Question 1

Assuming no adjusting journal entries have been made during the year,the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following?

Accepted Answer

The journal entry to record the cash payment of interest on the due date increases interest expense and decreases the premium on bonds payable account, an adjunct-liability account. Decreasing an adjunct-liability account decreases the book value of the bonds.

Question 2

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.How much is the semi-annual interest expense?

Accepted Answer

The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) F1F1F1S1F1F1F10 20 semi-annual interest payments.Semi-annual interest expense ($10,350) = Semi-annual cash payment ($300,000 F1F1F1S1F1F1F10 .07 F1F1F1S1F1F1F10 6/12) - Discount on bonds payable amortization ($150).

Question 3

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1,2010.On December 31,2010 the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

Accepted Answer

Given that the bonds sold for par value on January 1, 2010, the stated interest rate equaled the market rate of interest. As of December 31, 2010, the bonds were selling at a premium, which means that the stated rate was greater than the market rate on December 31, 2010, therefore the market rate of interest decreased.

Question 4

Mayberry,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,2009,for $102,360 on April 1,2009.The bonds pay interest annually on April 1.Straight-line amortization is used by the company.What entry is needed at April 1,2010 for the first interest payment?

Accepted Answer

The bond premium of $2,360 is amortized over 10 years, resulting in an annual amortization of $236. The interest expense is the cash interest payment of $12,000 minus the premium amortization of $236, resulting in $11,764.

Question 5

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

Accepted Answer

Interest expense = Cash interest payment - Equal premium amortization

Question 6

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% effective (market)interest rate.Assuming the effective-interest method of amortization is used,what is the book value of the bond liability as of June 30,2010 (to the nearest dollar)?

Accepted Answer

June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12)June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premium on bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 F1F1F1S1F1F1F10 .12 F1F1F1S1F1F1F10 6/12)]

Question 7

Which of the following statements regarding the effective-interest method of amortization is incorrect?

Accepted Answer

The effective-interest method of amortization is required by generally accepted accounting principles unless the amounts are immaterial.

Question 8

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.What is the bond liability to be reported on the December 31,2010 balance sheet?

Accepted Answer

The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) F1F1F1S1F1F1F10 20 semi-annual interest payments.December 31, 2010 bond liability ($302,850) = July 1, 2010 book value ($303,000) - December 31, 2010 premium on bond payable amortization ($150).

Question 9

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.Assuming the effective-interest method of amortization is used,what is the interest expense for the six-month period ending June 30,2010 (to the nearest dollar)?

Accepted Answer

Interest expense ($20,658) = January 1, 2010 book value ($413,153) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12)

Question 10

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153.Assuming the effective-interest method of amortization is used,which of the following statements is incorrect?

Accepted Answer

The amortization of the premium on bonds payable increases over time because of the decreasing interest expense relative to the constant cash payment.

Question 11

A company issued bonds when the stated rate of interest was 10% and the market rate was 10%.Which of the following statements is incorrect?

Accepted Answer

The cash payment of interest on the due date increases expenses and decreases assets. The payment does not affect the book value of the bond liability.

Question 12

A company issued bonds when the stated rate of interest was 10% and the market rate was 8%.Which of the following statements is incorrect?

Accepted Answer

Given that the market rate of interest was less than the stated rate of interest, the bonds sold at a premium. Therefore, the book value decreases as the premium on bond payable account is amortized, as a result interest expense decreases.

Question 13

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% effective (market)interest rate.Assuming the effective-interest method of amortization is used,what is the book value of the bond liability on December 31,2010 (to the nearest dollar)?

Accepted Answer

June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12).June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premium on bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 F1F1F1S1F1F1F10 .12 F1F1F1S1F1F1F10 6/12)].December 31, 2010 interest expense ($20,491) = June 30, 2010 book value ($409,811) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12).December 31, 2010 book value ($406,302) = June 30, 2010 book value ($409,811) - December 31, 2010 premium on bonds payable amortization [Interest expense ($20,491) - Cash interest payment ($400,000 F1F1F1S1F1F1F10 .12 F1F1F1S1F1F1F10 6/12)].

Question 14

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.Which of the following statements is incorrect?

Accepted Answer

The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) F1F1F1S1F1F1F10 20 semi-annual interest payments. The semi-annual interest expense is therefore $150 less than the semi-annual cash interest payment.

Question 15

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

Accepted Answer

When bonds are issued at a premium, interest expense over the life of the bonds equals the total payments for interest minus the premium on bonds payable initial account balance.

Question 16

Eaton Company issued $5 million of bonds.The stated rate of interest was 10% and the market rate was 11%.Which of the following statements is correct?

Accepted Answer

Given that the market rate of interest exceeded the stated rate of interest, the bonds sold at a discount. The annual interest expense exceeds the cash interest payments by the initial amount of discount on bonds payable.

Question 17

Which of the following statements incorrectly describes the accounting for bonds that were issued at a premium?

Accepted Answer

When a bond sells at a premium, the issue price (present value of future cash flows) exceeds the bond maturity value.

Question 18

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.Which of the following statements is incorrect?

Accepted Answer

The straight-line discount amortization ($200) = Discount on bonds payable ($50,000 - $48,000) F1F1F1S1F1F1F10 10 annual interest payments.Annual interest expense ($4,700) = Annual cash payment ($50,000 F1F1F1S1F1F1F10 .09) + Discount on bonds payable amortization ($200).

Question 19

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.What is the bond liability to be reported on the December 31,2011 balance sheet?

Accepted Answer

The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) F1F1F1S1F1F1F10 20 semi-annual interest payments.December 31, 2011 bond liability ($302,550) = Initial issue price ($303,000) - Premium on bond payable amortization ($150 F1F1F1S1F1F1F10 3).

Question 20

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% effective (market)interest rate.Assuming the effective-interest method of amortization is used,what is the interest expense for the six-month period ending December 31,2010 (to the nearest dollar)?

Accepted Answer

June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12).June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premium on bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 F1F1F1S1F1F1F10 .12 F1F1F1S1F1F1F10 6/12)].December 31, 2010 interest expense ($20,491) = June 30, 2010 book value ($409,811) F1F1F1S1F1F1F10 Six-month market rate of interest (10% F1F1F1S1F1F1F10 6/12).

Quiz 10: Reporting and Interpreting Bonds