& 067&nited
Nealthisconsiderin%t#oalternatives for thefinancin% ofsome hi%h
technolo%y medical e.uipment. 0hese t#o alternatives are81.2ssue
5+"+++ shares of /1+ par value common stoc- at /5+ per share.
2.2ssue /2"5++"+++" 1+," 1+)year bonds at par.0+ ) ;0 .>&
067
9cont.:2tisestimatedthatthecompany#illearn/8++"+++beforeinterestand
ta!esasaresultof ac.uirin%themedicale.uipment.0hecompanyhasan
estimatedta!rateof3+,andhas 1++"+++ shares of common stoc-
outstandin% prior to the ne# financin%.*nstructions3etermine the
effect on net income and earnin%s per share for these t#o methods
of financin%..>&
0690hreeplansforfinancin%a/2+"+++"+++corporationareunderconsiderationbyitsor%ani1ers.&ndereachofthefollo#in%plans"thesecurities#illbeissued
at their par or face amount and the income ta! rate is estimated at
3+,. 6lan 1 6lan 2 6lan39, onds M M/1+"+++"+++ 6,6referred 'toc-"
/1++ par M/1+"+++"+++5"+++"+++ Bommon 'toc-"/1+par/ 2 +"+++"+++1 +
"+++"+++ 5"++ + "+++0otal/ 2 +"+++"+++/ 2 +"+++"+++ /2+"+++"+++2t
is estimated that income before interest and ta!es #ill be
/4"+++"+++.*nstructions3etermine for each plan" the e!pected net
income and the earnin%s per share on common stoc-.4on%)0erm
4iabilities0+ ) ;0.>& 06:0aylor Borporation issued /3
million" 1+)year" 6, bonds on 5anuary 1" 2++8.*nstructions6repare
the entry to record the sale of these bonds" assumin% they#ere
issued at 9a:98.9b:1+3..>&
070>n5anuary1"2++8"DohlBorporationissued/7++"+++"8,"1+)yearbondsatfacevalue.
2nterestispayablesemiannuallyon5uly1and5anuary1.DohlBorporation has
acalendar year end.*nstructions6repare all entries related to the
bond issue for 2++8..>& 070>n 5anuary 1" 6orter
Borporation issued /8++"+++" 6," 5)year bonds at facevalue.
2nterest is payable semiannually on 5uly 1 and 5anuary
1.*nstructions6repare Aournal entries to record the 9a:2ssuance of
the bonds.9b:6ayment of interest on 5uly 1" assumin% no previous
accrual of interest. 9c:(ccrual of interest on 3ecember
31..>& 072=ood Bompany retired /3++"+++ face value" 9, bonds
on 5une 3+" 2++8 at98. 0he carryin% value of the bonds at the
redemption date #as /3+5"+++.*nstructions6repare the Aournal entry
to record the redemption of the bonds..>& 07;6resented belo#
are three independent
situations89a:No#ellBorporationpurchased/25+"+++ofitsbondson5une3+"
2++8"at1+2and immediatelyretiredthem.0hecarryin%valueofthe
bondsontheretirementdate#as /229"5++. 0hebondspaysemiannual
interestandtheinterestpaymentdueon5une3+" 2++8" has been made and
recorded.9b:5ustice"2nc.purchased/2++"+++ofitsbondsat97on5une3+"2++8"andimmediately
retiredthem.0hecarryin%valueofthebondsontheretirementdate#as/196"5++.0he
bondspaysemiannualinterestandtheinterestpaymentdueon5une3+"2++8"hasbeen
made and
recorded.9c:'tarrBompanyhas/8+"+++"1+,"12)yearconvertiblebonds
outstandin%.0hesebonds #ere soldat face value and pay semiannual
interest on 5une 3+ and 3ecember 31 of each year. 0he bonds are
convertible into 4+ shares of 'tarr /5 par value common stoc- for
each /1"+++parvaluebond.>n3ecember31"2++8"afterthebondinterest
hasbeenpaid" /3+"+++ par value of bonds #ere converted. 0he mar-et
value of 'tarrIs common stoc- #as /38 per share on 3ecember 31"
2++8.*nstructions;oreachoftheindependentsituations"preparetheAournalentrytorecord
theretirementor conversion of the bonds..>& 07&
0766resentedbelo#arethreedifferentaircraftleasetransactionsthatoccurredforKid#est(ir#ays
in2++8.(lltheleasesstarton5anuary1"2++8.2nnocasedoesKid#estreceivetitletothe
aircraft durin% or at the end of the lease periodQnor is there a
bar%ain purchase option.4es sor
0ype of property Fearly rental 4ease termEstimated economic life
;air mar-et value ofleased asset 6resent value of leaserental
paymentsGa nnoy 2nsurance747 (ircraft /7"445"+64 15 years25
years/69"3++"+++/63"+++"+++K ar- 4easi n %727 (ircraft /5"449"423
15 years25 years/54"+++"+++/46"+++"+++7 re %% 4eas in %4)1+11
(ircraft /2"851"8612+ years 25
years/32"+++"+++/28"+++"+++*nstructions9a:=hich oftheaboveleases
are operatin%leases and#hich arecapital leases@ E!plain your
ans#er.9b:No# should the lease transaction #ith Gannoy 2nsurance be
recorded in 2++8@ 9c:No# should the lease transaction #ith Kar-
4easin% be recorded in 2++8@.>& 0774ey Borporation entered
into the follo#in% transactions81.7antBar$ental leased
acarto4eyBorporation foroneyear.0erms ofthe operatin% lease call
for monthly payments of
/75+.2.>n5anuary1"2++8"4eyBorporationenteredintoana%reementtolease2+machinesfrom
=eissBorporation.0hetermsofthelease
a%reementre.uireaninitialpaymentof/3++"+++
andthenthreeannualrentalpaymentsof/36+"+++be%innin%on3ecember31"2++8.0he
presentvalueofthethreerental payments is /895"265. 0he lease is a
capital lease.*nstructions6repare the appropriate Aournal entries
to be made by 4ey Borporation in 5anuary related to the lease
transactions..>&
079>n5anuary1"2++8"$ilee2nc.enteredintoana%reementtoleasee.uipmentfrom;inleyBorporation.0heleasea%reementre.uiresfiveannualrentalpaymentsof/7+"+++be%innin%3ecember31"2++8.0hepresentvalueoftherentalpaymentsis/265"356.0heleasetransferssubstantially
all the benefits and ris-s of o#nership to
$ilee.*nstructions6repare the entry to record the lease a%reement
on the boo-s of $ilee 2nc. on 5anuary 1" 2++8..>& 07:0he
adAustedtrialbalancefor6ayneBorporationattheendofthecurrent
yearcontained the follo#in%
accounts8ondspayable"1+,.............................................................
ondinterestpayable...........................................................3iscount
onbondspayable ..................................................
4easeliability........................................................................Kort%a%e
notespayable"9,"due2+11...............................(ccounts
payable
................................................................./8++"+++
2+"+++ 4+"+++ 6+"+++ 8+"+++ 12+"+++*nstructions9a:6repare the
lon%)term liabilities section of the balance
sheet.9b:2ndicatetheproperbalancesheetclassificationfortheaccountslisted
abovethatdonot belon% in the lon%)term liabilities
section..>& 090>n 5anuary 1" 2++8" n5une3+"
2++8"=ayne"2nc. sold/2"+++"+++9facevalue:ofbonds.0hebonds are dated
5une 3+" 2++8" pay interest semiannually on 3ecember
31and5une3+"and#illmatureon5une3+"
2+11.0hefollo#in%schedule#asprepared by the accountant for
2++8.'emi)(nnual 2nt e rest 6 eri o d12nterest tobe 6
aid/8+"+++2nterest E ! pense/87"75+(mo r ti 1 ati o
n/7"75+&namorti1ed(mou nt /5+"+++ 42"25+ond B ar ry in% Ga l
ue/1"95+"+++ 1"957"75+*nstructions>n the basis of the above
information" ans#er the follo#in% .uestions. 9$ound your ans#er to
the nearest dollar or percent.:1.=hat is the stated interest rate
for this bond issue@2.=hat is the mar-et interest rate for this
bond issue@3.=hat #as the sellin% price of the bonds as a
percenta%e of the face [email protected] the Aournal entry to record
the sale of the bond issue on 5une 3+" 2++8.5.6repare the Aournal
entry to record the payment of interest and amorti1ation on
3ecember 31" 2++8..>& 092>n 5anuary 1" 2++8" 4ester
Borporation issued /2"+++"+++" 9," 5)year bonds dated 5anuary 1"
2++8" at 96. 0he bonds pay semiannual interest on 5anuary 1 and
5uly 1. 0he company uses the strai%ht)line method of amorti1ation
and has a calendar year
end.*nstructions6reparealltheAournalentriesthat4esterBorporation#ouldma-erelated
tothisbondissue throu%h 5anuary 1" 2++9. e sure to indicate the
date on #hich the entries #ould be made..>&
09;&nruhBompanyissued/9++"+++"1+,"2+)yearbondson5anuary1"2++8"at1+4.2nterestispayablesemiannuallyon5uly1and5anuary1.&nruhusesthestrai%ht)linemethodof
amorti1ation and has a calendar year end.*nstructions6repare all
Aournal entries made in 2++8 related to the bond issue..>&
09peratin% lease4. $e%istered bonds 1.( contractual arran%ement
#hich is in effect a purchase of property. 2.( le%al document that
sets forth the terms of a bond issue. 3.onds that mature in
installments.
a4.6roduces aperiodic intereste!pense e.ual to aconstant
percenta%eofthe carryin% value of the bonds. 5.onds issued in the
name of the o#ner. 6.( form of interest)bearin% notes payable used
by corporations. 7.>ccurs #hen the contractual interest rate is
%reater than the mar-et interest rate. 8.&nsecured bonds issued
a%ainst the %eneral credit of the borro#er. 9.( contractual
arran%ement that %ives the lessee temporary use of property.1+.(
solvency measure that indicates the percenta%e of assets provided
by creditors.11.>ccurs #hen the contractual interest rate is
less than the mar-et interest rate.
a12. 6roduces a periodic interest e!pense that is the same
amount each interest period.S,1/-)A2SW./ .SSA5 Q3.S-*12S
S)A.0::onds arefre.uentlyissued atamounts %reater
orlessthanfacevalue.3escribeho#themar-etinterestrate"relativetothecontractualinterestrate"affectsthesellin%priceofbonds.(lso
e!plaintherationaleforre.uirin%aninvestortopayaccruedinterest#henabondispurchasedbet#eeninterest
paymentdates.S)A.200(companydesirestoreplaceitscurrentplante.uipment#ithne#
e.uipmentthatcosts /1+"+++"+++. >nepossibility
#ouldbeforthecompanytoissue/1+"+++"+++ofbondsanduse
theproceedstopurchasethee.uipment.
(notherpossibilityistoac.uiretheuseofthe e.uipmentbysi%nin%a
lon%)termcapitallease#ithaleasin%company.3escribe andcompare the
financial statement effects of these t#o alternatives.S)A.200=hen
abond sells at a discount" #hat is probably true about the mar-et
interest rateversus the stated interest [email protected])A.
202ondsmayberedeemed9retired:beforematuritybytheissuin%corporation.E!plain#hya
company#oulddecidetoretirebondsbeforematurityandthenecessarystepstorecordthe
redemption.S)A.20;9Ethics:5eff=eaver"a26)year)oldentrepreneur"startedellsR=histles9R=:"2nc."afirmthat
speciali1esintop)of)the)lineadd)onsforcomputersystems.0hefirmhasacapitalstructureof
appro!imately6+,debt.0his#asnecessitatedbytherapid%ro#thofR="andKr.=eaverIs
lac-ofpersonalfundstosustainthe%ro#th.0he6+,debtamountis.uitehi%hforfirmsinthis
field"andinfactsli%htlye!ceedsthedebtcovenantsne%otiated#iththeban-.R=recently
receivednoticethattheban-considersthecompanyIsdebttobee!cessive"andthatsome
acceleratedrepaymentschedule#illbeadopted.0henoticecameataparticularlybadtime.
R=isin the midst
ofamaAorup%radeofitso#ncomputersystem.0hehard#are#astohave
beenpurchasedoutri%ht"financedbytheseller"Ki-e
o%%"lon%timefriendofKr.=eaver.Kr.o%%reallyneedsKr.=eaverLsbusiness.othbelieveinthelon%)termstren%thofR=.Ne
thereforesu%%eststoKr.=eaverthatthee.uipmentbepurchasedbymeansofashort)term
lease.Kr.=eavercouldrene#thelease annually./e?uire!$1. 2s Kr. o%%Is
su%%estion ethical@E!plain.2. 2f Kr. =eaver accepts the su%%estion"
is he behavin% ethically@ E!plain.S)A.20