Question 1

Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 103. The journal entry to record the issuance will show a
A)debit to Cash of $5,000,000.
B)credit to Premium on Bonds Payable for $150,000.
C)credit to Bonds Payable for $5,030,000.
D)credit to Cash for $5,150,000.

Accepted Answer

The bonds are issued at 103, which means they are issued at 103% of the face value. The premium is calculated as 3% of $5,000,000 (5,000 bonds x $1,000), which equals $150,000. Therefore, the credit to Premium on Bonds Payable is $150,000.

Question 2

Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 98. The journal entry to record the issuance will show a
A)debit to Cash of $2,000,000.
B)credit to Discount on Bonds Payable for $40,000.
C)credit to Bonds Payable for $2,040,000.
D)debit to Cash for $1,960,000.

Accepted Answer

The answer of Hernandez Corporation issues 2,000, 10-year, 8%, $1,000...

Question 3

The market interest rate is often called the
A)stated rate.
B)effective rate.
C)coupon rate.
D)contractual rate.

Accepted Answer

The market interest rate, also known as the effective rate, is the rate of interest investors demand for loaning funds. It differs from the stated, coupon, or contractual rate, which are terms more closely associated with the fixed interest rate specified in financial or bond agreements.

Question 4

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a
A)credit of $2,040 to Loss on Bond Redemption.
B)debit of $2,040 to Loss on Bond Redemption.
C)credit of $32,040 to Premium on Bonds Payable.
D)debit of $32,000 to Premium on Bonds Payable.

Accepted Answer

The carrying value of the bonds ($829,960) is greater than the face value ($800,000) plus the premium ($29,960), which means that the company has lost money on the redemption. Therefore, a loss on bond redemption needs to be recognized. The entry to record the redemption will include a debit to Bonds Payable for the face value of the bonds ($800,000), a debit to Loss on Bond Redemption for the difference between the carrying value and the face value ($2,040), and a credit to Cash for the amount paid to redeem the bonds (which is not given in the question). There is no entry that involves Premium on Bonds Payable.

Question 5

Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
A)$4,600 gain
B)$4,600 loss
C)$15,000 gain
D)$15,000 loss

Accepted Answer

The answer of Bargain Company has $1,500,000 of bonds outstanding....

Question 6

Each of the following accounts is reported as long-term liabilities except
A)Interest Payable.
B)Bonds Payable.
C)Discount on Bonds Payable.
D)Premium on Bonds Payable.

Accepted Answer

Interest Payable is reported as a current liability, not a long-term liability. Bonds Payable, Discount on Bonds Payable, and Premium on Bonds Payable are all examples of long-term liabilities.

Question 7

In the balance sheet the account Premium on Bonds Payable is
A)added to Bonds Payable.
B)deducted from Bonds Payable.
C)classified as a stockholders' equity account.
D)classified as a revenue account.

Accepted Answer

The answer of In the balance sheet the account Premium...

Question 8

A corporation recognizes a gain or loss
A)only when bonds are converted into common stock.
B)only when bonds are redeemed before maturity.
C)when bonds are redeemed at or before maturity.
D)when bonds are converted into common stock and when they are redeemed before maturity.

Accepted Answer

The answer of A corporation recognizes a gain or loss
A)only...

Question 9

Lake Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2015. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization. What is the amount of interest Lake must pay the bondholders in 2015?
A)$11,200
B)$12,000
C)$13,200
D)$10,800

Accepted Answer

The interest payment is calculated as the face value of the bonds ($200,000) multiplied by the annual interest rate (6%), resulting in $12,000 per year. Since the interest is paid semi-annually, the total interest paid in 2015 is $12,000.

Question 10

If bonds are issued at a discount, it means that the
A)financial strength of the issuer is suspect.
B)market interest rate is higher than the contractual interest rate.
C)market interest rate is lower than the contractual interest rate.
D)bondholder will receive effectively less interest than the contractual interest rate.

Accepted Answer

Bonds issued at a discount means that the market interest rate is higher than the contractual interest rate. This is because the issuer must offer a lower price for the bond to compensate for the lower interest payments. This is not necessarily an indicator of the financial strength of the issuer, but rather reflects current market conditions. The bondholder will receive the contractual interest rate, but the effective yield will be higher due to the lower purchase price. When bonds are issued at a discount, it means that the market interest rate is higher than the contractual interest rate. This is because investors are only willing to purchase the bonds at a lower price in order to achieve a return that meets their desired rate of return based on the current market interest rate. This also means that bondholders will receive effectively less interest than the contractual interest rate, as they will only receive interest payments based on the lower purchase price rather than the face value of the bond. A bond issued at a discount does not necessarily indicate a suspect financial strength of the issuer, as it may be a strategic decision based on market conditions.

Question 11

The carrying value of bonds will equal the market price
A)at the close of every trading day.
B)at the end of the fiscal period.
C)on the date of issuance.
D)every six months on the date interest is paid.

Accepted Answer

The carrying value of bonds is the amount that the company reports as a liability on its balance sheet. This amount is initially recorded on the date of issuance, and it represents the face value of the bonds plus any premium or discount. The market price of bonds can fluctuate over time based on changes in interest rates and market conditions, but this does not affect the carrying value recorded on the balance sheet. Therefore, the carrying value of bonds will not necessarily equal the market price at the close of every trading day or every six months on the date interest is paid. It only equals the market price at the time of issuance.

Question 12

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?
A)$797,000
B)$800,000
C)$820,910
D)$824,000

Accepted Answer

The answer of The current carrying value of Kane's $800,000...

Question 13

Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2013. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straight-line method of amortization. Beonce Company decided to redeem the bonds on January 1, 2015. What amount of gain or loss would Beonce report on its 2015 income statement?
A)$9,600 gain
B)$11,600 gain
C)$11,600 loss
D)$9,600 loss

Accepted Answer

First, we need to calculate the carrying value of the bonds on January 1, 2015.

Since the bonds were issued at a discount (the proceeds of $188,000 were less than the face value of $200,000), the carrying value of the bonds will be less than the face value.

To calculate the carrying value on January 1, 2015, we need to determine how much of the discount has been amortized (i.e. expensed) as of that date.

The bonds have a 10-year term, so they have been outstanding for 2 years (i.e. through December 31, 2014).

The annual amortization of the discount is ($200,000 - $188,000) / 10 = $1,200.

Since interest is paid semi-annually, the semi-annual amortization will be $1,200 / 2 = $600.

So, the total amortization through December 31, 2014 is:

Year 1: $600 
Year 2: $600

Total: $1,200

Therefore, the carrying value on January 1, 2015 is:

Face value - unamortized discount = $200,000 - $1,200 = $198,800

Since the call price is 101, or 101% of face value, the call price is $200,000 x 1.01 = $202,000.

When Beonce redeems the bonds on January 1, 2015, they will need to pay the call price of $202,000, but the carrying value of the bonds at that time is only $198,800.

So, Beonce will need to record a loss on redemption of $202,000 - $198,800 = $3,200.

Since this is a loss, and since it occurs when the bonds are redeemed (rather than during the amortization period), it is reported on the income statement as a loss on redemption of bonds.

Therefore, the answer is C) $11,600 loss.

Question 14

When bonds are converted into common stock,
A)the market price of the stock on the date of conversion is credited to the Common Stock account.
B)the market price of the bonds on the date of conversion is credited to the Common Stock account.
C)the market price of the stock and the bonds is ignored when recording the conversion.
D)gains or losses on the conversion are recognized.

Accepted Answer

When bonds are converted into common stock, the market price of the stock and the bonds is ignored. The book value of the bonds is transferred to the common stock and additional paid-in capital accounts, without recognizing any gain or loss.

Question 15

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the
A)market interest rate increases, the contractual interest rate will decrease.
B)contractual interest rate increases, then bond prices will go down.
C)market interest rate decreases, then bond prices will go up.
D)contractual interest rate increases, the market interest rate will decrease.

Accepted Answer

When the market interest rate decreases, bond prices will go up. This is because investors are willing to pay more for the fixed interest payments offered by the bond compared to new bonds being issued with lower interest rates. Conversely, if the market interest rate increases, the fixed interest payments from existing bonds become less attractive, causing the bond prices to decrease.

Question 16

The sale of bonds above face value
A)is a rare occurrence.
B)will cause the total cost of borrowing to be less than the bond interest paid.
C)will cause the total cost of borrowing to be more than the bond interest paid.
D)will have no net effect on Interest Expense by the time the bonds mature.

Accepted Answer

When bonds are sold above their face value, the issuer receives more money upfront than the amount that will be repaid at maturity. This premium reduces the total cost of borrowing because the issuer pays interest on the face value of the bonds, not on the higher amount received. Thus, over the life of the bonds, the total cost of borrowing (interest expense plus repayment of principal) is less than the total interest payments made to bondholders.

Question 17

If there is a loss on bonds redeemed early, it is
A)debited directly to Retained Earnings.
B)reported as an "Other Expense" on the income statement.
C)reported as an "Extraordinary Item" on the income statement.
D)debited to Interest Expense, as a cost of financing.

Accepted Answer

The answer of If there is a loss on bonds...

Question 18

If bonds can be converted into common stock,
A)they will sell at a lower price than comparable bonds without a conversion feature.
B)they will carry a higher interest rate than comparable bonds without the conversion feature.
C)they will be converted only if the issuer calls them in for conversion.
D)the bondholder may benefit if the market price of the common stock increases substantially.

Accepted Answer

If bonds can be converted into common stock, it gives the option to the bondholder to exchange their bond for a certain number of shares of common stock. If the market price of the common stock increases substantially, the bondholder may benefit by converting their bonds into stock and selling them at a higher price. This increases the value of the bondholder's investment and is a potential benefit of holding convertible bonds.

Question 19

Bond interest paid is
A)higher when bonds sell at a discount.
B)lower when bonds sell at a premium.
C)the same whether bonds sell at a discount or a premium.
D)higher when bonds sell at a discount and lower when bonds sell at a premium.

Accepted Answer

Bond interest paid is determined by the coupon rate, which remains the same throughout the life of the bond. The coupon rate is calculated as a percentage of the face value of the bond, regardless of whether the bond is sold at a discount (less than face value) or a premium (more than face value). Thus, the interest paid is the same regardless of whether the bonds sell at a discount or a premium.

Question 20

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a
A)gain on bond redemption of $12,000.
B)loss on bond redemption of $10,000.
C)loss on bond redemption of $12,000.
D)gain on bond redemption of $10,000.

Accepted Answer

The answer of A $600,000 bond was retired at 102...

Quiz 10: Liabilities

Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 103. The journal entry to record the issuance will show a

Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2015, at 98. The journal entry to record the issuance will show a

The market interest rate is often called the

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

Each of the following accounts is reported as long-term liabilities except

In the balance sheet the account Premium on Bonds Payable is

A corporation recognizes a gain or loss

If bonds are issued at a discount, it means that the

The carrying value of bonds will equal the market price

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?

When bonds are converted into common stock,

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the

The sale of bonds above face value

If there is a loss on bonds redeemed early, it is

If bonds can be converted into common stock,

Bond interest paid is

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a