ACC 206 Week 7 Quiz StrayerClick on the Link Below to Purchase A+ ra!e! Course "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 lease@a.0he 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 asset@a.0he 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 value@4.6repare 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 rate@3iscuss.S)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