Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-21
3. Identify which accounting effect (a through e) occurs as a result of each transaction
numbered 1 through 6. You may use each letter more than once or not at all.
Accounting Effects
a. + A and + L
b. + A and – L
c. – A and – L and – SE
d. – A and – SE
e. – A and + L and – SE
____ 1. Issued a bond payable at a premium
____ 2. Issued a bond payable at a discount
____ 3. Issued a non-interest-bearing note at a discount
____ 4. Paid periodic interest and amortized discount to interest expense
____ 5. Paid periodic interest and amortized premium to interest expense
____ 6. Paid interest on bond payable which was issued at par
Solution:
11–22 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
4. Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction
numbered 1 through 6 below. You may use each letter more than once or not at all.
Effects
a. Increase in debt/equity ratio
b. Decrease in debt/equity ratio
c. Does not change debt/equity ratio
____ 1. Acquired the use of equipment under a capital lease
____ 2. Paid the interest portion of the payment on a capital lease
____ 3. Paid the principal portion of the payment on a capital lease
____ 4. Acquired the use of equipment under an operating lease
____ 5. Payment required on an operating lease
Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-23
5. Identify which accounting effect (a through e) occurs as a result of each transaction
numbered 1 through 6. You may use each letter more than once or not at all.
Accounting Effects
a.
b.
c.
d.
e.
____ 1. Acquired the use of equipment under a capital lease
____ 2. Paid the interest portion of the payment on a capital lease
____ 3. Paid the principal portion of the payment on a capital lease
____ 4. Depreciation of equipment leased under a capital lease
____ 5. Acquired the use of equipment under an operating lease
____ 6. Payment required on an operating lease
11–24 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
6. Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction
numbered 1 through 6 below. You may use each letter more than once or not at all.
Effects
a. Increase in debt/equity ratio
b. Decrease in debt/equity ratio
c. Does not change debt/equity ratio
____ 1. Issued a bond payable at a discount
____ 2. Issued a non-interest-bearing note at a discount
____ 3. Issued an interest-bearing note at a premium
____ 4. Amortized discount to interest expense
____ 5. Paid interest on bonds payable that was issued at par
____ 6. Market value of bonds payable increased after issue date
____ 7. Retired a bond issue by paying cash
SHORT PROBLEMS
1. On January 1, 2017, Lukens Corporation issued 5-year bonds with a $50,000 face
amount and a 6% annual coupon rate paid annually on January 1. The bonds were
issued at $44,166 when the market rate of interest was 9%.
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2017.
Round to the nearest dollar.
B. Were the bonds issued at a premium or discount? How do you know?
A. Cash
Discount on Bonds Payable
Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-25
2. On January 1, a 3-year, $1,090 non-interest-bearing note payable was issued for $942
when the market rate of interest was 5%. How much interest expense will Hamlen
recognize in each of the first two years using the effective interest method? Round to the
nearest dollar.
3. On January 1, 2017, Hooper Corporation issued 3-year bonds with a $40,000 face
amount and a 6% annual coupon rate paid annually on December 31. The bonds were
issued at $36,021 when the market rate of interest was 10%. Complete the amortization
table for the bonds using the effective interest method. Round all amounts to the nearest
dollar.
Date
Cash
Interest Expense
Amortization
Carrying Value
1/1/17
12/31/17
12/31/18
12/31/19
4. On January 1, a 5-year, $5,000 non-interest-bearing note payable was issued when the
market rate of interest was 9%. What are the proceeds from this issue? Round your final
answer to the nearest dollar.
11–26 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
5. On January 1, a 5-year, $4,000 non-interest-bearing note payable was issued for $2,600
when the market rate of interest was 9%. What is the total interest expense that will be
recognized over the life of the note? Round your final answer to the nearest dollar.
6. On January 1, a 3-year, $10,000 non-interest-bearing note payable was issued for
$7,938 when the market rate of interest was 8%. Interest expense is recognized using
the effective interest method. Calculate the book value of the note a year after its
issuance. Round your final answer to the nearest dollar.
7. Samuels Corporation issued a $40,000, 3-year, non-interest-bearing note payable on
January 1, 2016. Reflecting a market rate of interest of 10%, Garrison received
$30,053. Calculate interest expense (to the nearest dollar) for 2016 and 2017.
8. On January 1, 2016, Pacific Corporation issued a 3-year, 8%, $5,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 10%. The bond was issued at $4,750.
Calculate the total interest expense over the 3-year life of the bond independent of the
particular accounting method used to recognize interest expense each year.
Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-27
9. On January 1, 2016, Mango Corporation issued a 3-year, 4%, $3,000 bond payable.
Beginning in 2017, interest is payable every year on January 1 over the life of the bond.
The market rate of interest on January 1, 2016 is 6%. What are the proceeds received
by Mercer from the issue of this bond on January 1, 2016?
LO 3 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FC: Measurement
10. On January 1, 2016, Sheena Corporation issued a 3-year, 7%, $4,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
bonds were issued at 104¼. Calculate the issue price.
11. On January 1, 2016, Enron Corporation issued a 4-year, 7%, $9,000 bond payable.
Beginning in 2017, interest is payable annually every January 1. The market rate of
interest at issuance is 9%. How much are the interest payments by Enron? Why is the
amount of interest expense different than the cash payments?
12. On January 1, 2016, Precision Corporation issued a 3-year, 7%, $2,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 10%. If Precision uses the effective interest
method, what is the book value of the bond payable on January 1, 2016?
11–28 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
13. On January 1, 2016, Edison Corporation issued a 4-year, 8%, $5,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 10%.
A. Calculate the contracted cash interest payments by Edison as specified by this bond.
B. Will the total interest expense over the life of the bond be less than or greater than
the total cash payments for interest? Explain.
14. On January 1, 2016, Lundell Corporation issued a 5-year, 4%, $2,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
bonds were issued at 105 3/4. How much cash did Lundell receive from issuing the
bonds on January 1, 2016?
15. On January 1, 2016 Frank Corporation issued a 3-year, 9%, $5,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 6% when the bonds were issued at 108.
Calculate the total interest expense over the 3-year life of the bond independent of the
particular accounting method used to recognize interest expense each year.
Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-29
16. On January 1, 2016, Field Corporation issued a 3-year, 9%, $5,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 6%. What is the impact of the debt/equity
ratio as a result of the issuance?
17. On December 31, 2016, Creative Corporation issued a 3-year, 9%, $1,000 bond
payable. Beginning in 2017, interest is payable every January 1 over the life of the bond.
The market rate of interest on December 31, 2016 is 5%. If Creative uses the effective
interest method, show how the bonds will appear on Creative’s balance sheet at
December 31, 2016.
18. On January 1, 2016, Luna Corporation issued a 5-year, 7%, $5,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 7%. Luna uses the effective interest
method. Calculate the balance sheet value of the bond payable on January 1, 2017.
11–30 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
19. On January 1, 2016, Richardson Company leased equipment under a 3-year lease with
payments of $8,000 on January 1, 2017, 2018, and 2019. The present value of the lease
payments at a discount rate of 7% is $20,992. RIchardson uses straight-line depreciation
with no salvage value. The lease is considered a capital lease. Calculate depreciation
expense and interest expense for 2016.
20. On January 1, 2017, Foster Corporation issued a 2-year, non-interest-bearing, $4,000
note payable. Interest is payable each December 31 during the life of the note. When the
note was issued, the market rate of interest was 6%. Complete the following
amortization schedule:
Date
Interest Expense
Cash Payment
Balance Sheet Value
1/1/17
12/31/17
12/31/18
Date
Interest Expense
Cash Payment
Balance Sheet Value
Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases 11-31
21. On January 1, 2016, Parker Company leased equipment under a 3-year lease with
payments of $5,000 on each December 31 of the lease term. The present value of the
lease payments at a discount rate of 12% is $12,010. If the lease is considered a capital
lease, depreciation expense (straight-line) and interest expense are recognized. If the
lease is considered an operating lease, then rent expense is recognized. What is the
difference in the total combined net incomes of 2016, 2017, and 2018, if the lease is
considered a capital lease instead of an operating lease?
Solution:
22. On January 1, 2016, Action Corporation issued a two-year, 5%, $1,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on January 1, 2016 is 3%. Calculate the present value of the bond
issued by Action on January 1, 2016.
23. On January 1, 2016, Alcon Corporation issued a 5-year, 10%, $10,000 bond payable.
Beginning in 2017, interest is payable every January 1 over the life of the bond. The
market rate of interest on the issue date is 10%. Calculate the interest expense for 2017
using the effective interest method.
11–32 Test Bank – Chapter 11 – Long-Term Liabilities: Notes, Bonds, and Leases
24. On January 1, 2016, Mega Company leased equipment under a 5-year lease with
payments of $7,000 on each December 31 of the lease term. The present value of the
lease payments at a discount rate of 9% is $27,230. The lease is considered a capital
lease.
A. Determine the amount of the leased asset and lease obligation on January 1, 2016.
B. Why are some leases accounted for as purchases by the lessee?
25. On January 1, 2016, Seaside Company leased equipment under a 5-year lease with
payments of $3,000 on each December 31 of the lease term. The present value of the
lease payments at a discount rate of 7% is $12,300. The lease is considered a capital
lease. Calculate depreciation expense (straight-line with no salvage) and interest
expense for 2016.