Long Term Liabilities

The term used for bonds that are unsecured is:

• (a) callable bonds.

• (b) U.S. Treasury bonds

• (c) debenture bonds.

• (d) convertible bonds.

The market interest rate:

• (a) is the contractual interest rate used to determine

  the amount of cash interest paid by the borrower.

• (b) is listed in the bond indenture.

• (c) is the rate investors demand for loaning funds.

• (d) More than one of the above is true.

Karson Inc. issues 10-year bonds with a maturity

value of $200,000. If the bonds are issued at a premium,

this indicates that:

• (a) the contractual interest rate exceeds the market

  interest rate.

• (b) the market interest rate exceeds the contractual

  interest rate.

• (c) the contractual interest rate and the market interest

  rate are the same.

• (d) no relationship exists between the two rates.

Four-Nine Corporation issued bonds that pay interest

every January 1. The entry to accrue bond interest at

December 31 includes a:

• (a) debit to Interest Payable.

• (b) credit to Cash.

• (c) credit to Interest Expense.

• (d) credit to Interest Payable.

Gester Corporation redeems its $100,000 face value

bonds at 105 on January 1, following the payment of

annual interest. The carrying value of the bonds at the

redemption date is $103,745. The entry to record the

redemption will include a:

• (a) credit of $3,745 to Loss on Bond Redemption.

• (b) debit of $3,745 to Premium on Bonds Payable.

• (c) credit of $1,255 to Gain on Bond Redemption.

• (d) debit of $5,000 to Premium on Bonds Payable.

Colson Inc. converts $600,000 of bonds sold at face

value into 10,000 shares of common stock, par value

$1. Both the bonds and the stock have a market value

of $760,000. What amount should be credited to

Paid-in Capital in Excess of Par—Common Stock as a

result of the conversion?

• (a) $10,000.

• (b) $160,000.

• (c) $600,000.

• (d) $590,000.

Howard Corporation issued a 20-year mortgage note

payable on January 1, 2017. At December 31, 2017,

the unpaid principal balance will be reported as:

• (a) a current liability.

• (b) a long-term liability.

• (c) part current and part long-term liability.

• (d) interest payable.

Andrews Inc. issues a $497,000, 10% 3-year mortgage

note on January 1. The note will be paid in three

annual installments of $200,000, each payable at the

end of the year. What is the amount of interest expense

that should be recognized by Andrews Inc. in the

second year?

• (a) $16,567.

• (b) $49,700.

• (c) $34,670.

• (d) $346,700.

For 2017, Corn Flake Corporation reported net income

of $300,000. Interest expense was $40,000 and income

taxes were $100,000. The times interest earned was:

• (a) 3 times.

• (b) 4.4 times.

• (c) 7.5 times.

• (d) 11 times.

Lease A does not contain a bargain purchase option,

but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not

transfer ownership of the property to the lessee by the

end of the lease term, but the lease term is equal to

75% of the estimated economic life of the leased property.

How should the lessee classify these leases?

• Lease A Lease B

  (a) Operating lease Capital lease

• Lease A Lease B

  (b) Operating lease Operating lease

• Lease A Lease B

  (c) Capital lease Operating lease

• Lease A Lease B

  (d) Capital lease Capital lease