Question 1

What is an annuity?

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Question 2

Identify and explain the different types and payment patterns of notes payable.

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Question 3

What is a lease? Be sure to explain the differences between an operating lease and a capital lease.

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Question 4

Identify and explain the advantages and disadvantages of bond financing.

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Question 5

On January 1,2013,Jo Corporation leased some machinery for two years,paying $7,500 per year each December 31.The lease is considered to be an operating lease.How would the company record this transaction?
A)Debit Rental Expense for $7,500 and credit Cash for $7,500.
B)Debit Rental Expense for $15,000 and credit Cash for $15,000.
C)Debit Leased Assets for $7,500 and credit Lease Liability for $7,500.
D)Debit Leased Assets for $15,000 and credit Lease Liability for $15,000.
E)Debit Interest Expense $7,500 and credit Cash for $7,500.

Accepted Answer

Since it is an operating lease, Jo Corporation would record the lease payment as a rental expense each year. Therefore, they would debit Rental Expense for $7,500 and credit Cash for $7,500 on December 31 each year.

Question 6

The Reed Company issued $200,000 par value,10% bonds outstanding that were issued at a discount of $9,800.How would the company' record the journal entry to retire the bonds at the date of maturity?
A)Debit Bonds Payable for $200,000 and credit Cash for $200,000.
B)Debit Cash for $200,000 and credit Bonds Payable for $200,000.
C)Debit Cash for $191,200 and credit Bonds Payable for $191,200.
D)Debit Bonds Payable for $191,200 and credit Cash for $191,200.
E)Debit Bonds Payable for $191,200,credit Discount on Bonds Payable for $9,800,and credit Cash for $200,000.

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Question 7

On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106¾.The interest payments are made on June 30 and December 31.Lane elects a fiscal year ending September 30.What is the amount that would be recorded as interest expense in the December 31,2013,journal entry?
A)$24,500.00
B)$22,925.00
C)$12,250.50
D)$11,462.50
E)$13,458.00

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Question 8

A corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan 1,bonds with a contract rate of interest of 6% would be issued.Under Plan 2,additional shares of common stock would be issued at $20 per share.The corporation currently has 300,000 shares of stock outstanding and it expects to earn $700,000 per year before bond interest and income taxes.The net income and return on investment for both plans is shown below:
  Comment on the relative effects of each alternative,including when one form of financing is preferred to another.

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Question 9

Carrington Industries converts $200,000 of par value bonds,with a carrying value of $100,000,into 50,000 shares of $1 par value common stock..How would the company record this transaction?
A)Debit Bonds Payable for $200,000 and credit Cash for $100,000.
B)Debit Bonds Payable for $200,000,credit Common Stock for $50,000,and credit Paid-In Capital in Excess of Par Value for $150,000.
C)Debit Bonds Payable for $200,000 and credit Common Stock for $200,000.
D)Debit Common Stock for $50,000,credit Paid-In Capital in Excess of Par Value for $150,000,and credit Bonds Payable for $200,000.
E)Debit Bonds Payable for $50,000 and credit Common Stock for $50,000.

Accepted Answer

When bonds are converted into common stock, the company credits the Bonds Payable account for the par value of the bonds being converted (in this case, $200,000), and debits the account(s) affected by the conversion. In this case, the company would credit the Common Stock account for the par value of the stock being issued (in this case, $50,000) and credit the Paid-In Capital in Excess of Par Value account for the excess of the bonds' carrying value over the par value of the common stock being issued (in this case, $150,000).

Question 10

On January 1,2013,$800,000,5-year,bonds with a contract rate of 8% payable annually were issued for cash of $684,627 when the market rate of interest was 12%.The first annual cash interest payment was $64,000 while that period's interest expense was calculated as $82,155.24.How would the company record the journal entry to record this first annual interest payment?
A)Debit Cash for $684,627,debit Discount on Bonds Payable for $115,373,and credit Bonds Payable for $800,000.
B)Debit Interest Expense for $82,155.24 and credit Cash for $82,155.24.
C)Debit Interest Expense for $64,000.00 and credit Cash for $64,000.00.
D)Debit Interest Expense for $82,155.24,credit Discount on Bonds Payable for $18,155.24,and credit Cash for $64,000.00.
E)Debit Interest Expense for $64,000.00,debit Discount on Bonds Payable for $18,155.24 and credit Cash for $82,155.24.

Accepted Answer

The correct journal entry involves debiting Interest Expense for the amount calculated ($82,155.24), crediting Cash for the actual cash payment made ($64,000), and crediting Discount on Bonds Payable for the difference ($18,155.24) to account for the amortization of the bond discount.

Question 11

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

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Question 12

On January 1,2013,Daisy Corporation leased equipment,agreeing to pay $5,000 every December 31 for the entire four years of the lease.The present value of the lease payments,at 6% interest is $17,326.The lease is considered a capital lease.How would the company record this transaction?
A)Debit Rental Expense for $17,326 and credit Cash for $17,326.
B)Debit Rental Expense for $5,000 and credit Cash for $5,000.
C)Debit Leased Assets for $17,326 and credit Lease Liability for $17,326.
D)Debit Leased Assets for $20,000 and credit Lease Liability for $20,000.
E)Debit Interest Expense $4,717,debit Lease Liability for $283,and credit Cash for $5,000.

Accepted Answer

As a capital lease, the leased asset should be recorded on the balance sheet. Therefore, the company should debit Leased Assets for $17,326 (the present value of the lease payments) and credit Lease Liability for $17,326 (the present value of the lease payments). This entry reflects the fact that the company has obtained the use of the asset and has an obligation to make the lease payments over the lease term.

Question 13

On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106 3/4.The interest payments are made on June 30 and December 31.The straight-line method is used to amortize any bond discount or premium.Lane elects a fiscal year ending September 30.What is the appropriate adjusting journal entry required for September 30,2013?
A) 
B) 
C) 
D) 
E)

Accepted Answer

The adjusting entry is necessary to record the amortization of the bond premium for the period ending September 30,2013. Using the straight-line method, the bond premium amortization for the first year is ($700,000 x 6.75%)/2 = $23,625. Therefore, the appropriate adjusting entry for the fiscal year ending September 30,2013 is:
Interest Expense 11,625
Premium on Bonds Payable 12,000 (=$23,625/2) 
This will increase Lane's interest expense and reduce the carrying value of the bond premium on the balance sheet. Choice C correctly reflects this adjusting entry.

Question 14

Explain the present value concept and how it applies to long-term liabilities.

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Question 15

On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106¾.The interest payments are made on June 30 and December 31.Lane elects a fiscal year ending September 30.What is the amount that would be recorded as cash paid in the December 31,2013,journal entry?
A)$24,500
B)$22,925
C)$12,250
D)$11,462
E)$13,458

Accepted Answer

The cash paid for interest on December 31, 2013, is calculated as the face value of the bonds ($700,000) multiplied by the annual interest rate (7%), divided by 2 for the semi-annual payment: $700,000 * 7% / 2 = $24,500.

Question 16

On January 1,2013,$1,200,000,5-year,bonds with a stated rate of 10% payable annually were issued for cash of $1,295,844 when the market rate of interest was 8%.The first annual cash interest payment was $120,000 while that period's interest expense was calculated as $103,666.How would the company record the journal entry to record this first annual interest payment?
A)Debit Interest Expense for $103,666,debit Premium on Bonds Payable for $16,334,and credit Cash for $120,000.
B)Debit Interest Expense for $120,000 and credit Cash for $120,000.
C)Debit Interest Expense for $16,334 and credit Cash for $16,334.
D)Debit Interest Expense for $120,000,credit Discount on Bonds Payable for $16,334,and credit Cash for $103,666.
E)Debit Cash for $1,295,844,credit Premium on Bonds Payable for $1,200,000,and credit Premium on Bonds Payable for $95,844.

Accepted Answer

The company issued bonds at a premium (issued at a higher price than their face value) because the stated rate of interest was higher than the market rate of interest. Therefore, the company recorded a debit to Premium on Bonds Payable for the excess of the cash received over the face value of the bonds. The interest payment for the first year is based on the face value of the bonds ($1,200,000 x 10% = $120,000). However, the interest expense recorded in the books is based on the market rate of interest at the time of issuance, which is 8%. Therefore, the interest expense is lower than the interest payment ($1,200,000 x 8% = $96,000). The difference between the interest payment and the interest expense is recorded as a reduction of the premium on bonds payable (Premium on Bonds Payable - reduction = $16,334). The entry to record the first annual interest payment is: Debit Interest Expense for $103,666, debit Premium on Bonds Payable for $16,334, and credit Cash for $120,000.

Question 17

Explain the accounting procedures when a bond's interest period does not coincide with the issuer's accounting period.

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Question 18

On June 1,Roberts Inc.issued bonds with a par value of $100,000.The bonds mature in 5 years and pay 12% annual interest,payable each June 30 and December 31.The bonds sell at par value plus interest accrued since January 1.How would the company record the issuance of the bonds on June 1?
A)Debit Cash for $100,000 and credit Bonds Payable for $100,000.
B)Debit Cash for $105,000 and credit Bonds Payable for $105,000.
C)Debit Cash for $101,000 and credit Bonds Payable for $101,000.
D)Debit Cash for $105,000,credit Bonds Payable for $100,000,and credit Interest Payable for $5,000.
E)Debit Cash for $101,000,credit Bonds Payable for $100,000,and credit Interest Payable for $1,000.

Accepted Answer

The bonds sell at par value plus interest accrued since January 1. So, the company would record the issuance of the bonds on June 1 by debiting Cash for $105,000, crediting Bonds Payable for $100,000, and crediting Interest Payable for $5,000.

Question 19

On January 1,2013,the Plimpton Corporation leased some equipment for two years,paying $15,000 per year each December 31.The lease is considered to be an operating lease.Prepare the general journal entry to record the first lease payment on December 31,2013.

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Question 20

Explain how a bond premium is amortized.Identify and describe the amortization methods available.

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Quiz 10: Reporting and Analyzing Long-Term Liabilities

What is an annuity?

Identify and explain the different types and payment patterns of notes payable.

What is a lease? Be sure to explain the differences between an operating lease and a capital lease.

Identify and explain the advantages and disadvantages of bond financing.

On January 1,2013,Jo Corporation leased some machinery for two years,paying $7,500 per year each December 31.The lease is considered to be an operating lease.How would the company record this transaction?

The Reed Company issued $200,000 par value,10% bonds outstanding that were issued at a discount of $9,800.How would the company' record the journal entry to retire the bonds at the date of maturity?

On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106¾.The interest payments are made on June 30 and December 31.Lane elects a fiscal year ending September 30.What is the amount that would be recorded as interest expense in the December 31,2013,journal entry?

Carrington Industries converts $200,000 of par value bonds,with a carrying value of $100,000,into 50,000 shares of $1 par value common stock..How would the company record this transaction?

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

On January 1,2013,Daisy Corporation leased equipment,agreeing to pay $5,000 every December 31 for the entire four years of the lease.The present value of the lease payments,at 6% interest is $17,326.The lease is considered a capital lease.How would the company record this transaction?

Explain the present value concept and how it applies to long-term liabilities.

On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106¾.The interest payments are made on June 30 and December 31.Lane elects a fiscal year ending September 30.What is the amount that would be recorded as cash paid in the December 31,2013,journal entry?

Explain the accounting procedures when a bond's interest period does not coincide with the issuer's accounting period.

On June 1,Roberts Inc.issued bonds with a par value of $100,000.The bonds mature in 5 years and pay 12% annual interest,payable each June 30 and December 31.The bonds sell at par value plus interest accrued since January 1.How would the company record the issuance of the bonds on June 1?

On January 1,2013,the Plimpton Corporation leased some equipment for two years,paying $15,000 per year each December 31.The lease is considered to be an operating lease.Prepare the general journal entry to record the first lease payment on December 31,2013.

Explain how a bond premium is amortized.Identify and describe the amortization methods available.