Chapter 9—Long-Term Liabilities Key
1. Long-term debt generally refers to obligations that extend beyond one year.
2. Bonds are generally issued in denominations of $1,000.
3. Mortgage bonds are secure bonds.
4. Debenture bonds are backed by specific collateral of the issuing company.
5. Convertible bonds normally allow bondholders to convert the bond into another security.
6. If a bondholder has the right to retire the bonds, they are referred to as callable.
7. Callable bonds may be retired by the issuer before their specified due date.
8. The relative cost of issuing debt (interest payments) is often lower than the cost of issuing equity.
9. The contract rate is also called the coupon or stated rate.
10. When the yield rate of interest is greater than the stated rate, then the bond will be issued at a discount.
11. When a bond is issued at a discount, the amortization of the bond interest increases each year using the
straight line method.
12. The effective interest rate method will record amortization of a bond discount or premium in a manner that
produces a constant rate of interest expense from period to period.
13. The amortization of a bond premium increases the effective interest expense incurred each period for the
issuer.
14. In an operating lease, the lessor retains the risks and obligations of ownership.
15. A lease is accounted for as an operating lease if the present value of the lease payments is at least 90 percent
of the fair value of the leased property.
16. The debt-to-equity ratio is defined as total liabilities divided by total stockholders’ equity.
17. The interest rate used to calculate interest expense in the effective interest method of amortization is equal
18. A bond issue price is the present value of the cash flows that the bond will produce.
19. The market value of a bond is determined by calculating its present value, which is based on the face
amount, the number of periods, and the market rate of interest.
20. A significant disadvantage of financing with debt rather than stock is the fact that the interest expense on
debt is not tax-deductible.
21. A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to
the lender.
22. In periods of inflation, debt financing is preferable to equity financing because the company is able to repay
23. When evaluating a company’s solvency, an investor’s major concern is whether all debt has been properly
recorded.
24. Obligations that extend beyond one year are referred to as ____________________.
25. The amount of money the borrower agrees to repay at maturity is usually referred to as the
____________________.
26. ____________________ bonds may be retired by the issuing company before their specified due date.
27. If the yield rate of interest is greater then the stated rate, then the bonds are issued at a
____________________.
28. The ____________________ rate of interest is a function of economic factors and the creditworthiness of
the borrower.
29. The bond’s ____________________ price is typically quoted as a percentage of the face value of the bond.
30. Bonds are issued at a ____________________ when the issue price exceeds the face value.
31. Discount on Bonds Payable is shown on the balance sheet as a ____________________.
32. ____________________ is the amortization method of transferring the same amount from the bond
discount or premium each time period to adjust interest expense.
33. A bond’s ____________________ is computed by taking the bond’s face value, then either subtracting any
unamortized discount or adding any unamortized premium.
34. The effective interest method amortizes premium or discount in a manner that produces a
____________________ rate of interest from period to period.
35. Under the effective interest method of amortization, the interest expense for each period is the carrying
value times the ____________________.
36. When each payment reduces the outstanding loan balance, which, in turn, reduces the interest expense in the
subsequent period, it is call an ____________________ debt.
37. An advantage of financing with debt rather than stock is that interest expense is ____________________ for
tax purposes.
38. A(n) ____________________ lease is recorded on the lessee’s balance sheet as an asset and related
liability.
39. Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the
____________________.
40. 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 ____________________.
41. The times interest earned ratio divides __________________________ by interest expense.
42. The two promises made by a bond issuer to the purchaser of the bond are to pay periodic interest and to
___________________.
43. Long-term debt generally includes:
44. Which of the following would describe a callable bond?
45. A convertible bond is one where
46. A company issued $10,000,000 of bonds. Assuming the most common denomination of bonds, the number
of bonds sold was
47. Which of the following statements regarding bonds payable is true?
48. Bonds sell at a premium when the
49. Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a
stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be
issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is
paid annually on December 31, how much will the company receive from the sale of the bonds?
50. If a company’s bonds are callable,
51. Convertible bonds are attractive to bondholders because
52. When will bonds sell at a discount?
53. Bonds are a popular source of financing because
54. A company issued 10-year, 9%, $1,000,000 bonds paying interest on an annual basis, at a premium. Which
one of the following statements is true?
55. Which of the following terms does not describe the interest rate printed on the bond certificate?
56. When bonds are issued by a company, the accounting entry shows an
57. When bonds are sold for less than the par amount, this means that the
58. The Discount on Bonds Payable account is shown on the balance sheet as
59. The Premium on Bonds Payable account is shown on the balance sheet as
60. A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If
the interest is paid semiannually and the bonds are due in 10 years, what would be the total amount of interest
paid over the life of the bonds?
61. When determining the amount of interest to be paid on a bond, which of the following information is
necessary?
62. On January 1, 2013, Kaiser Permanente issued $2,000,000 of 8% bonds at par. These bonds are due in 10
years with interest payable semi-annually on June 30 and December 31. What is the amount of the interest
expense in 2013 assuming the use of the effective interest amortization method?
63. On January 2, 2013, Kangaroo Convenience Stores issued 10-year, $5,000,000, zero-coupon bonds at 75.
What is the amount of interest expense recorded in 2013 using the straight line amortization method?
64. A corporation issued $150,000 of 10-year bonds at the stated rate of 8%, with interest payable semiannually.
How much cash will the bond investors receive at the end of the first interest period?
65. If bonds were initially issued at a discount, the carrying value of the bonds on the issuer’s books will
66. Which of the following statements regarding amortization is true?
67. On the issuance date, the Bonds Payable account has a balance of $55,000,000 and Premium on Bonds
Payable has a balance of $5,000,000. These bonds issued at
68. Under the effective interest method, the cash paid on each interest payment date will
69. Which of the following statements about bond accounting under the effective interest method is correct?
70. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective
interest method will
71. Kalahari Limited
On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on
June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the
effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. The interest expense on the bonds at June 30, 2013 is
72. Kalahari Limited
On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on
June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the
effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. The semiannual cash payment on the bonds is
73. Kalahari Limited
On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on
June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the
effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. What is the carrying value of the bonds after the first interest payment is made on
June 30, 2013?
74. Kalahari Limited
On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on
June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the
effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. What is the carrying value of the bonds at the end of ten years before the final
maturity payment is made?
75. Kalahari Limited
On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on
June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the
effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. At the maturity date, besides an interest payment, the company would repay the
bondholders
76. Kaleidoscope Paint
On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on
June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of
amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. The interest expense on the bonds at June 30, 2013, is
77. Kaleidoscope Paint
On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on
June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of
amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. What is the carrying value of the bonds after the first interest payment is made on
June 30, 2013?
78. Kaleidoscope Paint
On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on
June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of
amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. The cash payment on June 30, 2013, is
79. Kaleidoscope Paint
On January 1, 2013, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on
June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of
amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. What is the carrying value of the bonds on the maturity date?
80. On January 01, 2013, Kale Farms purchased a tractor for $20,000. The company signed a 6% installment
note to pay off the debt with 48 monthly payments over four years. Each payment is $469.70. How much
interest must be paid over the life of the loan?
81. A company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the
financial press are likely to report the bond issue price as:
82. A bond issuing at 101.25 means that the bond
83. With the Effective Interest Method of Amortization, the amortization of a bond discount results in a(n)
84. With the Effective Interest Method of Amortization, the amortization of a bond premium results in a(n)
85. On January 2, 2012, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10
years and pay interest annually on December 31. The company properly recorded the payment of interest and
amortization of the discount using the effective interest method. Which of the following statements is true about
the carrying value of the bonds and/or the unamortized discount at the end of 2012?
86. The Kaplan Group sold $200,000 of 10-year bonds for $190,000. The face rate on the bonds was 8% and
interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid?
(Numbers are omitted.)
87. In 2013, Karaoke Tunes issued $200,000 of bonds for $190,200. If the stated rate of interest was 6.5% and
the market rate of interest was 7.1%, how would the company calculate the discount at the time the bonds were
issued using the effective interest method?
88. Kid Karate issued $100,000 of 6%, 10 year bonds when the market rate of interest was 5%. The proceeds
from this bond issue were $107,000. Using the effective interest method of amortization, which of the following
statements is true? Assume interest is paid annually.
89. The result of using the effective interest method of amortization for bond discounts is that the
90. A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year. What is
the company’s net cash outflow if the effective tax rate is 40%?
91. Which of the following lease conditions would result in a capital lease to the lessee?
92. Which of the following statements regarding leases is false?
93. Karuna Consulting leased a building on January 2, 2013. The lease qualifies as an operating lease. The
annual payments are $25,000 at the beginning of each year, and the life of the lease is 10 years. What entry
would the company make on January 2, 2013?
94. Kauffman Tire Repair leased a machine that will enable it to repair tires found on monster vehicles. The
annual payments are $9,000 and the life of the lease is 7 years. It is estimated that the useful life of the machine
is 8 years. How would the company record the acquisition of the machine?
95. Which of the following accounts would not appear on the balance sheet of a lessee company recording a
capital lease?
96. Kay Animal Hospital leased a building to expand its services downtown. The 10-year lease is recorded as a
capital lease. The annual payments are $10,000 and the recorded cost of the asset is $67,100. The straight-line
method is used to calculate depreciation. Which of the following statements is true?
97. A capital lease liability would appear on the balance sheet as:
98. One way analysts measure the ability of a company to meet its obligations is to calculate the times interest
earned ratio for any outstanding debt the company may have. How would a company with $100,000 of
outstanding bonds paying 8.5% annually and income before interest and taxes of $50,000, calculate the interest
coverage (accrual basis) ratio?
99. Keystone Corporation’s balance sheet showed the following liability and stockholders’ equity amounts:
Current Liabilities, $100,000; Bonds Payable, $150,000; Capital Lease Obligations, $20,000; Deferred Income
Tax Liability, $5,000; and total stockholders’ equity, $500,000. The debt-to-equity ratio is
100. A company’s balance sheet showed the following amounts for liabilities and stockholders’ equity accounts:
Current Liabilities, $50,000; Bonds Payable, $600,000; Capital Lease Obligations, $120,000; and Deferred
Income Tax Liability, $20,000. Total stockholders’ equity was $520,000. What is the debt-to-equity ratio?
101. When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer trucks. The annual
payments are $1,000,000 and the life of the lease is 8 years. It is estimated that the useful life of the trucks is 10
years. The present value interest factors for 9% are provided below:
n PV($1) PV(annuity)
8 0.502 5.535
9 0.460 5.995
10 0.422 6.418
The company should record the acquisition of the trucks (rounded to nearest thousand) as an asset with a cost
of:
102. A company wishes to issue $600,000 of 10-year, 6.8% bonds, with interest paid annually at the end of the
year. The market rate of interest is currently 5%. What information is needed in order to determine the selling
price?
103. The bond issue price is determined by calculating the
104. A company with operating income of $200,000, cash flow from operating activities of $75,000 and gross
profit of $380,000, has interest payments of $25,000. What is the company’s Interest Coverage Ratio (Cash
Basis)?
105. Current assets are $200,000, long term assets are $300,000, current liabilities are $100,000, long-term
liabilities are $200,000, paid-in capital is $150,000, and retained earnings total $50,000. What is the debt-to–
total-assets ratio?
106. A twenty-year lease obligation would appear on the balance sheet as
107. Rent owed to the lessor under an operating lease would appear on the balance sheet as:
108. A Discount on Bonds Payable account would appear on the balance sheet as:
109. A capital leased asset would appear on the balance sheet as:
110. A Premium on Bonds Payable account would appear on the balance sheet as:
111. The current portion of long-term debt would appear on the balance sheet as:
112. Keller Company issued $1,000,000, 8%, 7 year bonds with interest payable semiannually when the yield
rate was 8%. The bonds issued at