Question : 81. Plantation RestaurantOn January 1, Year 7, Plantation Restaurant planning to : 1230295

 

 

81. Plantation Restaurant

On January 1, Year 7, Plantation Restaurant is planning to enter as the lessee into the two lease agreements described below. Each lease is noncancelable, and Plantation does not receive title to either leased property during or at the end of the lease term. All payments required under these agreements are due on January 1 each year.
 

Lessor

Hadaway Inc.

Cutter Electronics

Type of property

Oven

Computer

Yearly rental (not including executory costs)

$15,000

$4,000

Lease term

10 years

3 years

Economic life

15 years

5 years

Purchase option

None

$3,000

Renewal option

None

None

Fair market value at inception of lease

$125,000

$10,200

Unguaranteed residual value

None

$2,000

Lessee’s incremental borrowing rate

10%

10%

Executory costs paid by

Lessee

Lessor

Annual executory costs

$800

$500

Present value factor at 10% (of an annuity due)

6.76

2.74

 

 

 

(CMA adapted, Dec 93 #28) Refer to the Plantation Restaurant example. Plantation Restaurant should treat the lease agreement with Cutter Electronics as a(n) 
A. operating lease, charging $3,400 in rental expense and $500 in executory costs to annual operations
B. operating lease, charging $4,000 in rental expense and $500 in executory costs to annual operations
C. operating lease, charging $3,500 in rental expense and $500 in executory costs to annual operations
D. capital lease
E. operating lease, charging $3,500 in rental expense and $400 in executory costs to annual operations

 

82. On January 1, Year 4, David Realty Company issued 8 percent term bonds with a face amount of $1 million due January 1, Year 14. Interest is payable semi-annually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest rate of 6 percent. Assume the bonds were issued on January 1, Year 4. for $1,148,959. Using the effective interest amortization method, David Realty Company recorded interest expense for the six months ended June 30, Year 4, in the amount of 
A. $40,000
B. $80,000
C. $68,938
D. $34,469
E. none of the above

 

83. On January 1, Year 4, David Realty Company issued 8 percent term bonds with a face amount of $1 million due January 1, Year 14. Interest is payable semi-annually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest rate of 6 percent. Assume the bonds were issued on January 1, Year 4. for $1,148,959. The bonds were issued on January 1, Year 4, at 
A. a premium
B. an amortized value
C. a discount
D. face value
E. par value

 

84. On February 1, Year 1, BMI issues $100,000 semi-annual 12% bonds at par plus accrued interest. The interest is payable on July 1 and January 1 of each year. What entry is necessary to record the issuance of the bonds on February 1? 
A. Cash                  100,000
      Bonds Payable        100,000
B. Cash                 101,000
      Bonds Payable        101,000
C. Cash                100,000
Interest Payable         1,000
      Bonds Payable        101,000
D. Cash                101,000
Bonds Payable        100,000
       Interest Payable          1,000
E. none of the above

 

85. In Year 7, Band Manufacturing issued $100,000 semi-annual 12% bonds at par. Interest is payable on July 1 and January 1. What entry is necessary at December 31, Year 9? 
A. Interest Expense    6,000
      Cash                           6,000
B. Interest Expense    6,000
      Bonds Payable            6,000
C. Interest Expense    6,000
      Interest Payable          6,000
D. Interest Expense   12,000
      Interest Payable         12,000
E. Cash                     6,000
      Interest Payable           6,000

 

86. Bonds whose indentures contain a provision which gives the issuing company the option to retire portions of the bond issue before maturity if it so desires, but the provision does not require the company to do so are called _____ bonds. 
A. callable
B. refunded
C. sinking fund
D. serial
E. convertible

 

87. Bonds are issued at greater than par value when 
A. the bonds are risk free
B. the market interest rate is less than the stated interest rate on the bond
C. the market rate of interest is declining
D. the market interest rate is greater than the stated interest rate on the bond
E. the market interest rate equals the stated interest rate on the bond

 

88. Drum Co., Inc.

On January 1, Year 1, Drum Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1 and July 1. Use the present value tables.

Refer to the Drum Co. Inc. example. What is the bonds payable account (net of any bond discount or premium) at the end of Year 2? 
A. $104,374
B. $100,000
C. $89,894
D. $85,519
E. $83,519

 

89. Drum Co., Inc.

On January 1, Year 1, Drum Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1 and July 1. Use the present value tables.

Refer to the Drum Co., Inc. example. How much are the initial issue proceeds? 
A. $32,197
B. $88,530
C. $100,000
D. $112,462
E. $102,462

 

90. When the market interest rate exceeds the coupon rate; the market price of the bond  
A. will be more than par
B. will be less than par
C. will be equal to par
D. is not affected
E. none of the above

 

 

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