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Exam 14: Long-Term Liabilities

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Question 61

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A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.Each annual payment equals $75,000.The present value of the note is:

A) $56,352.84.
B) $93,921,41.
C) $375,000.
D) $299,452.50.
E) $187,842.81.

F) B) and E)
G) A) and E)

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Question 62

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A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

A) True
B) False

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Question 63

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On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,Year 1 is:

Charger Company's most recent balance sheet reports total assets of $27,000,000,total liabilities of $15,000,000 and total equity of $12,000,000.The debt to equity ratio for the period is (rounded to two decimals) :

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

A discount on bonds payable:

Marwick Corporation issues 8%,5 year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling) price,assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of principle will be included in the first annual payment?

A bondholder that owns a $1,000,10%,10-year bond has:

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

The ______________ ratio is used to assess the risk of a company's financing structure.

____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets set aside as specified amounts and dates to repay the bonds.

An advantage of bond financing is that issuing bonds does not affect owner control.

The carrying (book)value of a bond at the time when it is issued is always equal to its par value.

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

A 10-year bond issue with a $100,000 par value,8% annual contract rate,with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

A company holds $150,000 par value of bonds with a carrying value of $147,950.The company calls the bonds at $151,000.Prepare the journal entry to record the retirement of the bonds.

A company previously issued $2,000,000,10% bonds,receiving a $120,000 premium.On the current year's interest date,after the bond interest was paid and after 40% of the total premium had been amortized,the company purchased the entire bond issue on the open market at 98 and retired it.Prepare the journal entry to record the retirement of these bonds.

Wasp Corporation has a loan agreement that provides it with cash today,and the company must pay $25,000 one year from today,$15,000 two years from today,and $5,000 three years from today.Wasp agrees to pay 10% interest.The following are factors from a present value table: What is the amount of cash that Wasp receives today?

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.