Question 1

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2013. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2015?

Accepted Answer

First, we need to calculate the total interest paid per year which is $10,000,000 × 7.8% = $780,000. The annual interest expense is calculated by multiplying the carrying value of the bond at the beginning of the year by the market interest rate of 8%.

Carrying value at the beginning of the first year (2013) is the same as the proceeds from the sale of the bond, which is $9,802,072.

Carrying value at the beginning of the second year (2014) can be calculated as follows:
Carrying value of bond at the beginning of 2014 = Carrying value at the end of 2013 + Annual interest expense
= $9,802,072 + ($9,802,072 × 8%)
= $10,594,762

Carrying value at the beginning of the third year (2015) can be calculated as follows:
Carrying value of bond at the beginning of 2015 = Carrying value at the end of 2014 + Annual interest expense
= $10,594,762 + ($10,594,762 × 8%)
= $11,448,217

Using straight-line amortization, the annual amortization is calculated as ($10,000,000 - $9,802,072) / 20 = $98,464 per year. This amount is added to the interest expense for each year to get the total annual expense.

The carrying value of the bond at the end of 2015 can be calculated as follows:
Carrying value of bond at the end of 2015 = Carrying value at the beginning of 2015 + Annual interest expense + Amortization expense
= $11,448,217 + ($11,448,217 × 8%) + $98,464
= $12,284,793

Therefore, the carrying value of the bonds on December 31, 2015, using straight-line amortization, is $9,831,761 (closest to option D).

Question 2

Farmer Company issues $25,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Accepted Answer

The bonds were issued at 97 plus accrued interest, which means that the actual selling price of the bonds is 97% of the face amount plus interest.

To calculate the total cash received on the issue date, we first need to calculate the total face amount of the bonds:

$25,000,000 / 0.97 = $25,773,196.72

This is the total amount of money that Farmer Company will receive over the life of the bonds.

However, on the issue date, the company will only receive the face amount minus the accrued interest.

To calculate the accrued interest, we need to determine the number of days between January 1, 2014 and March 1, 2014 (the issue date).

There are 59 days between these two dates (31 days in January + 28 days in February).

To calculate the daily interest rate, we take the annual rate (9%) and divide by the number of days in a year (365):

9% / 365 = 0.024657534

Multiplying this daily rate by the number of days between the two dates gives us the accrued interest:

$25,773,196.72 x 0.024657534 x 59 / 360 = $416,666.67

Therefore, the total cash received on the issue date is:

$25,773,196.72 - $416,666.67 = $25,356,530.05

Rounding this to the nearest thousand gives us the answer of $24,625,000. Choice C is the correct answer.

Question 3

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using effective-interest amortization, how much interest expense will be recognized in 2014?

Accepted Answer

To calculate interest expense using effective-interest amortization, we first need to calculate the interest payment and the amortization of the bond discount or premium.

Step 1: Calculate the semi-annual interest payment 
$20,000,000 x 7.8% x 6/12 = $780,000

Step 2: Calculate the bond discount 
Bond proceeds - face value = Bond discount 
$19,604,144 - $20,000,000 = $395,856

Step 3: Calculate the bond amortization using the effective-interest method 
Year 1, 1st interest payment: 
Bond carrying value x market rate per period = Interest expense 
($19,604,144 + $395,856) x 4% = $868,017

Carrying value at end of year 1: 
Carrying value at beginning of year - Amortization of bond discount + Interest expense 
$19,604,144 - $868,017 + $780,000 = $19,516,127

Year 1, 2nd interest payment: 
Bond carrying value x market rate per period = Interest expense 
($19,516,127 + $395,856) x 4% = $869,147

Total interest expense for 2014 = $868,017 + $869,147 = $1,737,164

Therefore, the correct choice is C) $1,568,498.

Question 4

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: 
-The present value of the interest is

Accepted Answer

The answer of Use the following information for questions 60...

Question 5

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: 
-The issue price of the bonds is

Accepted Answer

The issue price of the bonds is calculated based on the present value of the bond's future cash flows, which include the present value of the principal and the present value of the interest payments. The correct calculation results in $3,534,240.

Question 6

The following information applies to both questions 77 and 78.
On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.
-The entry to record the issuance of the bonds would include a credit of

Accepted Answer

The bonds were issued at 104, which means they were issued at 104% of their face value. Therefore, the premium on the bonds is calculated as 4% of the face value ($4,000,000 * 0.04 = $160,000), which is credited to Premium on Bonds Payable.

Question 7

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?

Accepted Answer

The carrying value of the bonds increases by the amortization of the discount. The interest expense is calculated using the effective interest rate (8%) on the carrying amount, and the cash interest paid is based on the coupon rate (7.8%). The difference is the amortization of the discount. After two periods, the carrying value is $9,806,321.

Question 8

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?

Accepted Answer

The straight-line amortization method spreads the bond discount evenly over the life of the bond. The annual discount amortization is ($10,000,000 - $9,802,072) / 20 = $9,896. The annual interest expense is the cash interest payment ($10,000,000 * 7.8% = $780,000) plus the annual discount amortization ($9,896), totaling $789,896.

Question 9

Downing Company issues $4,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

Accepted Answer

The first step is to calculate the semi-annual coupon payment:
Coupon payment = face value x coupon rate / 2
= $4,000,000 x 6% / 2
= $120,000
Then, we need to calculate the present value of the bond using the given information:
N = 5 x 2 = 10 (since there are semi-annual payments for 5 years)
I/Y = 2.5% (since the annual yield is 5% and there are semi-annual payments)
PMT = $120,000
FV = $4,000,000
Using a financial calculator, we get the present value to be $4,175,047. This is the proceeds from the bond issue, since it represents the amount of money that the company will receive from selling the bonds.

Question 10

The following information applies to both questions 77 and 78.
On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.
-Bond interest expense reported on the December 31, 2014 income statement of Macklin Corporation would be

Accepted Answer

The bond interest expense for Macklin Corporation includes the interest payment plus the amortization of the bond premium. The interest payment for three months (October 1 to December 31) is calculated as $4,000,000 * 5% * 3/12 = $50,000. The bond was issued at 104, meaning there's a $160,000 premium ($4,000,000 * 4%). This premium is amortized over the life of the bond (10 years), resulting in an annual amortization of $16,000, or $4,000 for three months ($16,000 * 3/12). Therefore, the bond interest expense is $50,000 (interest payment) - $4,000 (amortization of premium) = $46,000.

Question 11

Feller Company issues $15,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Accepted Answer

The total cash received is calculated by considering the issue price at 97% of the face value plus the accrued interest for two months (January and February). The face value is $15,000,000, so at 97%, the cash received from the sale is $15,000,000 * 0.97 = $14,550,000. The accrued interest for two months (9% annual rate) is $15,000,000 * 9% * (2/12) = $225,000. Therefore, the total cash received is $14,550,000 + $225,000 = $14,775,000.

Question 12

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2013. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2015?

Accepted Answer

The carrying value of the bonds on December 31, 2015, can be calculated by adding the total amount of amortization up to that date to the initial proceeds from the bond issuance. Since the bonds were issued at a discount ($19,604,144 instead of $20,000,000), the discount is amortized over the life of the bonds (20 years) using the straight-line method. The annual amortization amount is the difference between the face value and the issue price divided by the number of years: ($20,000,000 - $19,604,144) / 20 = $19,792.80 per year. Since interest is paid semi-annually, the semi-annual amortization amount is $9,896.40. By the end of 2015 (3 years), there will have been 6 interest payments, so the total amortization is 6 * $9,896.40 = $59,378.40. Adding this to the initial proceeds gives the carrying value on December 31, 2015: $19,604,144 + $59,378.40 = $19,663,522.

Question 13

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2014?

Accepted Answer

To calculate the interest expense using effective-interest amortization, we need to use the following formula:

Interest Expense = Effective Interest Rate x Carrying Value at the Beginning of the Period

We can break down the calculation of carrying value into two parts:

Carrying Value = Present Value of Principal + Present Value of Interest

Present Value of Principal = $10,000,000

To calculate the Present Value of Interest, we can use the following formula:

PV of Annuity = PMT x [(1 - (1 / (1 + r)^n)) / r]

Where:
PMT = $10,000,000 x 7.8% / 2 = $390,000
r = 8% / 2 = 4%
n = 40 (20 years x 2 because interest is paid semi-annually)

PV of Annuity = $390,000 x [(1 - (1 / (1.04)^40)) / 0.04] = $6,618,029

Carrying Value = $10,000,000 + $6,618,029 = $16,618,029

Now we can calculate the interest expense for the first period (January 1, 2014, to June 30, 2014):

Interest Expense = 8% x $16,618,029 = $1,329,443

Since interest is paid semi-annually, we need to divide this amount by two to get the interest expense for the year:

Interest Expense in 2014 = $1,329,443 / 2 = $664,721.50

However, this amount only includes the interest paid on June 30, 2014. To get the total interest expense recognized in 2014, we need to add the interest paid on December 31, 2014:

Interest Expense in 2014 = $664,721.50 + $119,527.50 = $784,249.

Therefore, the answer is C.

Question 14

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?

Accepted Answer

The carrying value is calculated by adding the interest expense (based on the yield rate) to the initial carrying value and subtracting the actual interest paid. The initial carrying value is $19,604,144. The interest expense for the first period is $784,166 (8% of $19,604,144 / 2), and the interest paid is $780,000 (7.8% of $20,000,000 / 2). The new carrying value after the first period is $19,608,310. For the second period, the interest expense is $784,332 (8% of $19,608,310 / 2), and the interest paid is again $780,000. The new carrying value after the second period is approximately $19,612,642.

Question 15

Everhart Company issues $20,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

Accepted Answer

To calculate the proceeds from the bond issue, we need to use the present value formula:

PV = FV/(1+r)^n

Where FV is the face value of the bond ($20,000,000), r is the annual interest rate (5%), and n is the number of periods (10 semiannual payments over 5 years).

Using a financial calculator or spreadsheet program, we can calculate the present value to be $20,875,236. Therefore, the answer is C.

Question 16

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. What is interest expense for 2015, using straight-line amortization?

Accepted Answer

The answer of A company issues $20,000,000, 7.8%, 20-year bonds...

Question 17

On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense for 2014 is

Accepted Answer

Interest expense is calculated using the effective interest rate on the carrying amount of the bonds at the beginning of the period. The bonds were sold to yield 10% annually, or 5% semiannually. The carrying amount at the beginning of the period is the issue price, $1,077,250. Thus, the interest expense for the first six months is 5% of $1,077,250, which is $53,862.50. For the second six months, the carrying amount is adjusted for the amortization of the bond premium. The total interest expense for the year is the sum of the two semiannual interest expenses, which is more than the stated interest ($60,000) due to the effective-interest method, leading to the correct answer of $107,419.

Question 18

The entry to record the issuance of the bonds would include a

Accepted Answer

The answer of The entry to record the issuance of...

Question 19

Bond interest expense reported on the December 31, 2014 income statement of Bartley Corporation would be

Accepted Answer

To determine the bond interest expense reported on the income statement, we need to calculate the interest payment on the outstanding bonds for the period.

According to the problem, Bartley Corporation issued $1,000,000 of 10-year, 8% bonds on January 1, 2014.

The total interest payment for the year is calculated as: 
$1,000,000 (bond principal) x 8% (interest rate) = $80,000

Since the interest is paid semi-annually, the interest payment for each period is: 
$80,000 / 2 = $40,000

Therefore, the bond interest expense reported on the income statement for the year ended December 31, 2014 would be: 
2 x $40,000 = $80,000 
However, the company only paid interest on the bonds for half the year, from January 1, 2014 to June 30, 2014. Therefore, the interest expense reported on the income statement would be half of the total interest payment for the year:

$80,000 / 2 = $40,000

Subtracting the interest payment made for the first six months ($40,000), we get:

$40,000 - $2,500 = $37,500

Adding the amortization of the bond discount for the year ($20,000), we get:

$37,500 + $20,000 = $57,500

Therefore, the answer is C: $57,500.

Question 20

On January 2, 2014, a calendar-year corporation sold 8% bonds with a face value of $1,500,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,384,000 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2014?

Accepted Answer

Step 1: Calculate the semi-annual interest payment
Face value of bonds = $1,500,000
Coupon rate = 8%
Number of semi-annual periods = 5 x 2 = 10
Semi-annual interest payment = Face value x Coupon rate / Number of semi-annual periods = $1,500,000 x 8% / 10 = $120,000

Step 2: Calculate the present value of the bonds
Selling price of bonds = $1,384,000
Coupon rate = 8%
Number of semi-annual periods = 5 x 2 = 10
Required rate of return = 10% / 2 = 5%
Present value factor = [(1 - (1 + r)^-n) / r] = [(1 - (1 + 5%)^-10) / 5%] = 7.72173
Present value of bonds = Semi-annual interest payment x Present value factor + Face value / (1 + r)^n = $120,000 x 7.72173 + $1,500,000 / (1 + 5%)^10 = $1,384,000

Step 3: Calculate the amount of interest expense for 2014
Interest expense = (Present value of bonds - Selling price of bonds) / Number of periods = ($1,384,000 - $1,384,000) / 10 = $138,860. Therefore, the answer is C.

Quiz 14: Long-Term Liabilities