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Accounting Study Guide: journal entries, balance sheets, using bonds as long-term financing, annual net cash cost of a bond, secured bonds and more...

81. Santo Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 30,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?
a. Subscriptions Receivable 450,000
Subscription Revenue 450,000
b. Cash 450,000
Unearned Subscription Revenue 450,000
c. Subscriptions Receivable 75,000
Unearned Subscription Revenue 75,000
d. Prepaid Subscriptions 450,000
Cash 450,000

82. Baldwin Company issued a five-year interest-bearing note payable for $50,000 on January 1, 2003. Each January the company is required to pay $10,000 on the note. How will this note be reported on the December 31, 2004 balance sheet?
a. Long-term debt, $50,000.
b. Long-term debt, $40,000.
c. Long-term debt, $30,000; Long-term debt due within one year, $10,000.
d. Long-term debt of $40,000; Long-term debt due within one year, $10,000.

83. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
a. bond interest is deductible for tax purposes.
b. interest must be paid on a periodic basis regardless of earnings.
c. income to stockholders may increase as a result of trading on the equity.
d. the bondholders do not have voting rights.

84. If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
a. $2,000,000.
b. $60,000.
c. $200,000.
d. $140,000.

85. Secured bonds are bonds that
a. are in the possession of a bank.
b. are registered in the name of the owner.
c. have specific assets of the issuer pledged as collateral.
d. have detachable interest coupons.

86. A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called
a. a bond indenture.
b. a bond debenture.
c. trading on the equity.
d. a term bond.

87. Stockholders of a company may be reluctant to finance expansion through issuing more equity because
a. leveraging with debt is always a better idea.
b. their earnings per share may decrease.
c. the price of the stock will automatically decrease.
d. dividends must be paid on a periodic basis.

88. Which of the following is not an advantage of issuing bonds instead of common stock?
a. Stockholder control is not affected.
b. Earnings per share on common stock may be lower.
c. Income to common shareholders may increase.
d. Tax savings result.

89. Bonds that are secured by real estate are termed
a. mortgage bonds.
b. serial bonds.
c. debentures.
d. bearer bonds.

90. Bonds that mature at a single specified future date are called
a. coupon bonds.
b. term bonds.
c. serial bonds.
d. debentures.

91. Bonds that may be exchanged for common stock at the option of the bondholders are called
a. options.
b. stock bonds.
c. convertible bonds.
d. callable bonds.

92. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called
a. callable bonds.
b. early retirement bonds.
c. options.
d. debentures.

93. Investors who receive checks in their names for interest earned on bonds must hold
a. registered bonds.
b. coupon bonds.
c. bearer bonds.
d. direct bonds.

94. A bondholder that sends in a coupon to receive interest payments must have a(n)
a. unsecured bond.
b. bearer bond.
c. mortgage bond.
d. serial bond.

95. Bonds that may be directly transferred to another party by delivery are
a. coupon bonds.
b. debentures.
c. registered bonds.
d. transportable bonds.

96. Bonds that must be canceled and reissued as new bonds in order to have ownership interest transferred are
a. coupon bonds.
b. bearer bonds.
c. serial bonds.
d. registered bonds.

97. Corporations are granted the power to issue bonds through
a. tax laws.
b. state laws.
c. federal security laws.
d. bond debentures.

98. The party who has the right to exercise a call option on bonds is the
a. investment banker.
b. bondholder.
c. bearer.
d. issuer.

99. Bonds cannot always be categorized as
a. callable or convertible.
b. term or serial.
c. registered or bearer.
d. secured or unsecured.

100. Which of the following statements concerning bonds is not a true statement?
a. Bonds are generally sold through an investment company.
b. The bond indenture is prepared after the bonds are printed.
c. The bond indenture and bond certificate are separate documents.
d. The trustee keeps records of each bondholder.

Exercises
Ex. 144
On March 1, Henson Company borrows $90,000 from Lyon State Bank by signing a 6-month, 10%, interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Henson Company.
(a) Prepare the entry on March 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.

Ex. 151
On January 1, 2003, Leary Corporation issued $800,000, 9%, 5-year bonds dated January 1, 2003, at 96. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end.
Instructions
Prepare all the journal entries that Leary Corporation would make related to this bond issue through January 1, 2004. Be sure to indicate the date on which the entries would be made.

Ex. 160
Dwyer Corporation issues a $500,000, 12%, 20-year mortgage note payable on December 31, 2003, to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $33,231 on June 30 and December 31.
Instructions
(a) Prepare the journal entries to record the mortgage loan on December 31, 2003, and the first installment payment.
(b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment?

Solution Preview

81. Santo Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 30,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?
Answer: d. Prepaid Subscriptions 450,000
Cash 450,000

82. Baldwin Company issued a five-year interest-bearing note payable for $50,000 on January 1, 2003. Each January the company is required to pay $10,000 on the note. How will this note be reported on the December 31, 2004 balance sheet?
Answer: d. Long-term debt of $40,000; Long-term debt due within one year, $10,000.

83. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
Answer: b. interest must be paid on a periodic basis regardless of earnings.

84. If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
Answer: b. $60,000.
($2,000,000 x 10% x 30% = $60,000)

85. Secured bonds are bonds that
Answer: c. have specific assets of the issuer pledged as collateral.
86. A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is ...

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