Learning Objective 14-1: Chapter 14 Long-Term Liabilities

Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)
Chapter 14 Long-Term Liabilities
Learning Objective 14-1
1) The current portion of notes payable is the principal amount that will be paid within two years of the
balance sheet date and the remaining portion is long term.
Answer: FALSE
Diff: 1
LO: 14-1
AACSB: Concept
AICPA Functional: Measurement
2) The current portion of notes payable must be reported on the balance sheet under current liabilities
and the long-term portion under long-term liabilities.
Answer: TRUE
Diff: 1
LO: 14-1
AACSB: Concept
3) Issuance of a note by the issuer is recorded by crediting the Cash account and debiting the Note
Receivable account.
Answer: FALSE
Diff: 1
LO: 14-1
AACSB: Concept
4) A mortgage payable is a long-term debt that is backed with a security interest in specific property.
Answer: TRUE
Diff: 1
LO: 14-1
AACSB: Concept
5) The difference between a mortgage payable and a note payable is that notes payable are always
secured by specific assets.
Answer: FALSE
Diff: 1
LO: 14-1
AACSB: Concept
1
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6) The amount of interest paid each period on long-term liabilities remains the same, as well as the
principal payments and the total payments.
Answer: FALSE
Diff: 1
LO: 14-1
AACSB: Concept
7) Installment payments for mortgages typically contain both an amount for principal repayment and an
amount for interest.
Answer: TRUE
Diff: 1
LO: 14-1
AACSB: Concept
8) On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $20,000. It is payable over a
10-year term in $2,000 principal installments on March 1 of each year, beginning March 1, 2016. Each
yearly installment will include both principal repayment of $2,000 and interest payment for the preceding
one-year period. The journal entry to pay the first installment will include a debit to the Interest Expense
account for $1,000.
Answer: TRUE
Diff: 2
LO: 14-1
AACSB: Application
9) A note payable can either be classified as a long-term liability or a short-term liability depending on the
discretion of the accountant.
Answer: FALSE
Diff: 1
LO: 14-1
AACSB: Concept
10) An amortization schedule details each loan payment's allocation between principal and interest and
also the beginning and ending balances of the loan.
Answer: TRUE
Diff: 1
LO: 14-1
AACSB: Concept
2
11) On March 1, 2015, Vinnie Services issued a 5% long-term notes payable for $15,000. It is payable over
a 3-year term in $5,000 annual principal payments on March 1 of each year plus interest, beginning March
1, 2016. How will this information be shown on the balance sheet dated December 31, 2015?
A) $15,000 shown as current liability only
B) $5,000 shown as current liability; $15,000 shown as long-term liability
C) $5,000 shown as current liability; $10,000 shown as long-term liability
D) the entire $15,000 shown as long-term liability
Answer: C
Diff: 1
LO: 14-1
AACSB: Application
a 3-year term in $5,000 annual principal payments on March 1 of each year plus interest, beginning March
1, 2016. Each yearly installment will include both principal repayment of $5,000 and interest payment for
the preceding one-year period. On March 1, 2016:
A) Vinnie must accrue $5,000 of Interest Expense.
B) Vinnie must accrue for the coming $5,000 as current portion of principal payment.
C) Vinnie must pay out $750 of Interest Expense to the note holder.
D) Vinnie will receive $5,000 as an installment payment.
Answer: C
Explanation: C) Interest Expense = $15,000 × 5% = $750
Diff: 2
LO: 14-1
AACSB: Application
a 3-year term in $5,000 principal installments on March 1 of each year, beginning March 1, 2016. Each
yearly installment will include both principal repayment of $5,000 and interest payment for the preceding
one-year period. What is the amount of total cash payment that the Vinnie will make on March 1, 2016?
A) $5,000
B) $5,750
C) $15,000
D) $5,375
Answer: B
Explanation: B)
Principal payment $5,000
Add: Interest Expense ($15,000 × 5%) 750
Total cash payment $5,750
Diff: 1
LO: 14-1
AACSB: Application
3
a 3-year term in $5,000 principal installments on March 1 of each year, beginning March 1, 2016. Which of
the following entries needs to be made at March 1, 2015?
A)
Long-Term Notes Payable 5,000
Cash 5,000
B)
Current Portion of Long-Term Notes Payable 15,000
C)
Accounts Payable 15,000
D)
Cash 15,000
Answer: D
Diff: 1
LO: 14-1
AACSB: Application
15) On December 1, 2013, Fine Products borrowed $80,000 on a 4%, 8-year note with annual installment
payments of $10,000 plus interest due on December 1 of each succeeding year. On December 1, the
principal amount was initially recorded as long-term notes payable. What amount of the note payable
will be shown as current portion of Long-Term Note Payable on the balance sheet as of December 31,
2013?
A) $10,000
B) $13,200
C) $3,200
D) $20,000
Answer: A
Explanation: A) Current portion of Long-Term Note Payable = $80,000 / 8 = $10,000.
Diff: 1
LO: 14-1
AACSB: Application
4
16) On November 1, 2015, EZ Products borrowed $48,000 on a 5%, 10-year note with annual installment
payments of $4,800 plus interest due on November 1 of each succeeding year. On November 1, 2016,
what will the balance be in the Long-Term Notes Payable account?
A) $38,400
B) $48,000
C) $43,200
D) $4,800
Answer: A
Explanation: A) Long-term notes payable= $48,000 - $4,800 - $4,800 = $38,400
Diff: 2
LO: 14-1
AACSB: Application
17) On December 1, 2015, Fine Products borrowed $80,000 on a 4%, 8-year note with annual installment
payments of $10,000 plus interest due on December 1 of each succeeding year. Which of the following
describes the first installment payment made on December 1, 2016?
A) $10,000 principal plus $3,200 interest
B) $10,000 principal plus $400 interest
C) $10,000 principal plus $10,000 interest
D) $3,200 interest only
Answer: A
Explanation: A) Interest = $80,000 × 4% = $3,200
Diff: 2
LO: 14-1
AACSB: Application
18) Trek Company signed a 9%, 10-year note for $150,000. The company paid $1,900 as the installment for
the first month. What portion of the first monthly payment is interest expense?
A) $4,800
B) $16,000
C) $14,400
D) $1,125
Answer: D
Explanation: D) Interest Expense for 1 month ($150,000 × 9% × 1 ∕ 12) = $1,125
Diff: 1
LO: 14-1
AACSB: Application
5
the first month. What portion of the first monthly payment is principal?
A) $775
B) $2,375
C) $1,800
D) $14,400
Answer: A
Explanation: A)
Interest Expense for 1 month ($150,000 × 9% × 1 / 12) $1,125
Total payment 1,900
Principal Amount ($1,900 - $1,125) $ 775
Diff: 2
LO: 14-1
AACSB: Application
the first month. After the first payment, what is the updated principal balance?
A) $147,625
B) $159,430
C) $149,225
D) $159,100
Answer: C
Explanation: C)
Interest Expense for 1 month ($150,000 × 9% × 1 / 12) $ 1,125
Total Payment 1,900
Principal Amount ($1,900 - $1,125) $ 775
Principal Balance ($150,000 - $775) $149,225
Diff: 2
LO: 14-1
AACSB: Application
6
21) On January 1, 2015, Bratios Company purchased equipment and signed a 6-year mortgage note for
$80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016.
On January 1, 2016, the journal entry to record the first installment payment will include a:
A) debit to Mortgage Payable for $21,139.
B) debit to Interest Expense for $12,000.
C) credit to Cash for $9,139.
D) credit to Mortgage Payable for $80,000.
Answer: B
Explanation: B)
Beginning Principal Interest Total Ending
Balance Payment Expense Payment Balance
01/01/2015 $80,000
01/01/2016 $80,000 $9,139 $12,000 $21,139 70,861
01/01/2017 70,861 10,510 10,629 21,139 60,351
01/01/2018 60,351 12,086 9,053 21,139 48,265
01/01/2019 48,265 13,899 7,240 21,139 34,366
01/01/2020 34,366 15,984 5,155 21,139 18,382
01/01/2021 18,382 18,382 2,757 21,139 0
Diff: 2
LO: 14-1
AACSB: Application
22) On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for
Calculate the balance of the Mortgage Payable account after the payment of the first installment.
A) $12,000
B) $58,861
C) $70,861
D) $60,351
Answer: C
Explanation: C)
01/01/2015 $80,000
01/01/2016 $80,000 $9,139 $12,000 $21,139 70,861
01/01/2017 70,861 10,510 10,629 21,139 60,351
01/01/2018 60,351 12,086 9,053 21,139 48,265
01/01/2019 48,265 13,899 7,240 21,139 34,366
01/01/2020 34,366 15,984 5,155 21,139 18,382
01/01/2021 18,382 18,382 2,757 21,139 0
Diff: 2
LO: 14-1
AACSB: Application
7
Calculate the portion of interest expense paid on the third installment.
A) $21,139
B) $9,053
C) $12,000
D) $70,861
Answer: B
Explanation: B)
01/01/2015 $80,000
01/01/2016 $80,000 $9,139 $12,000 $21,139 70,861
01/01/2017 70,861 10,510 10,629 21,139 60,351
01/01/2018 60,351 12,086 9,053 21,139 48,265
01/01/2019 48,265 13,899 7,240 21,139 34,366
01/01/2020 34,366 15,984 5,155 21,139 18,382
01/01/2021 18,382 18,382 2,757 21,139 0
Diff: 2
LO: 14-1
AACSB: Application
Calculate the portion of principal amount paid on the third installment.
A) $12,086
B) $12,000
C) $21,139
D) $9,503
Answer: A
Explanation: A)
01/01/2015 $80,000
01/01/2016 $80,000 $9,139 $12,000 $21,139 70,861
01/01/2017 70,861 10,510 10,629 21,139 60,351
01/01/2018 60,351 12,086 9,053 21,139 48,265
01/01/2019 48,265 13,899 7,240 21,139 34,366
01/01/2020 34,366 15,984 5,155 21,139 18,382
01/01/2021 18,382 18,382 2,757 21,139 0
Diff: 2
LO: 14-1
AACSB: Application
8
25) On May 1, 2015, Vinnie Services issued a long-term notes payable for $35,000. It is payable over a 5-
year term in $7,000 annual principal payments plus interest, on May 1 of each year beginning on May 1,
2016. Provide the initial journal entry for the issuance of the note.
Answer:
Cash 35,000
Diff: 1
LO: 14-1
AACSB: Application
26) In order to expand business, the management of Vereos Inc. decided to issue long-term notes payable
for $50,000. The instrument carries interest at the rate of 12% with 10 equal yearly installments, beginning
in one year. What will be the journal entry at the inception?
Answer:
Cash 50,000
Diff: 1
LO: 14-1
AACSB: Concept
27) In order to expand business, the management of Vereos Inc. decided to issue Long-term notes payable
for $50,000. The note will be paid over ten years with payments of $5,000 plus 12% interest. Provide the
journal entry needed after 1 year for the first installment payment.
Answer:
Interest Expense ($50,000 × 12%) 6,000
Long-Term Notes Payable ($50,000 / 10) 5,000
Cash 11,000
Diff: 2
LO: 14-1
AACSB: Application
9
28) On January 1, 2015, Paramount Inc. issued long-term notes payable for $50,000. The note will be paid
over ten years with payments of $5,000 plus 12% interest due each January 1, beginning January 1, 2016.
Prepare the amortization schedule for the first three payments.
Answer: Beginning Principal Interest Total Ending
01/01/2015 $50,000
01/01/2016 $50,000 $5,000 $6,000 $11,000 45,000
01/01/2017 45,000 5,000 5,400 10,400 40,000
01/01/2018 40,000 5,000 4,800 9,800 35,000
Diff: 2
LO: 14-1
AACSB: Application
29) On April 1, 2015, Ardoos Products borrowed $100,000 on a 15%, 10-year note with annual installment
payments of $10,000 plus interest due on April 1 of each succeeding year. Provide the first journal entry
for the issuance of the note.
Answer:
Cash 100,000
Diff: 1
LO: 14-1
AACSB: Concept
30) On April 1, 2015, Nurix Manufacturers purchases equipment for $100,000, paying $30,000 in cash and
signing a 10-year mortgage for $70,000 taken out at 8%. Prepare the journal entry to record the acquisition
of the equipment.
Answer:
Equipment 100,000
Mortgage Payable 70,000
Cash 30,000
Diff: 1
LO: 14-1
AACSB: Application
10
31) On April 1, 2015, Ardoos Products borrowed $100,000 on a 15%, 10-year note with annual installment
payments of $10,000 plus interest due on April 1 of each succeeding year. Provide the journal entry for
the first installment payment made on April 1, 2016.
Answer:
Interest Expense ($100,000 × 15%) 15,000
Long-Term Notes Payable ($100,000 / 10) 10,000
Cash 25,000
Diff: 3
LO: 14-1
AACSB: Application
32) Garotia Company buys a building on a plot of land for $115,000, paying $30,000 cash and signing a
30-year mortgage note for $85,000 at 11%. Provide the journal entry for the purchase.
Answer:
Building and Land 115,000
Cash 30,000
Diff: 1
LO: 14-1
AACSB: Application
33) Garotia Company buys a building on a plot of land for $115,000, paying $30,000 cash and signing a
30-year mortgage note for $85,000 at 11%. The payment will be made in equal monthly installments of
$809. Provide the journal entry for the first monthly payment. (Round your answers to nearest whole
dollar number).
Answer:
Interest Expense ($85,000 × 11% × 1/12) 779
Mortgage Payable ($809 - 779) 30
Cash 809
Diff: 3
LO: 14-1
AACSB: Application
11
34) On January 1, 2013, Anderson Company purchases machinery with a fair value of $300,000 by paying
$50,000 in cash and signing a 10-year mortgage note at 13% for the balance. On January 1, 2013, what will
be the journal entry?
Answer:
Machinery 300,000
Cash 50,000
Diff: 2
LO: 14-1
AACSB: Application
35) On January 1, 2015, Anderson Company purchases property of $300,000 by paying $50,000 in cash
and signing a 10-year mortgage note at 13% for the balance. The amortization schedule shows that
Anderson Company will pay $46,072 per year. Journalize the first yearly payment on January 1, 2016.
Answer:
Interest Expense 32,500
Cash 46,072
Diff: 3
LO: 14-1
AACSB: Application
36) On January 1, 2015, Anderson Company purchases property of $300,000 by paying $50,000 in cash
and signing a 10-year mortgage note at 13% for the balance. Anderson will make yearly payments of
$46,072. Prepare the amortization schedule for the first five payments. (Round your answers to the
nearest dollar.)
Answer: Beginning Principal Interest Total Ending
01/01/2015 $250,000
01/01/2016 $250,000 $13,572 $32,500 $46,072 236,428
01/01/2017 236,428 15,336 30,736 46,072 221,092
01/01/2018 221,092 17,330 28,742 46,072 203,762
01/01/2019 203,762 19,583 26,489 46,072 184,179
01/01/2020 184,179 22,129 23,943 46,072 162,050
Diff: 3
LO: 14-1
AACSB: Application
12
1) Bonds are short-term debt issued to multiple lenders called bondholders, usually in increments of
$1,000.
Answer: FALSE
Diff: 1
LO: 14-2
AACSB: Concept
2) On the maturity date, the bondholder is paid the face amount of the bond plus the last interest
payment.
Answer: TRUE
Diff: 1
LO: 14-2
AACSB: Concept
3) If a bond is issued at a discount, it will sell for more than face value.
Answer: FALSE
Diff: 1
LO: 14-2
AACSB: Concept
4) If a bond is issued at a premium, it will sell for more than face value.
Answer: TRUE
Diff: 1
LO: 14-2
AACSB: Concept
5) The issue price of a bond—whether it is sold at par, premium, or discount—has a considerable effect
on the required principal repayment at maturity.
Answer: FALSE
Diff: 1
LO: 14-2
AACSB: Concept
6) A bond once sold to a bondholder, can be resold to another investor on the bonds market.
Answer: TRUE
Diff: 1
LO: 14-2
AACSB: Concept
13
7) When a bond is sold, the selling price is generally equivalent to the present value of the bond
payments.
Answer: TRUE
Diff: 1
LO: 14-2
AACSB: Concept
8) The market rate is the rate used to calculate the actual cash payments made to bondholders.
Answer: FALSE
Diff: 1
LO: 14-2
AACSB: Concept
9) Which of the following is the amount the borrower must pay back to the bondholders on maturity?
A) market value
B) present value
C) stated interest value
D) principal amount
Answer: D
Diff: 1
LO: 14-2
AACSB: Concept
10) A bond is issued at premium :

A) when a bond's stated interest rate is equal to the market interest rate.
B) when a bond's stated interest rate is less than the effective interest rate.
C) when a bond's stated interest rate is less than the market interest rate.
D) when a bond's stated interest rate is higher than the market interest rate.
Answer: D
Diff: 1
LO: 14-2
AACSB: Concept
11) A bond is issued at discount:

A) when a bond's stated interest rate is equal to the market interest rate.
B) when a bond's stated interest rate is more than the effective interest rate.
C) when a bond's stated interest rate is less than the market interest rate.
D) when a bond's stated interest rate is higher than the market interest rate.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
14
12) The interest rate that determines the amount of cash interest the borrower pays and the investor
receives each year is called:
A) amortization rate.
B) market interest rate.
C) stated interest rate.
D) discounting rate.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
13) The date on which the principal amount is repaid to the bondholder is known as:
A) issuing date.
B) interest date.
C) maturity date.
D) installment date.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
14) The reason investors buy bonds is to:

A) earn interest.
B) own controlling interest in the company.
C) exercise voting rights in a company.
D) receive dividend payments.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
15) The interest rate on which cash payments to bondholders are based is the:
A) market rate.
B) discount rate.
C) stated rate.
D) amortization rate.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
15
16) An instrument that matures at one specified time is known as a:
A) preferred share.
B) common share.
C) bond.
D) letter of credit.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
17) Which of the following describes a serial bond?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
18) Which of the following describes a secured bond?

B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay principal or interest
Answer: B
Diff: 1
LO: 14-2
AACSB: Concept
19) Which of the following describes a debenture?

B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay principal or interest
Answer: D
Diff: 1
LO: 14-2
AACSB: Concept
16
20) Which of the following statements is true of a bond that is issued at a discount?
A) It will be sold at par.
B) Its stated interest rate is higher than the prevailing market rate.
C) It will repay a lesser amount than the face value at maturity.
D) It will be sold for less than the face value.
Answer: D
Diff: 1
LO: 14-2
AACSB: Concept
21) Which of the following statements is true of a bond that is issued at a premium?
A) It will be sold above par.
B) Its stated interest rate is lower than the prevailing market rate.
C) It will repay a greater amount than the face value at maturity.
D) It will be sold at par.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
22) If bonds with a face value of $200,000 are sold at 98, the amount of cash proceeds is:
A) $202,000.
B) $200,000.
C) $196,000.
D) $192,157.
Answer: C
Explanation: C) Cash Proceeds ($200,000 × 0.98) = $196,000
Diff: 1
LO: 14-2
AACSB: Application
23) If bonds with a face value of $200,000 are sold at par, the amount of cash proceeds is:
A) $202,000.
B) $200,000.
C) $196,000.
D) $192,157.
Answer: B
Diff: 1
LO: 14-2
AACSB: Application
17
24) If bonds with a face value of $200,000 are sold at 105, the amount of cash proceeds is:
A) $209,523.
B) $200,000.
C) $190,476.
D) $210,000.
Answer: D
Explanation: D) Cash proceeds = $200,000 × 1.05 = $210,000
Diff: 1
LO: 14-2
AACSB: Application
25) Which of the following concepts represents time value of money?

A) the concept that money becomes obsolete over time
B) the concept that money earns income over time
C) the concept that money loses its purchasing power over time
D) the concept that money can be converted into other currencies over time
Answer: B
Diff: 1
LO: 14-2
AACSB: Concept
26) If a bond's stated interest rate is lower than the market rate, which of the following is true?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount higher than the maturity value.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
27) If a bond's stated interest rate is higher than the market rate, which of the following is true?
D) The bond will be issued for an amount lower than the maturity value.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
18
28) If a bond's stated interest rate is the same as the market rate, which of the following is true?
D) The bond will be issued for an amount lower than the maturity value.
Answer: B
Diff: 1
LO: 14-2
AACSB: Concept
29) A bond is sold for an amount less than its face value. Which of the following statements is true?
A) The bond's stated rate is lower than the prevailing market rate at the time of sale.
B) The bond's stated rate is the same as the prevailing market rate at the time of sale.
C) The bond's stated rate is higher than the prevailing market rate at the time of sale.
D) The bond is not secured by specific assets of the issuer.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
30) A bond is sold for an amount higher than face value. Which of the following statements is true?
A) The bond's stated rate is lower than the prevailing market rate at time of sale.
B) The bond's stated rate is the same as the prevailing market rate at time of sale.
C) The bond's stated rate is higher than the prevailing market rate at time of sale.
Answer: C
Diff: 1
LO: 14-2
AACSB: Concept
31) A bond is sold for an amount equal to its face value. Which of the following statements is true?
A) The bond's stated rate is lower than the prevailing market rate at time of sale.
B) The bond's stated rate is the same as the prevailing market rate at time of sale.
C) The bond's stated rate is higher than the prevailing market rate at time of sale.
Answer: B
Diff: 1
LO: 14-2
AACSB: Concept
19
32) The interest rate that investors demand in order to loan their money is known as the:
A) yield to maturity.
B) coupon rate.
C) differential rate.
D) market interest rate.
Answer: D
Diff: 1
LO: 14-2
AACSB: Concept
33) When a bond is sold at a price higher than the face value, the difference is known as a:
A) premium.
B) discount.
C) maturity value.
D) face value.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
34) Why would a corporation issue bonds payable instead of issuing stock?
A) Debt is a less expensive source of capital than stock.
B) Borrowing by issuing bonds payable carries no risk to the company.
C) Debts affect the percentage of ownership of the corporation by the stockholders.
D) Debts don't carry any cost.
Answer: A
Diff: 1
LO: 14-2
AACSB: Concept
35) Earning more income on borrowed money than the related interest expense is called:
A) premium.
B) leverage.
C) annuity.
D) amortization.
Answer: B
Diff: 1
LO: 14-2
AACSB: Concept
20
36) Campbell Inc. has net income of $500,000 and 200,000 shares of common stock. The company is
considering a project which requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised
can be used to increase income before interest and taxes by $300,000 each year. The company estimates
income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in
higher earnings per share.
Answer:
Option 1 Option 2
Net income before new project 500,000 500,000
Expected income on the new
project before interest and income
tax expenses 300,000 300,000
Less: Interest Expense ($800,000 × 12%) 96,000 0
Project income before income tax 204,000 300,000
Less: Income tax expense 81,600 120,000
Project net income 122,400 180,000
Net income with new project 622,400 680,000
Earnings per share with new project
Option 1 ($622,400 ∕ 200,000) 3.11
Option 2 ($680,000 ∕ 300,000) 2.27
Since EPS of option 1 is more than option 2, therefore Campbell Inc. should borrow the amount to fund
the investment.
Diff: 2
LO: 14-2
AACSB: Application
1) The amortization of bond premium increases interest expense over the life of the bonds.
Answer: FALSE
Diff: 1
LO: 14-3
AACSB: Application
2) The face value of a bond payable minus the current balance of the discount account plus the current
balance of the premium account is the bond's carrying amount.
Answer: TRUE
Diff: 1
LO: 14-3
AACSB: Concept
21
3) The balance in the Bonds Payable account is a credit of $65,000. The balance in the Discount on Bonds
Payable account is a debit of $2,250. The bond's carrying amount is $62,750.
Answer: TRUE
Diff: 1
LO: 14-3
AACSB: Concept
Payable is a debit of $3,500. The balance sheet will report the bond balance as $75,500.
Answer: FALSE
Diff: 1
LO: 14-3
AACSB: Concept
5) The balance in the Bonds Payable account is a credit of $89,000. The balance in the Premium on Bonds
Payable account is a credit of $990. The bond's carrying amount is $89,990.
Answer: TRUE
Diff: 1
LO: 14-3
AACSB: Concept
6) The balance in the Bonds Payable is a credit of $16,500. The balance in the Premium on Bonds Payable
is a credit of $800. The balance sheet will report the bond balance as $15,700.
Answer: FALSE
Diff: 1
LO: 14-3
AACSB: Concept
7) Discount on Bonds Payable is considered to be an additional Interest Expense of the company that
issues the bond.
Answer: TRUE
Diff: 1
LO: 14-3
AACSB: Application
8) Premium on Bonds Payable is considered to be an additional Interest Expense of the company that
issues the bond.
Answer: FALSE
Diff: 1
LO: 14-3
AACSB: Application
22
9) Which of the following is true of a Premium on Bonds Payable account?
A) It is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet.
B) It is added to the Bonds Payable balance and shown with owner's equity on the balance sheet.
C) It is subtracted from the Bonds Payable balance and shown with long-term liabilities on the balance
sheet.
D) It is subtracted from the Bonds Payable balance and shown with the current liabilities on the balance
sheet.
Answer: A
Diff: 2
LO: 14-3
AACSB: Application
10) Which of the following is true of a Discount on Bonds Payable account?

A) It is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet.
B) It is subtracted from the Bonds Payable balance and shown with the current liabilities on the balance
sheet.
C) It is added to the Bonds Payable balance and shown with owner's equity on the balance sheet.
D) It is subtracted from the Bonds Payable balance and shown with long-term liabilities on the balance
sheet.
Answer: D
Diff: 2
LO: 14-3
AACSB: Application
11) On June 1, 2015, Smith Services issued $30,000 of 7.50% bonds that mature in five years. They were
sold at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On
December 31, 2015, how much is the total interest payments made to bondholders?
A) $1,125.00
B) $2,250.00
C) $562.25
D) $750.00
Answer: A
Explanation: A)
Principal Amount $30,000.00
Rate of interest 7.50%
No. of months 6
Interest ($30,000 × 7.5% × 1/2) $1,125.00
Diff: 2
LO: 14-3
AACSB: Application
23
12) On June 1, 2015, Smith Services issued $36,000 of 8% bonds that mature in five years for $45,000. The
bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31,
2015, how much is the total interest paid to bondholders?
A) $1,440
B) $2,880
C) $1,800
D) $3,600
Answer: A
Explanation: A)
Principal Amount $36,000
No. of months 6
Total amount paid to bondholders ($36,000 × 8% × 1/2) $1,440
Diff: 2
LO: 14-3
AACSB: Application
13) On June 1, 2015, Smith Services issued $30,000 of 7.50% bonds that mature in five years. They were
sold at a premium, for a total of $31,250. The bonds pay semiannual interest payments on June 30 and
December 31 of each year. On December 31, 2015, how much is the total amount paid to bondholders?
A) $1,125.00
B) $2,250.00
C) $1,171.88
D) $2,343.75
Answer: A
Explanation: A)
Principal Amount $30,000
No. of months 6
Total amount paid to bondholders ($30,000 × 7.5% × 1/2) $1,125
Diff: 2
LO: 14-3
AACSB: Application
24
Payable account is a debit of $2,150. How much is the bond's carrying amount?
A) $2,150
B) $67,650
C) $65,500
D) $63,350
Answer: D
Explanation: D)
Bonds Payable Account $65,500
Less: Discount on Bonds Payable Account 2,150
Bond Carrying Amount $63,350
Diff: 1
LO: 14-3
AACSB: Concept
15) On December 31, 2013, Clark Sales has a Bonds Payable Balance of $89,000 and a Discount on Bonds
Payable of $2,350. On the balance sheet, how will this information be shown?
A) $89,000 less Discount of $2,350 for a Net Balance of $86,650
B) $89,000 plus Discount for a total balance of $91,350
C) $89,000
D) $89,000 less one-tenth of $2,350 for a Net Balance of $88,765
Answer: A
Explanation: A)
Less: Discount on Bonds Payable Account 2,350
Diff: 1
LO: 14-3
AACSB: Concept
16) The balance in the Bonds Payable Account is a credit of $68,000. The balance in the Premium on
Bonds Payable Account is a credit of $900. How much is the bond carrying amount?
A) $900
B) $68,900
C) $68,000
D) $67,100
Answer: B
Explanation: B)
Add: Premium on Bonds Payable Account 900
Diff: 1
LO: 14-3
AACSB: Concept
25
17) On December 31, 2015, Lopez Sales has a Bonds Payable Balance of $71,000 and a Premium on Bonds
Payable of $3,900. On the balance sheet, how will this information be shown?
A) $71,000 less Premium of $3,900 for a Net Balance of $67,100
B) $71,000 less one-tenth of $3,900 for a net balance of $70,610
C) $71,000
D) $71,000 plus a premium of $3,900 for a net balance of $74,900
Answer: D
Explanation: D)
Add: Premium on Bonds Payable Account $3,900
Net Balance $74,900
Diff: 1
LO: 14-3
AACSB: Concept
18) On January 1, 2015, Carter Sales issued $15,000 in bonds for $14,700. They were 6-year bonds with a
stated rate of 9%, and pay semiannual interest. Carter Sales uses the straight-line method to amortize the
Bond Discount. On June 30, 2015, when Carter makes the first payment to bondholders, how much will
they report as Interest Expense?
A) $675
B) $700
C) $25
D) $825
Answer: B
Explanation: B)
Interest Expense ($15,000 × 9% × 6 ∕ 12) $675
Add: Amortized Amount [(($15,000 - $14,700) ÷ 6) × (6/12)] $25
Total Interest Expense $700
Diff: 2
LO: 14-3
AACSB: Application
26
Bond Discount. Immediately after issue of the bonds, the ledger balances appeared as follows:
After the first interest payment on June 30, 2015, what will be the balance in the Discount Account?
A) Debit of $275
B) Debit of $300
C) Debit of $325
D) Credit of $25
Answer: A
Explanation: A)
Discount on Bonds Payable $300
Less: Amount Amortized [(($15,000 - $14,700) ÷ 6) × (6/12)] 25
Balance $275
Diff: 2
LO: 14-3
AACSB: Application
27
Bond Discount. Immediately after issue of the bonds, the ledger balances appeared as follows:
After the second interest payment on December 31, 2015, what will be the balance in the Discount
account?
A) debit of $275
B) debit of $350
C) debit of $250
D) credit of 300
Answer: C
Explanation: C)
Discount on Bonds Payable $300
Less: Amount Amortized (300 / 6) 50
Balance $250
Diff: 2
LO: 14-3
AACSB: Application
bond premium. On June 30, 2015, when Carter makes the first payment to bondholders, how much will
they report as Interest Expense?
A) $625
B) $675
C) $275
D) $280
Answer: A
Explanation: A)
Interest Expense ($15,000 × 9% × 6 / 12) $675
Less: Amortized Amount [(($15,800 - $15,000) ÷ 8) × (6/12)] 50
Total Interest Expense $625
Diff: 2
LO: 14-3
AACSB: Application
28
Bond Premium. Immediately after issue of the bonds, the ledger balances appeared as follows:
After the first interest payment on June 30, 2015, what will be the balance in the Premium Account?
A) debit of $50
B) debit of $900
C) credit of $625
D) credit of $750
Answer: D
Explanation: D)
Premium on Bonds Payable $800
Less: Amount Amortized ($800/8 × 1/2) 50
Balance $750
Diff: 2
LO: 14-3
AACSB: Application
bond premium. After the first interest payment on June 30, 2015, what was the bond carrying amount?
A) $15,800
B) $15,750
C) $15,050
D) $15,000
Answer: B
Explanation: B)
Bond Payable $15,000
Add: Premium on Bonds Payable ($800 - $50) 750
Diff: 2
LO: 14-3
AACSB: Application
29
bond discount. After the first interest payment on June 30, 2015, what was the bond carrying amount?
A) $15,000
B) $14,200
C) $14,344
D) $14,400
Answer: C
Explanation: C)
Less: Discount on Bonds Payable 656
[$700 - ($15,000 - $14,300) / 8 × 6 / 12] ______
Diff: 2
LO: 14-3
AACSB: Application
bond discount. After the second interest payment on December 31, 2015, what was the bond carrying
amount?
A) $14,388
B) $14,344
C) $15,000
D) $14,300
Answer: A
Explanation: A)
Less: Discount on Bonds Payable [$700 - ($15,000 - $14,300)/8] 612
Diff: 2
LO: 14-3
AACSB: Application
30
26) On November 1, 2014, Archangel Services issued $300,000 of 8-year bonds with a stated rate of 9% at
par. The bonds make semiannual payments on April 30 and October 31. At December 31, 2014, Archangel
made an adjusting entry to accrue interest at year-end. How much Interest Expense will be recorded at
December 31, 2014?
A) $27,000
B) $4,500
C) $13,500
D) $14,200
Answer: B
Explanation: B) Interest Expense = $300,000 × 9% × 2/12 = $4,500
Diff: 2
LO: 14-3
AACSB: Application
27) On November 1, 2014, Archangel Services issued $300,000 of 5-year bonds with a stated rate of 10%.
The bonds were sold at par, and Archangel makes semiannual payments on April 30 and October 31. At
December 31, 2014, Archangel made an adjusting entry to accrue interest at year-end. No further entries
were made until April 30, 2015, when the first payment was sent out. How much interest expense was
recorded for the period of January 1 to April 30, 2015?
A) $10,000
B) $30,000
C) $15,000
D) $24,000
Answer: A
Explanation: A) Interest Expense = $300,000 × 10% × 4 ∕ 12 = $10,000
Diff: 2
LO: 14-3
AACSB: Application
28) Blanding Company issues $1,000,000 of 8%, 10-year bonds at 98 on February 28, 2014. The bonds pay
interest on February 28 and August 31. The journal entry to record the issuance would include a:
A) debit to Cash for $1,000,000.
B) credit to Bonds Payable for $980,000.
C) credit to Discount on Bonds Payable for $20,000.
D) debit to Cash for $980,000.
Answer: D
Explanation: D) Cash received = 1,000,000 × 98% = 980,000
Diff: 2
LO: 14-3
AACSB: Application
31
interest on February 28 and August 31. Assume that Blanding uses the straight-line method for
amortization. The journal entry to record the first interest payment on August 31, 2014 would be a:
A) debit to Cash for $40,000.
C) debit to Interest Expense for $39,000.
D) debit to Discount on Bonds Payable for $1,000.
Answer: B
Explanation: B)
Interest Expense ($1,000,000 × 8% × 6 / 12) $40,000
Add: Amortization of Discount ($20,000 / 10) × 6 / 12 1,000
Total Interest Expense $41,000
Diff: 2
LO: 14-3
AACSB: Application
interest on February 28 and August 31. Assume that Blanding uses the straight-line method for
amortization. What net balance will be reported for the bonds on the balance sheet on August 31, 2014?
A) $981,000
B) $1,000,000
C) $979,000
D) $980,000
Answer: A
Explanation: A)
Bonds Payable $1,000,000
Less: Discount on Bonds Payable
($1,000,0000 - $980,000) - [($1,000,000 - $980,000) ÷ 10 × (6 /12)] 19,000
Net Balance $981,000
Diff: 3
LO: 14-3
AACSB: Application
31) The Amazing Widget Company issues $500,000 of 6%, 10-year bonds at 103 on March 31, 2014. The
bonds pay interest on March 31 and September 30. Assume that the company uses the straight-line
method for amortization. The journal entry to record the issuance would include a:
B) credit to Bonds Payable for $515,000.
C) debit to Premium on Bonds Payable for $15,000.
D) debit to Cash for $515,000.
Answer: D
Explanation: D) Cash received = $500,000 × 103% = $515,000
Diff: 2
LO: 14-3
AACSB: Application
32
bond pays interest on March 31 and September 30. Assume that the company uses the straight-line
method for amortization. The journal entry to record the first interest payment on September 30, 2014 is a:
C) debit to Interest Expense for $14,250.
D) credit to Premium on Bonds Payable for $750.
Answer: C
Explanation: C)
Interest Expense ($500,000 × 6% × 6/12) $15,000
Less: Amortization of Premium
($15,000 ÷ 20) 750
Total Interest Expense $14,250
Diff: 2
LO: 14-3
AACSB: Application
bond pays interest on March 31 and September 30. Assume that the company uses the straight-line
method for amortization. Calculate the net balance that will be reported for the bonds on the balance
sheet on September 30, 2014.
A) $500,000
B) $515,000
C) $514,250
D) $515,250
Answer: C
Explanation: C)
Bonds Payable $500,000
Add: Premium on Bonds Payable ($15,000 - $750) 14,250
Net Balance $514,250
Diff: 2
LO: 14-3
AACSB: Application
34) Cases Company issues $800,000 of 7%, 10-year bonds on March 31, 2013. The bond pays interest on
March 31 and September 30. Which of the following statements is true?
A) If the market rate of interest is 8%, the bonds will issue at a premium.
B) If the market rate of interest is 8%, the bonds will issue at a discount.
C) If the market rate of interest is 8%, the bonds will issue at par.
D) If the market rate of interest is 8%, the bonds will issue above par.
Answer: B
Diff: 2
LO: 14-3
AACSB: Application
33
35) Blanding Company issues $1,000,000 of 8%, 10-year bonds at 98 on February 28, 2015. The bond pays
interest on February 28 and August 31. On August 31, 2015, how much cash did Blanding pay out to
bondholders?
A) $41,000
B) $40,000
C) $80,000
D) $39,000
Answer: B
Explanation: B) Interest Paid = $1,000,000 × 8% × 6 / 12 = $40,000
Diff: 2
LO: 14-3
AACSB: Application
bond pays interest on March 31 and September 30. On September 30, 2013, how much cash did the
company pay out to bondholders?
A) $14,250
B) $30,000
C) $15,000
D) $7,500
Answer: C
Explanation: C) Interest Paid = $500,000 × 6% × 6 / 12 = $15,000
Diff: 2
LO: 14-3
AACSB: Application
37) On January 1, 2013, Davie Services issued $20,000 of 8% bonds that mature in five years. They were
issued at par. Provide the journal entry to issue bonds.
Answer:
Cash 20,000
Bonds Payable 20,000
Diff: 1
LO: 14-3
AACSB: Application
34
sold for a total of $19,000. Provide the journal entry to issue bonds.
Answer:
Cash 19,000
Discount on Bonds Payable 1,000
Diff: 1
LO: 14-3
AACSB: Application
sold at a premium, for a total of $20,750. Provide the journal entry to issue bonds.
Answer:
Cash 20,750
Premium on Bonds Payable 750
Diff: 1
LO: 14-3
AACSB: Application
sold at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year.
Provide the journal entry for the payment made on June 30, 2013.
Answer:
Interest Expense 800
Cash 800
Explanation: Interest Paid = $20,000 × 8% × 6 / 12 = $800

Diff: 2
LO: 14-3
AACSB: Application
35
41) On January 2, 2014, Mahoney Sales issued $10,000 in bonds for $9,400. They were 5-year bonds with a
stated rate of 4%, and pay semiannual interest. Mahoney Sales uses the straight-line method to amortize
bond discount. Provide the journal entry for the first interest payment on June 30, 2014.
Answer:
Discount on Bonds Payable 60
Cash 200
Explanation: Interest Expense = ($10,000 × 4% × 6 / 12) + ($600 ÷ 10) = $260

Diff: 2
LO: 14-3
AACSB: Application
42) On January 2, 2014, Mahoney Sales issued $10,000 in bonds for $10,900. They were 5-year bonds with
a stated rate of 4%, and pay semiannual interest. Mahoney Sales uses the straight-line method to amortize
bond premium. Provide the journal entry for the first interest payment to be made on June 30, 2014.
Answer:
Cash 200
Explanation: Interest Expense = ($10,000 × 4% × 6/12) - ($900 ÷ 10) = $110

Diff: 2
LO: 14-3
AACSB: Application
1) The main reason companies retire bonds prior to their maturity date is to relieve the pressure of paying
interest payments.
Answer: TRUE
Diff: 1
LO: 14-4
AACSB: Concept
2) An alternative to calling the bonds is to purchase them in the open market at their current market
price.
Answer: TRUE
Diff: 1
LO: 14-4
AACSB: Concept
36
3) Callable bonds are bonds that the issuer may call and pay off at a specified price whenever the issuer
wants.
Answer: TRUE
Diff: 2
LO: 14-4
AACSB: Concept
4) On July 1, 2014, Miniature Company has bonds with balances as shown below.
If the company retires the bonds for $66,150, what will be the effect on the income statement?
A) loss on retirement of $4,400
B) gain on retirement of $4,400
C) sales revenue of $61,750
D) no effect on net income
Answer: A
Explanation: A)
Face value of the bonds being retired $65,000
Less: Discount on Bonds Payable 3,250
Carrying Amount of Bonds Payable $61,750
Market price paid to retire the bonds 66,150
Loss on retirement of Bonds Payable ($4,400)
Diff: 2
LO: 14-4
AACSB: Application
37
5) On July 1, 2014, Miniature Company has bonds with balances as shown below.
If the company retires the bonds for $66,150, what will be the effect on the income statement?
A) gain on retirement of $4,400
B) loss on retirement of $4,400
C) gain on retirement of $2,100
D) loss on retirement of $2,100
Answer: C
Explanation: C)
Face value of the bonds being retired $65,000
Add: Premium on Bonds Payable 3,250
Carrying Amount of Bonds Payable $68,250
Market price paid to retire the bonds 66,150
Gain on retirement of Bonds Payable $2,100
Diff: 2
LO: 14-4
AACSB: Application
6) On March 21, 2013, the bond accounts of Urban Sales showed the following balances.
Urban Sales retires the bonds for $66,150. What will be the journal entry to retire the bonds?
Answer:
Premium on Bonds Payable 3,250
Gain on Retirement on Bonds 2,100
Cash 66,150
Diff: 2
LO: 14-4
AACSB: Application
38
7) On March 21, 2013, the bond accounts of Urban Sales showed the following balances.
Urban Sales retires the bonds for $66,150. What will be the journal entry to retire the bonds?
Answer:
Loss on Retirement on Bonds 4,400
Discount on Retirement on Bonds 3,250
Cash 66,150
Diff: 2
LO: 14-4
AACSB: Application
8) Dolby Inc. issued a $5,000 face value, 10%, 5-year bond at 98. What will be the journal entries at the
maturity of the bond? The bonds have semiannual interest and the company uses the straight-line
method of discount amortization.
Answer:
Bonds Payable 5,000
Cash 5,000

Cash($5,000 × 10% × 1/2) 250
Discount on Bonds Payable($5,000 × 2%)/ 10 10
Diff: 1
LO: 14-4
AACSB: Application
1) The United Way Payable account would normally be shown on the balance sheet under current
liabilities.
Answer: TRUE
Diff: 1
LO: 14-5
AACSB: Concept
39
2) FICA—OASDI tax payable would normally be shown on the balance sheet under long-term liabilities.
Answer: FALSE
Diff: 1
LO: 14-5
AACSB: Concept
3) Federal Unemployment Taxes Payable is typically shown on the balance sheet under the long-term
liabilities section.
Answer: FALSE
Diff: 1
LO: 14-5
AACSB: Concept
4) The Current Portion of Notes Payable would normally be shown on the balance sheet under current
liabilities.
Answer: TRUE
Diff: 1
LO: 14-5
AACSB: Concept
5) The Employee Bonus Payable would normally be shown on the balance sheet under long-term
liabilities.
Answer: FALSE
Diff: 1
LO: 14-5
AACSB: Concept
6) Bonds Payable are reported on the balance sheet as the balance in Bonds Payable plus any discount or
minus any premium.
Answer: FALSE
Diff: 1
LO: 14-5
AACSB: Concept
40
7) Refer to the following list of liability balances at December 31, 2015.
Accounts Payable $ 13,000

Employee Health Insurance Payable 450
Employee Income Tax Payable 400
Estimated Warranty Payable 600
Long-Term Notes Payable(Due 2019) 33,000
FICA—OASDI Taxes Payable 560
Sales Tax Payable 370
Mortgage Payable(Due 2020) 6,000
Bonds Payable(Due 2021) 53,000
What is the total amount of current liabilities?

A) $18,880
B) $15,380
C) $14,980
D) $14,380
Answer: A
Explanation: A)
Accounts Payable $13,000
______
Total Current Liabilities $18,880
Diff: 1
LO: 14-5
AACSB: Application
41
8) Refer to the following list of liability balances at December 31, 2015.
Accounts Payable $ 13,000

Long-Term Notes Payable(Due 2019) 33,000
Mortgage Payable(Due 2020) 6,000
Bonds Payable(Due 2021) 53,000
What is the total amount of long-term liabilities?

A) $39,000
B) $92,000
C) $86,000
D) $33,000
Answer: B
Explanation: B)
Long-Term Notes Payable (Due 2019) $33,000
Mortgage Payable (Due 2020) 6,000
Bonds Payable (Due 2021) 53,000
Total Long-Term Liabilities $92,000
Diff: 1
LO: 14-5
AACSB: Application
1) The debt to equity ratio measures the proportion of total liabilities relative to the total equity.
Answer: TRUE
Diff: 1
LO: 14-6
AACSB: Concept
42
2) If a company is financing more assets with debt than with equity, then the:
A) debt to equity ratio will be more than 1.
B) debt to equity ratio will be between 0 to 1.
C) debt to equity ratio will be equal to 1.
D) debt to equity ratio will be negative.
Answer: A
Diff: 1
LO: 14-6
AACSB: Concept
3) Which of the following statements is true of the debt to equity ratio?

A) The higher the debt to equity ratio, the lower the company's financial risk.
B) The higher the debt to equity ratio, the greater the company's financial risk.
C) If the debt to equity ratio is greater than 1, then the company is financing more assets with equity than
with debt.
D) If the debt to equity ratio is less than 1, then the company is financing more assets with debt than with
equity.
Answer: B
Diff: 1
LO: 14-6
AACSB: Concept
4) Alexander Corp. has the following balances as on December 31, 2015:
Total Assets $89,000

Total Liabilities 54,000
Total Equity 35,000
Calculate the debt to equity ratio.

A) 0.64
B) 0.04
C) 1.54
D) 1.65
Answer: C
Explanation: C) Debt to equity ratio = $54,000 ÷ $35,000 = 1.54
Diff: 1
LO: 14-6
AACSB: Application
43
5) The debt to equity ratio of four companies is given below.
Debt to equity ratio

Lewis Inc. 1.30
Jackson Inc. 1.50
Jones Corp. 0.88
Roberts Corp. 0.92
Which of the following companies has the greatest financial risk?

A) Lewis Inc.
B) Jackson Inc.
C) Jones Corp.
D) Roberts Corp.
Answer: B
Diff: 1
LO: 14-6
AACSB: Application
6) The debt to equity ratio of four companies is given below.
Debt to equity ratio

Lewis Inc. 1.30
Jackson Inc. 1.39
Jones Corp. 1.88
Roberts Corp. 0.92
Which of the following companies has less debt than equity in its capital structure?
A) Lewis Inc.
B) Jackson Inc.
C) Jones Corp.
D) Roberts Corp.
Answer: D
Diff: 1
LO: 14-6
AACSB: Application
1) The fact that invested cash earns income over time is called the time value of money.
Answer: TRUE
Diff: 1
LO: 14-7
AACSB: Concept
44
2) Simple interest means that interest is calculated on the principal and on all previously earned interest.
Answer: FALSE
Diff: 1
LO: 14-7
AACSB: Concept
3) Compound interest means that interest is calculated only on the principal amount.
Answer: FALSE
Diff: 1
LO: 14-7
AACSB: Concept
4) A stream of equal cash payments made at equal time intervals is called a(n):
A) present value.
B) annuity.
C) compound interest.
D) future value.
Answer: B
Diff: 1
LO: 14-7
AACSB: Application
5) If $12,000 is invested for one year at an annual interest rate of 12%, it will grow in value to:
A) $13,440.
B) $14,400.
C) $440.
D) $400.
Answer: A
Explanation: A)
Principal $12,000
Add: Interest ($12,000 × 12%) 1,440
Value after 1 year $13,440
Diff: 1
LO: 14-7
AACSB: Application
45
6) Using the present value tables, compute the present value of $30,000 discounted back 6 periods at 7%.
A) $24,500
B) $18,400
C) $23,700
D) $19,980
Answer: D
Explanation: D)
Present Value Factor 0.666
Future Value $30,000
Present Value ($30,000 × 0.666) $19,980
Diff: 2
LO: 14-7
AACSB: Application
7) Using the present value tables, compute the present value of an ordinary annuity which pays $3,000
per year for 15 years, discounted at 9%.
A) $24,183
B) $24,200
C) $23,180
D) $25,390
Answer: A
Explanation: A)
Future Value 3,000
Present Value ($3,000 × 8.061) $24,183.00
Diff: 2
LO: 14-7
AACSB: Application
46
8) The principal amount of a bond is $65,000, its stated rate is 7%, and the term of the bond is 5 years. The
bond pays interest semiannually. At the time of issue, the market rate is 8%. Determine the present value
of the bonds at issuance.
A) $44,265
B) $18,453
C) $62,393
D) $65,000
Answer: C
Explanation: C)
Future Value 65,000
Present Value Factor × 0.676
Present Value ($65,000 × 0.676) $43,940
Interest 2,275
Annuity Factor × 8.111
Present Value of Interest Payments $18,453
______
Total Present Value $62,393
Diff: 2
LO: 14-7
AACSB: Application
9) The principal amount is $80,000, the stated rate is 10%, and the term of the bond is 8 years. The bond
pays interest semiannually. At the time of issue, the market rate is 9%. What is the present value of the
bond at the market rate?
A) $84,456
B) $44,936
C) $40,160
D) $87,290
Answer: A
Explanation: A)
Future Value 80,000
Present Value ($80,000 × 0.494) $39,520
Interest $4,000
Annuity Factor 11.234
Present Value of Interest
Payments($4,000 × 11.234) $44,936
______
Total Present Value $84,456
Diff: 2
LO: 14-7
AACSB: Application
47
1) On January 1, 2015, Finch Company issued $72,000 of 5-year bonds with a stated rate of 8%. The
market rate at time of issue was 12%, so the bonds were discounted and sold for $61,401. Finch uses the
effective-interest method of amortization for bond discount. Semiannual interest payments are made on
June 30 and December 31 of each year. How much Interest Expense will be recorded when the first
interest payment is made?
A) $2,778
B) $3,684
C) $2,880
D) $4,320
Answer: B
Explanation: B) Interest Expense = $61,401 × 12% × 6 / 12 = $3,684
Diff: 2
LO: 14-8
AACSB: Concept
48
2) On January 1, 2015, Finch Company issued $72,000 of 5-year bonds with a stated rate of 8%. The
market rate at time of issue was 12%, so the bonds were discounted and sold for $61,401. Finch uses the
effective-interest method of amortization for bond discount. Semiannual interest payments are made on
June 30 and December 31 of each year. Which of the following is the correct journal entry to record the
first interest payment? (Round all amounts to the nearest whole dollar.)
A)
Cash 4,320
B)
Discount on Bonds Payable 804
Cash 2,880
C)
Cash 4,320
D)
Cash 1,440
Answer: B
Explanation: B) Interest Expense = $61,401 × 12% × 6 / 12 = $3,684
Cash = $72,000 × 8%× 6 / 12 = $2,880
Diff: 2
LO: 14-8
AACSB: Concept
3) On January 1, 2014, Zing Services issued $165,000 of 6-year bonds with a stated rate of 12%. The market
rate at time of issue was 11%, so the bonds were issued with a premium and sold for $172,110. Zing uses
the effective-interest method to amortize bond premium. Semiannual interest payments are made on June
30 and December 31 of each year. How much Interest Expense will be recorded when the first interest
payment is made?
A) $10,139
B) $9,466
C) $9,900
D) $9,075
Answer: B
Explanation: B) Interest = $172,110 × 11% × 6 / 12 = $9,466
Diff: 2
LO: 14-8
AACSB: Concept
49
4) On January 1, 2014, Zing Services issued $165,000 of 6-year bonds with a stated rate of 12%. The market
rate at time of issue was 11%, so the bonds were issued with a premium and sold for $172,110. Zing uses
the effective-interest method to amortize bond premium. Semiannual interest payments are made on June
30 and December 31 of each year. Which of the following is the correct journal entry to record the first
interest payment?
A)
Cash 9,294
B)
Discount on Bond Payable 606
Cash 9,900
C)
Cash 9,900
D)
Cash 9,900
Answer: C
Explanation: C) Interest Expense = $172,110 × 11% × 6 / 12 = $9,466
Cash paid = $165,000 × 12% × 6 / 12 = $9,900
Diff: 2
LO: 14-8
AACSB: Concept
50
5) On January 1, 2014, Partridge Company issued $50,000 of 6-year bonds with a stated rate of 3%. The
market rate at time of issue was 4%, so the bonds were discounted and sold for $47,356. Partridge uses
the effective-interest method of amortization for bond discount. Semiannual interest payments are made
on June 30 and December 31 of each year. Prepare the amortization table for the first four interest
payments.
Answer: Bond Principal Amount $50,000 Stated Rate 3%
Bond
End of semiannual Interest Interest Discount Discount Carrying
interest period Payment Expense Amortization Balance Amount
Jan 1, 2014 $2,644 $47,356
June 30, 2014 $750 $947 $197 2,447 47,553
Dec. 31, 2014 750 951 201 2,246 47,754
June 30, 2015 750 955 205 2,041 47,959
Dec. 31, 2015 750 959 209 1,832 48,168
Explanation: Interest Payment = $50,000 × 3% × 6 / 12 = $750

First interest Expense = $47,356 × 4% × 6 / 12 = $947
Diff: 2
LO: 14-8
AACSB: Application
6) On January 1, 2013, Diab Services issued $140,000 of 4-year bonds with a stated rate of 9%. The market
rate at time of issue was 8%, so the bonds were issued at a premium and sold for $144,713. Diab uses the
effective-interest method to amortize bond premium. Semiannual interest payments are made on June 30
and December 31 of each year. Prepare the amortization table for the first four interest payments.
Answer: Bond Principal Amount $140,000 Stated Rate 9%
Bond
End of semiannual Interest Interest Premium Premium Carrying
interest period Payment Expense Amortization Balance Amount
Jan 1, 2013 $4,713 $144,713
June 30, 2013 $6,300 $5,789 $511 4,202 144,202
Dec. 31, 2013 6,300 5,768 532 3,670 143,670
June 30, 2014 6,300 5,747 553 3,117 143,117
Dec. 31, 2014 6,300 5,725 575 2,542 142,542
Explanation:
Interest Payment = $140,000 × 9% × 6/ 12 = $6,300
First Interest Expense = $144,713 × 8% × 6 /12 = $5,789
Diff: 2
LO: 14-8
AACSB: Application
51

Learning Objective 14-1: Chapter 14 Long-Term Liabilities

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Learning Objective 14-1: Chapter 14 Long-Term Liabilities

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Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)

Chapter 14 Long-Term Liabilities

Learning Objective 14-1

10) A bond is issued at premium :

11) A bond is issued at discount:

14) The reason investors buy bonds is to:

17) Which of the following describes a serial bond?

18) Which of the following describes a secured bond?

19) Which of the following describes a debenture?

25) Which of the following concepts represents time value of money?

Learning Objective 14-3

10) Which of the following is true of a Discount on Bonds Payable account?

Explanation: Interest Paid = $20,000 × 8% × 6 / 12 = $800

Explanation: Interest Expense = ($10,000 × 4% × 6 / 12) + ($600 ÷ 10) = $260

Explanation: Interest Expense = ($10,000 × 4% × 6/12) - ($900 ÷ 10) = $110

Learning Objective 14-4

Interest Expense 260

Learning Objective 14-5

Accounts Payable $ 13,000

What is the total amount of current liabilities?

Accounts Payable $ 13,000

What is the total amount of long-term liabilities?

Learning Objective 14-6

3) Which of the following statements is true of the debt to equity ratio?

4) Alexander Corp. has the following balances as on December 31, 2015:

Total Assets $89,000

Calculate the debt to equity ratio.

Debt to equity ratio

Which of the following companies has the greatest financial risk?

6) The debt to equity ratio of four companies is given below.

Debt to equity ratio

Learning Objective 14-7

Explanation: Interest Payment = $50,000 × 3% × 6 / 12 = $750

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