Chapter 10: Long-Term Liabilities
104. When the market rate of interest is less than the face rate, then the bond issue will be sold at a discount.
a. True
b. False
105. The excess of the face value of bonds over the issue price is known as a premium.
a. True
b. False
106. The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a
constant amount of interest expense from period to period.
a. True
b. False
107. The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the
market rate of interest at the time the bonds are issued.
a. True
b. False
108. The amortization of bond discount increases the effective interest expense incurred each period for the issuer while
amortization of bond premium decreases it.
a. True
b. False
109. When a bond is issued at a discount, the interest expense each year is less than the cash payment for interest.
a. True
b. False
110. The sum of the carrying value and the redemption price at the time bonds are redeemed results in the gain or loss
on redemption.
a. True
b. False
Chapter 10: Long-Term Liabilities
111. When a bond issue is retired early, the amount of unamortized discount or premium is not considered in the
calculation of a gain or loss.
a. True
b. False
112. In an operating lease, the lessee acquires the right to use an asset for only a limited period of time.
a. True
b. False
113. A lease is accounted for as a capital lease if the lease term is 75% or more of the property’s economic life.
a. True
b. False
114. When a lease is classified as an operating lease, the lease liability should be presented on the balance sheet of the
lessee.
a. True
b. False
115. IFRS typically uses a more “rulebased” approach than U.S. GAAP.
a. True
b. False
116. In general, the international accounting standards provide lease criteria that are similar to the U.S. standards.
a. True
b. False
117. The accounting for leases is an excellent example of the differences in how U.S. and IFRS accounting standards
are applied.
a. True
b. False
118. The terms of a lease can only be structured in one way to meet the lessor and lessee and satisfy accounting
standards.
a. True
b. False
119. In an operating lease, the lessee is not required to record the right to use the property as an asset or to record the
obligation for payments as a liability.
a. True
b. False
120. In an operating lease, the lessee has acquired sufficient rights of ownership and control of the property to be
considered its owner.
a. True
b. False
121. If the lease term is 75% or more of the property’s economic life, the lease agreement should be accounted for as an
operating lease.
a. True
b. False
122. The asset leased under an operating lease requires the lessee to record depreciation expense.
a. True
b. False
123. An investor views a high debt-to-equity ratio and a low times interest earned as a favorable sign of a company’s
abilities to meet its long-term obligations.
a. True
b. False
124. Longterm liabilities are a component of the “capital structure” of a company.
a. True
b. False
125. The debt-to-equity ratio is defined as total long-term liabilities divided by total stockholders’ equity.
a. True
b. False
Chapter 10: Long-Term Liabilities
126. Most investors would prefer to see equity rather than debt on the balance sheet.
a. True
b. False
127. Stock investors view equity as a claim against the company that must be satisfied before they get a return on their
money.
a. True
b. False
128. All changes in long-term liabilities are reflected in the financing activities category of the statement of cash flows.
a. True
b. False
129. Most longterm liabilities are related to a firm’s investing activities.
a. True
b. False
130. The change in the Deferred Taxes account is reflected in the Operating Activities category of the statement of
cash flows.
a. True
b. False
131. [APPENDIX] Deferred tax is an amount that reconciles the differences between the income for financial purposes
with the income reported for tax purposes. In most cases, it is a long-term liability.
a. True
b. False
132. [APPENDIX] A permanent difference with respect to taxes is a difference that affects the tax records but not the
accounting records, or vice versa.
a. True
b. False
Chapter 10: Long-Term Liabilities
133. [APPENDIX] Temporary differences occur when an item affects both book and tax calculations but not in the
same time period.
a. True
b. False
134. [APPENDIX] The Deferred Tax account should reflect permanent differences but not items that are temporary
differences between book accounting and tax reporting.
a. True
b. False
135. All liabilities that are not classified as current liabilities are classified as .
136. The denomination or principal amount of the bond is usually referred to as the .
137. bonds may be retired by the issuing company before their specified due date.
138. The rate of interest is the rate that bondholders could obtain by investing in other
bonds that are similar to the issuing firm’s bonds.
139. The bond issue price equals the of the cash flows that the bond will produce.
140. Bonds were issued at a(n) when the issue price exceeds the face value.
141. Discount on Bonds Payable is shown on the balance sheet as a(n) .
142. If the market rate of interest is greater than the face rate, then the bonds are issued at a(n)
________________________.
143. is the process of transferring an amount from the bond discount or premium to
interest expense each time period to adjust interest expense.
Chapter 10: Long-Term Liabilities
144. is either the bond’s face value minus any unamortized discount or plus any
unamortized premium.
145. The effective interest method amortizes premium or discount in a manner that produces a(n) rate of interest
from period to period.
146. Under the effective interest method of amortization, the interest expense for each period is the carrying value times
the ______________________.
147. When a bond is retired early and the redemption price is greater than the bond’s carrying value, there will be a(n)
______________________ on redemption.
148. A(n) lease is recorded on the lessee’s balance sheet as an asset and related liability.
149. Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the
____________________________________.
150. For a capital lease, the lessee must record both an asset and a liability. The amount of the asset is subsequently
reduced by the process of __________________________.
151. In calculating deferred income taxes, occur when an item is
included in the tax calculation and is never included for financial accounting purposes, or vice versa.
152. An alternate term for a timing difference is a .
Chapter 10: Long-Term Liabilities
Backkus Metal Company
Use the liabilities section of Backkus Metal Company’s balance sheet to answer the questions that follow.
Backkus Metal Company
Consolidated Balance Sheets
(in millions)
December 31,
2015
2014
Current liabilities
Short-term borrowings
$ 354
$ 202
Accounts payable and other current liabilities
4,461
4,529
Income taxes payable
183
64
Total current liabilities
$4,998
$4,795
Long-term debt
$2,651
$3,009
Other long-term liabilities
3,876
3,960
Deferred income taxes (assume all are long-term)
1,496
1,367
153. Review the consolidated balance sheets of Backkus Metal Company.
REQUIRED:
(1) Which long-term liability would also be listed in the short-term liability section? Why?
(2) What percent of the total liabilities for 2015 and 2014 are long-term liabilities? What implication does this have?
154. Review the consolidated balance sheets of Backkus Metal Company.
REQUIRED:
Which one of the liabilities shown in the balance sheets is used in the calculation of the debt-to-equity ratio?
If we can assume that the stockholders’ equity total remained relatively constant for the two years, how would the
ratio change (increase/decrease) from 2014 to 2015? What would this say about the company’s financial position?
Chapter 10: Long-Term Liabilities
155. Review the consolidated balance sheets of Backkus Metal Company.
REQUIRED:
(1) What are the total long-term liabilities for the two years presented?
(2) What is the percent increase/decrease of long-term liabilities from 2014 to 2015? Which liability appears to
have caused the greatest change?
156. On March 1, 2015, Farmer Co. issued at a price of 100 $20 million of 8%, 25-year bonds payable. Interest
is payable semiannually each March 1 and September 1.
REQUIRED:
Present the adjusting entry necessary at December 31, 2015, regarding this bond issue.
Chapter 10: Long-Term Liabilities
157. Caron Industries received authorization on December 31, 2014, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued
interest, April 1, 2015. The bonds are callable by Caron at any time at 102.
REQUIRED:
Prepare the journal entry to record issuance of the bonds on April 1, 2015.
158. Caron Industries received authorization on December 31, 2014, to issue $7,000,000 face value of 6%, 10-year
bonds interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 2015. The bonds are callable by Caron at any time at 102.
REQUIRED:
Prepare the journal entry to record the first semiannual interest payment on the bonds at June 30, 2015.
Chapter 10: Long-Term Liabilities
159. Caron Industries received authorization on December 31, 2014, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued
interest, April 1, 2015. The bonds are callable by Caron at any time at 102.
REQUIRED:
1. What is the amount of bond interest expense that appears in Caron’s 2015 income statement relating to these
bonds?
2. What is the amount of accrued bond interest expense that appears in Caron’s balance sheet at December 31, 2015,
with respect to these bonds?
160. Caron Industries received authorization on December 31, 2014, to issue $7,000,000 face value of 6%, 10-year
bonds interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 2015. The bonds are callable by Caron at any time at 102.
REQUIRED:
Caron exercises the call provision and retires one-half of the bond issue on July, 1, 2017. Prepare the journal entry t
record this transaction on July 1, 2017.
Chapter 10: Long-Term Liabilities
161. A bond payable is dated January 1, 2015, and is issued on that date. The face value of the bond is $120,000, and
the face rate of interest is 6%. The bond pays interest semiannually. The bond will mature in five years.
REQUIRED:
1. What will be the issue price of the bond if the market rate of interest is 6% at the time of issuance?
2. What will be the issue price of the bond if the market rate of interest is 10% at the time of issuance?
162. A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2015.
The issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate.
REQUIRED:
a) Determine the effect on the accounting equation upon recording the issuance of the bonds.
b) Determine the effect on the accounting equation upon recording the recognition of interest
expense at December 31, 2015. Any premium or discount should be amortized using the
effective interest rate method.
c) Determine the effect on the accounting equation upon recording the interest paid to
the bondholders on January 2, 2016.
d) Determine the effect on the accounting equation upon recognizing the interest expense at
December 31, 2016. Any premium or discount should be amortized using the effective interest
rate method.
Chapter 10: Long-Term Liabilities
Chapter 10: Long-Term Liabilities
163. A company issued 5-year bonds with a par value of $35,000,000 and a 7% annual face on January 2, 2015.
The issue price of the bond issue was $35,216,127 which reflected a 6.85% effective interest rate.
REQUIRED:
a) Determine the effect on the accounting equation upon recording the issuance of the bonds.
b) Determine the effect on the accounting equation upon recording the recognition of interest expense at December
31, 2015. Any premium or discount should be amortized using the effective interest rate method.
c) Determine the effect on the accounting equation upon recording the interest paid to the bondholders on
January 2, 2016.
d) Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2016.
Any premium or discount should be amortized using the effective interest rate method.
Chapter 10: Long-Term Liabilities
164. Bonds payable are dated January 1, 2016, and are issued on that date. The face value of the bonds is $200,000, and
the face rate of interest is 8%. The bonds pay interest semiannually. The bonds will mature in five years. The
market rate of interest at the time of issuance was 6%.
REQUIRED:
1. What is the bond issuance price?
2. Using the effective interest amortization method, what amount should be amortized for the first six-month
period? What amount of interest expense should be reported for the first six-month period?
3. Using the effective interest amortization method, what amount should be amortized for the period from July 1
to December 31, 2016? What amount of interest expense should be reported for the period from July 1 to
December 31, 2016?