Question 1

On January 1,Melrose Manufacturing issues a 5-year bond with a face value of $15,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $16,299.Using the effective-interest method of amortization and rounding to the nearest dollar,the interest expense for the first year ended December 31 would be:
A)$750.
B)$814.95.
C)$1,050.
D)$1,140.93.

Accepted Answer

Interest expense = Carrying value of bonds × Market interest rate
= $16,299 × 0.05 = $814.95

Question 2

A company issued 10-year,7% bonds with a face value of $100,000.The company received $97,947 for the bonds.Using the straight-line method of amortization,the amount of interest expense for the first annual interest period is:
A)$7,000.00
B)$7,205.30
C)$6,794.70
D)$2,053.00

Accepted Answer

Discount on bonds payable = Face value − Issue price
= $100,000 − $97,947 = $2,053
Straight-line amortization = Discount ÷ Number of years
= $2,053 ÷ 10 = $205.30 per year
Interest payment = Face value × Stated interest rate × Time
= $100,000 × 0.07 = $7,000
Interest expense = Interest Payment + Amortization of discount
= $7,000 + $205.30 = $7,205.30

Question 3

A 10-year bond that pays interest annually was issued at a $5,000 premium.The entry to record the payment of interest using straight-line amortization will include a ________ to Premium on Bonds Payable for ________ each period.
A)credit;$500
B)debit;$500
C)debit;a greater amount each period
D)credit;a lower amount each period

Accepted Answer

Straight-line amortization = Premium ÷ Number of years
= $5,000 ÷ 10 years = $500 per year
The entry includes a debit to Interest Expense (for the interest payment amount minus the amortization),a debit to Premium on Bonds Payable for $500,and a credit to Cash (for the par value times the stated interest rate).

Question 4

On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.Your company used the effective-interest method of amortization.At the end of the first year,your company should:
A)debit Interest Expense for $543.30,debit Premium on Bonds Payable for $156.70,and credit Interest Payable for $700.
B)debit Interest Expense for $700,credit Premium on Bonds Payable for $156.70,and credit Interest Payable for $543.30.
C)debit Interest Expense for $700,debit Premium on Bonds Payable for $156.70,and credit Interest Payable for $543.30.
D)debit Interest Expense for $543.30 and credit Interest Payable for $543.30.

Accepted Answer

Interest expense = Carrying value × Market interest rate
= $10,866 × 0.05 = $543.30
Interest Payment = Bonds Payable × Stated Interest Rate
= $10,000 × 0.07 = $700.00
Amortization of premium = Interest payment − Interest expense
= $700.00 − $543.30 = $156.70
The entry includes a debit to Interest Expense for $543.30,a debit to Premium on Bonds Payable for $156.70,and a credit to Cash for $700.

Question 5

A company issues a 5-year bond with a $7,500 discount.Using straight-line amortization,the company should:
A)debit Discount on Bonds Payable for $1,500 per year.
B)credit Discount on Bonds Payable for $1,500 per year.
C)debit Interest Payable for $1,500 per year.
D)credit Interest Expense for $1,500 per year.

Accepted Answer

Using straight-line amortization,the amount of the discount is evenly allocated over the bond's life.The Discount on Bonds Payable account is a contra-liability account and,as such,it normally has a debit balance.Each year,the company should credit Discount on Bonds Payable for $1,500 (or discount of $7,500 ÷ 5 years).

Question 6

Hubbard Street Dance Company sells subscriptions for its monthly dance performances.The company received annual subscription payments on November 15,2018 for performances that will take place during 2019 in the amount of $120,000.The subscription payments will be earned equally throughout each month.
Required:
Part a.Describe how the subscription payments should be reported in the balance sheet and income statement on December 31,2018
Part b.Describe how the subscription payments should be reported in the balance sheet and income statement on January 31,2019.
Part c.Prepare the journal entry for the receipt of annual subscription payments on November 15,2018.
Part d.Prepare the required adjusting entry for the subscription payments on January 31,2019.

Accepted Answer

The answer of Hubbard Street Dance Company sells subscriptions for...

Question 7

Hardtack Industries borrowed $336,000 from its bank in return for an installment note with 8% interest.Hardtack will make 6 annual payments of $72,682.At the end of the first period,Hardtack will report a note payable on its balance sheet of:
A)$336,000.
B)$263,318.
C)$290,198.
D)$240,732.

Accepted Answer

Interest expense: $336,000 × 8% = $26,880;Note payable balance: $336,000 − ($72,682 − $26,880)= $290,198.

Question 8

Which of the following statements about bonds payable net of a discount or premium is not correct?
A)If a company records a discount or premium with the bonds payable in a single account called Bonds Payable,Net,it is using simplified effective-interest amortization.
B)When bonds payable are accounted for net of a discount,the initial amount recorded in the Bonds Payable,Net account is the issue price of the bond.
C)When simplified effective-interest amortization is used for bonds issued at a premium,the balance in the Bonds Payable,Net account will increase as the bond approaches the maturity date.
D)If a company issued bonds at their face value,the balance of Bonds Payable,Net account will always be equal to the face value of the bonds as long as the bonds are outstanding.

Accepted Answer

When simplified effective-interest amortization is used,the issue price of the bond is initially credited to an account called Bonds Payable,Net.If the bonds are sold at a premium,the amount of Bonds Payable,Net,will decrease over the life of the bonds and will be equal to face value at the maturity date.If the bonds are sold at a discount,the Bonds Payable,Net account will increase over the life of the bonds.If the bonds are sold at face value,the balance in the Bonds Payable,Net account will not change over the life of the bonds.

Question 9

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Interest expense for the second period equals:
A)$17,667.
B)$9,600.
C)$8,291.36.
D)$25,958.

Accepted Answer

Interest expense (first period): $120,000 × 8% = $9,600;Interest expense (second period): $120,000 − ($25,958 − $9,600)= $103,642;$103,642 × 8% = $8,291.36.

Question 10

ABC Company received $9,631 for its 5-year,10% bonds with a total face value of $10,000.The market rate of interest was 11%.The bonds pay interest annually on December 31.How much interest expense will ABC Corporation record on the first annual interest payment date using the effective-interest method?
A)$1,059.41
B)$1,000
C)$1,100
D)$963.10

Accepted Answer

Interest expense = Carrying value × Market interest rate
= $9,631 × 0.11 = $1,059.41

Question 11

Which one of the following statements about amortization of discounts and premiums is not correct?
A)Under straight-line amortization,when a bond is sold at a premium,the annual premium amortization is the total premium divided by the number of years until bond maturity.
B)When a bond is sold at a discount,interest expense recorded using the effective-interest method is less than the interest paid on the bond.
C)The effective-interest method of amortization is considered to be conceptually superior to straight-line amortization.
D)When a bond discount is amortized using the effective-interest method,the promised interest payment is less than the interest expense,so the bond liability will increase as a result of the contra-liability account decreasing.

Accepted Answer

Straight-line amortization results in equal amounts of amortization each period,the effective-interest method is preferred to the straight-line method,and the bond liability does increase (by reducing the contra-liability)when a discount is amortized using the effective-interest method.The effective interest method of amortization allocates a discount based on the carrying value of the bonds,so a bond issued at a discount would result in a higher interest expense than the amount of interest paid.

Question 12

Using the simplified effective-interest amortization,interest expense is calculated as:
A)Bonds Payable,Net × Market Interest Rate × Time.
B)Bonds Payable,Net × Stated Interest Rate × Time.
C)Face Value × Stated Interest Rate × Time.
D)Face Value × Market Interest Rate × Time.

Accepted Answer

Using the simplified effective-interest amortization,interest expense is calculated as: Bonds Payable,Net × Market Interest Rate × Time.

Question 13

On January 1,Mallory Company issued $400,000 of 8%,5-year bonds when the market rate of interest was 6%.The bonds were issued for $433,698 and interest will be paid annually on December 31.How much premium amortization will Mallory record on the first interest payment date using the effective-interest method?
A)$0
B)$26,021.88
C)$32,000
D)$5,978.12

Accepted Answer

Interest expense = Carrying value × Market interest rate
= $433,698 × 0.06 = $26,021.88
Interest payment = Bonds payable × Stated interest rate
= $400,000 × 0.08 = $32,000
Amortization of premium = Interest payment − Interest expense
= $32,000 − $26,021.88 = $5,978.12

Question 14

When interest expense is calculated using the effective-interest amortization method,interest expense on a bond that pays interest annually is equal to the:
A)actual amount of interest paid.
B)carrying value of the bonds payable multiplied by the effective interest rate.
C)maturity value of the bonds payable multiplied by the effective interest rate.
D)carrying value of the bonds payable multiplied by the stated interest rate.

Accepted Answer

The effective-interest method of amortization applies a constant percentage,the effective interest rate,to the carrying value of bonds payable to calculate interest expense each year.

Question 15

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Interest expense for the first period equals:
A)$16,358.
B)$7,523.
C)$9,600.
D)$25,958.

Accepted Answer

$120,000 x 8% = $9,600.

Question 16

When the effective-interest method of amortization is used,what happens to interest expense as a bond moves toward maturity?
A)Interest expense falls for bonds sold at either a discount or a premium.
B)Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium.
C)Interest expense rises for bonds sold at either a discount or a premium.
D)Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.

Accepted Answer

Using the effective-interest method of amortization,bonds issued at a discount have an increasing carrying value as they approach maturity,whereas bonds issued at a premium have a decreasing carrying value.As a result,interest expense rises for bonds sold at a discount and falls for bonds sold at a premium as the bond moves toward maturity.

Question 17

Hermosa Vista Company issued $200,000 5-year,7% bonds and received $202,274 in cash.The market rate of interest when the bonds were issued was 6.5%.What is the amount of interest expense to be recorded for the first annual interest period if the company uses simplified effective-interest amortization?
A)$13,147.81
B)$14,000.00
C)$13,000.00
D)$14,159.18

Accepted Answer

Interest expense = Carrying value of bonds × Market interest rate
= $202,274 × 0.065 = $13,147.81

Question 18

A company sells a bond with a face value of $10,000 and receives a premium of $800.Using simplified effective-interest amortization,what journal entry is used to record the issuance of the bonds?
A)Debit Cash for $10,800 and credit Bonds Payable,Net for $10,800.
B)Debit Cash for $10,800,credit Bonds Payable,Net for $10,000,and credit Premium on Bond Payable for $800.
C)Debit Cash for $10,000,debit Interest Expense for $800,credit Bonds Payable,Net for $10,000,and credit Premium on Bonds Payable for $800.
D)Debit Cash for $10,000,debit Interest Expense for $800,credit Bonds Payable for $10,000,and credit Premium on Bonds Payable for $800.

Accepted Answer

When simplified effective-interest amortization is used,the proceeds from the issuance are recorded in the Cash and Bonds Payable,Net accounts.

Question 19

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Which of the following is correct regarding this note? A)There is a balloon payment of principal due to the lender at the end of the 6^th period. B)The payments will decrease each year as a portion of the principal is paid. C)Each payment includes both principal and interest. D)Interest expense will increase each year.

Accepted Answer

Under an installment note,each payment is split between principal and interest so that no "balloon" payment of principal is required at maturity.Each payment consists of principal and interest.Each period the portion of the payment for interest decreases and the portion of the payment for principal increases.

Question 20

Using the simplified effective-interest amortization,the credit to Cash each interest payment is calculated as:
A)Bonds Payable,Net × Market Interest Rate × Time.
B)Bonds Payable,Net × Stated Interest Rate × Time.
C)Face Value × Stated Interest Rate × Time.
D)Face Value × Market Interest Rate × Time.

Accepted Answer

Using the simplified effective-interest amortization,the credit to Cash is calculated as: Face Value × Stated Interest Rate × Time.

Quiz 10: Liabilities

A company issued 10-year,7% bonds with a face value of $100,000.The company received $97,947 for the bonds.Using the straight-line method of amortization,the amount of interest expense for the first annual interest period is:

A 10-year bond that pays interest annually was issued at a $5,000 premium.The entry to record the payment of interest using straight-line amortization will include a to Premium on Bonds Payable for each period.

On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.Your company used the effective-interest method of amortization.At the end of the first year,your company should:

A company issues a 5-year bond with a $7,500 discount.Using straight-line amortization,the company should:

Hardtack Industries borrowed $336,000 from its bank in return for an installment note with 8% interest.Hardtack will make 6 annual payments of $72,682.At the end of the first period,Hardtack will report a note payable on its balance sheet of:

Which of the following statements about bonds payable net of a discount or premium is not correct?

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Interest expense for the second period equals:

Which one of the following statements about amortization of discounts and premiums is not correct?

Using the simplified effective-interest amortization,interest expense is calculated as:

When interest expense is calculated using the effective-interest amortization method,interest expense on a bond that pays interest annually is equal to the:

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Interest expense for the first period equals:

When the effective-interest method of amortization is used,what happens to interest expense as a bond moves toward maturity?

A company sells a bond with a face value of $10,000 and receives a premium of $800.Using simplified effective-interest amortization,what journal entry is used to record the issuance of the bonds?

Burlingame Co.is purchasing a new forklift to be used in its warehousing operations.Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest.Burlingame will make 6 equal annual payments of $25,958.Which of the following is correct regarding this note?

Using the simplified effective-interest amortization,the credit to Cash each interest payment is calculated as: