Chapter 12

Question 1

A liability that does not need to be
paid within one year or within the
entity’s operating cycle, whichever
is longer

Answer 1

Long-term liability

Question 2

A schedule that details each loan
payment’s allocation between
principal and interest and the
beginning and ending loan balances.

Answer 2

amortization

Question 3

Long-term debts that are backed
with a security interest in specific
property

Answer 3

Mortgages payable

Question 4

Formula for calculating interest on payments

Answer 4

Beginning balance x interest rate x time

Question 5

What’s the difference in a long term notes payable amortization schedule and a mortgage schedule

Answer 5

Long term notes payable have a stable principle payment and varying interest which means the total payment changes. Mortgages principal and interest payments change so the total payment stays the same.

Question 6

A long-term debt issued to multiple lenders called bondholders, usually in increments of $1000 per bond

Answer 6

Bonds Payable

Question 7

The amount a borrower must pay
back to the bondholders on the
maturity date.

Answer 7

Face value

Question 8

The interest rate that determines
the amount of cash interest the
borrower pays and the investor
receives each year

Answer 8

Stated interest rate

Question 9

Bonds that all mature at the same
time.

Answer 9

Term Bonds

Question 10

Bonds that mature in installments at
regular intervals.

Answer 10

Serial Bonds

Question 11

Bonds that give bondholders the
right to take specified assets of
the issuer if the issuer fails to pay
principal or interest.

Answer 11

Secured Bonds

Question 12

Unsecured bonds backed only by
the creditworthiness of the bond
issuer

Answer 12

Debentures

Question 13

Occurs when a bond’s issue price is
less than face value

Answer 13

Discount on bonds payable

Question 14

Occurs when a bond’s issue price is
more than face value.

Answer 14

Premium on Bonds Payable

Question 15

Recognition that money earns
interest over time.

Answer 15

Time Value of Money

Question 16

The value of an investment today.

Answer 16

Present value

Question 17

The value of an investment at the
end of a specific time frame.

Answer 17

Future value

Question 18

The interest rate that investors
demand in order to loan their
money

Answer 18

Market Interest Rate

Question 19

Occurs when a company earns
more income on borrowed money
than the related interest expense.

Answer 19

Financial leverage

Question 20

A bond payable minus the discount
account current balance or plus the
premium account current balance.

Answer 20

Carrying Amount of Bonds

Question 21

An account that is directly related to
another account. Adjunct accounts
have the same normal balance as
the related account and are added
to the related account.

Answer 21

Adjunct account

Question 22

Bonds that the issuer may call
and pay off at a specified price
whenever the issuer wants.

Answer 22

callable

Question 23

A ratio that measures the
proportion of total liabilities
relative to total equity.
Total liabilities/Total equity

Answer 23

Debt to equity ratio

Question 24

What are the 5 steps to retiring bonds before maturity

Answer 24

1. Record partial-period amortization of discount or premium and partial-period interest payment if the retirement date does not fall on an interest payment date
2. Remove the portion of unamortized discount or premium that relates to the bonds being retired
3. Debit bonds payable at face value
4. Credit a gain or debit a loss on retirement
5. Credit cash for amount paid to retire the bonds

Question 25

A stream of equal cash payments
made at equal time intervals

Answer 25

Annuity

Question 26

Interest calculated only on the
principal amount

Answer 26

Simple interest

Question 27

Interest calculated on the principal
and on all previously earned
interest.

Answer 27

Compound interest

Question 28

An amortization model that
calculates interest expense based
on the current carrying amount of
the bond and the market interest
rate at issuance, and then amortizes
the difference between the cash
interest payment and calculated
interest expense as a decrease to
the discount or premium

Answer 28

effective-interest amortization method