Chapter 12
Long-Term Liabilities
Review Questions
1. Where is the current portion of notes payable reported on the balance sheet?
The current portion of notes payable is reported in the current liability section of the balance
sheet.
2. What is an amortization schedule?
3. What is a mortgage payable?
4. What is a bond payable?
5. What is the difference between the stated interest rate and the market interest rate?
The stated interest rate is the interest rate that determines the amount of cash interest the
6. When does a discount on bonds payable occur?
7. When does a premium on bonds payable occur?
A premium on bonds payable occurs when a bond’s issue price is greater than the face value.
This occurs because the stated rate of interest exceeds the market rate of interest.
8. When a bond is issued, what is its present value?
9. Why would a company choose to issue bonds instead of issuing stock?
A company may issue bonds instead of stock because the interest on the bonds is tax
10. What is the carrying amount of a bond?
11. In regard to a bond discount or premium, what is the straight-line amortization method?
The straight-line amortization method allocates an equal amount of bond discount or
12. What type of account is Discount on Bonds Payable? What is its normal balance? Is it added
to or subtracted from the Bonds Payable account to determine the carrying amount?
Discount on Bonds Payable is a contra account to Bonds Payable. The normal balance of the
13. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added
to or subtracted from the Bonds Payable account to determine the carrying amount?
Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of
14. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added
to or subtracted from the Bonds Payable account to determine the carrying amount?
Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of
15. What is the journal entry to retire bonds at maturity?
16. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added
to or subtracted from the Bonds Payable account to determine the carrying amount?
Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of
17. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added
to or subtracted from the Bonds Payable account to determine the carrying amount?
18. What is the journal entry to retire bonds at maturity?
The journal entry to retire bonds at maturity is a debit to Bonds Payable and a credit to Cash.
19. What does it mean when a company calls a bond?
20. What are the two categories of liabilities reported on the balance sheet? Provide examples of
each.
The two categories of liabilities reported on the balance sheet are current and long-term.
21. What does the debt to equity ratio show, and how is it calculated?
The debt to equity ratio shows the relationship between total liabilities and total equity. It is
18A. Explain each of the key factors that the time value of money depends on.
The time value of money depends on these key factors:
19A. What is an annuity?
An annuity is a stream of equal cash payments made at equal time intervals.
20A. How does compound interest differ from simple interest?
21B. In regard to a bond discount or premium, what is the effective-interest amortization
method?
The effective-interest amortization method calculates interest expense based on the current
carrying amount of the bond and the market interest rate at issuance, then amortizes the
Short Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
S12-1 Accounting for a long-term note payable
Learning Objective 1
On January 1, 2018, Lakeman-Fay signed a $1,500,000, 15-year, 7% note. The loan required
Lakeman-Fay to make annual payments on December 31 of $100,000 principal plus interest.
Requirements
1. Journalize the issuance of the note on January 1, 2018.
2. Journalize the first note payment on December 31, 2018.
SOLUTION
Requirement 1
S12-2 Accounting for mortgages payable
Learning Objective 1
Ember Company purchased a building with a market value of $280,000 and land with a market
value of $55,000 on January 1, 2018. Ember Company paid $15,000 cash and signed a 25-year,
12% mortgage payable for the balance.
Requirements
1. Journalize the January 1, 2018, purchase.
2. Journalize the first monthly payment of $3,370 on January 31, 2018. (Round to the nearest
dollar.)
S12-2, cont.
SOLUTION
Requirement 1
S12-3 Determining bond prices
Learning Objective 2
Bond prices depend on the market rate of interest, stated rate of interest, and time. Determine
whether the following bonds payable will be issued at face value, at a premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At issuance,
the market interest rate was 10.25%.
SOLUTION
S12-4 Pricing bonds
Learning Objective 2
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Requirements
1. Compute the price of the following 8% bonds of Country Telecom.
a. $100,000 issued at 75.25
b. $100,000 issued at 103.50
c. $100,000 issued at 94.50
d. $100,000 issued at 103.25
2. Which bond will Country Telecom have to pay the most to retire at maturity? Explain your
answer.
SOLUTION
Requirement 1
S12-5 Determining bond amounts
Learning Objective 3
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable at 99.5. Interest is
paid semiannually.
Requirements
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
SOLUTION
Requirement 1
S12-6 Journalizing bond transactions
Learning Objective 3
Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on January 1, 2018.
Interest is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest on July 1, 2018.
SOLUTION
S12-7 Journalizing bond transactions
Learning Objective 3
Owen Company issued a $110,000, 11%, 10-year bond payable at 94 on January 1, 2018. Interest
is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest and amortization of the bond discount or
premium on July 1, 2018.
SOLUTION
Requirement 1
S12-8 Journalizing bond transactions
Learning Objective 3
Wilkes Mutual Insurance Company issued a $100,000, 5%, 10-year bond payable at 111 on
January 1, 2018. Interest is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest and amortization of the bond discount or
premium on July 1, 2018.
SOLUTION
S12-9 Journalizing bond transactions including retirement at maturity
Learning Objectives 3, 4
McQueen Company issued a $100,000, 7.5%, 10-year bond payable. Journalize the following
transactions for McQueen Company, and include an explanation for each entry:
a. Issuance of the bond payable at face value on January 1, 2018.
b. Payment of semiannual cash interest on July 1, 2018.
c. Payment of the bond payable at maturity, assuming the last interest payment had already been
recorded. (Give the date.)
SOLUTION