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Exam 10: Reporting and Analyzing Long-Term Liabilities

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Question 41

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All of the following statements regarding leases are true except:

A) For a capital lease the lessee records the leased item as its own asset.
B) For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.
C) Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D) Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E) For an operating lease the lessee reports the lease payments as rental expense.

F) All of the above
G) B) and E)

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Question 42

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The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

A) True
B) False

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Question 43

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A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

On January 1 of 2015, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semi-annually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:

_______________ bonds are bonds that mature at more than one date, often in a series, and thus are usually repaid over a number of periods.

Explain how to record the issuance and sale of a bond between interest payment dates.

Explain the present value concept as it applies to long term liabilities.

A bond sells at a discount when the:

On January 1, the Forman Group leased some equipment on a 5-year lease, paying $15,000 per year each December 31. The lease is considered to be an operating lease. The general journal entry to record the first lease payment on December 31 should be:

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, at a selling price of $885,295 when the annual market interest rate was 12%. The company uses the effective interest amortization method. Interest is paid semiannually each June 30 and December 31. (1) Prepare an amortization table for the first two payment periods using the format shown below: (2) Prepare the journal entry to record the first semiannual interest payment.

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accrued since the most recent interest payment.

The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235. $15,000 * 6.7101 = $100,651.50

A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

A company issued 9%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. On the first semiannual interest date, what amount of cash should be paid to the holders of these bonds for interest?

The use of debt financing ensures an increase in return on equity.

A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium. (Round amounts to the nearest whole dollar)

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called: