Session:13 Long-Term Liabilities
Answer Key
Principles of Accounting, Volume 1: Financial Accounting | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-financial-accounting
Questions
1. Callable bonds can be bought back by the issuing company whenever they want to, but putable bonds can be cashed in by the holder whenever the holder wants to.
3. A junk bond is typically titled as a high-yield bond; it sounds less unfavorable than junk. Its rating is below what is typically expected for investment-grade bonds. Investors and speculators might buy these bonds because if they don’t default, the rate of return could be significantly higher than investment grade bonds. However, the possibility of the bonds defaulting and neither paying the interest nor principle at maturity is higher than with investment-grade bonds.
5. In bond pricing problems, if the interest compounds more than one a year, divide the interest rate by the number of compounding periods per year, and multiply the number of years by the number of compounding periods per year. If it is paid quarterly, divide the interest rate by 4 and multiply the number of years by 4.
7. It is the difference between the cash interest payment and the interest on the carrying value.
9. The Discount on Bonds Payable is a contra liability account and reduces the associated liability. The Premium on Bonds Payable is a liability account and increases the associated liability.
11. DR Interest Expense and CR Cash
13. Bondholders receive the stated rate times the principle, so they would receive $6,000.
15. Amortizing a bond premium reduces interest expense.