Question 1

Kenton Corporation issued $562,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.After 11 years,what is the carrying value of the bonds?

Accepted Answer

The answer of Kenton Corporation issued $562,000 of 30-year,8 percent...

Question 2

In 2010,Hopkins Corporation issued ten-year,10 percent bonds when the market interest rate was 12 percent.Interest is payable annually.During 2013,the market rate of interest for similar bonds was 14 percent.Using the effective interest method of amortization,what interest rate will be used to calculate interest expense for 2013?

Accepted Answer

The effective interest method uses the market interest rate at the time of issuance to calculate interest expense, which was 12 percent in 2010.

Question 3

The total interest cost on seventy-eight,ten-year,6 percent,$1,000 bonds that are issued at 98 is

Accepted Answer

The total interest cost includes both the cash interest paid and the discount on the bonds. The cash interest is calculated as 78 bonds * $1,000 * 6% * 10 years = $46,800. The discount on the bonds is 2% of $78,000 (78 bonds * $1,000 * 2%) = $1,560. Adding these gives $46,800 + $1,560 = $48,360.

Question 4

Trigg Corporation issued $200,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.The entry to record the bond interest expense on the next interest payment date is:

Accepted Answer

The interest on the bonds is calculated at a rate of 6% per annum and the bonds are issued at a discount of 2% (98% of face value). This means that the effective interest rate for the bonds is higher than 6%. Since the straight-line method of amortization is used, the unamortized bond discount at the time of the interest payment date is $100 ($2,000 per year for 20 years, divided by 40 semi-annual periods). Therefore, the entry to record the bond interest expense would be:

Bond Interest Expense = $6,000 per year / 2 = $3,000

Unamortized Bond Discount = $100

Cash = $6,000

This is the correct entry as shown in choice A).

Question 5

When bonds have been issued at a premium,the periodic amortization of the premium will

Accepted Answer

When bonds are issued at a premium, it means that the market interest rate is lower than the stated interest rate on the bonds. This results in the bond being sold for more than its face value. The excess amount is the premium.

The periodic amortization of the premium will gradually reduce the liability over time, resulting in a decrease in the carrying value (or book value) of the bonds. This is because the premium is being amortized, meaning it is being gradually written off as a reduction of the bond liability.

Therefore, the correct answer is C.

Question 6

The effective interest method of amortization of bond premiums and discounts is superior to the straight-line method because it results in a(n)

Accepted Answer

The answer of The effective interest method of amortization of...

Question 7

On January 2,2013,Owsley Corporation issued 20-year bonds payable with a face value of $600,000 and a face interest rate of 10 percent.The bonds were issued to yield a market interest rate of 12 percent.Interest is payable annually on January 2.In calculating the present value of the bond issue of January 2,2013,the

Accepted Answer

The market interest rate is used to calculate the present value of both the face amount and the periodic interest payments.

Question 8

A bond premium has the effect of

Accepted Answer

A bond premium occurs when the bond's selling price is higher than its face value, which effectively lowers the bond's yield or effective interest rate below the stated (face) interest rate because the investor pays more upfront for the bond but still receives the same nominal interest payments.

Question 9

A company issued $300,000 of 20-year,8 percent bonds at 96.If interest is paid semi-annually,the entry to record the amount of bond interest expense (assuming the straight-line method of amortization)on any interest date is

Accepted Answer

The bond was issued at 96, meaning it was sold for 96% of its face value, resulting in a discount. The annual interest is $24,000 (8% of $300,000), or $12,000 semi-annually. The discount of $12,000 ($300,000 - $288,000) is amortized over 40 periods (20 years x 2), resulting in $300 per period. Therefore, the bond interest expense is $12,300 ($12,000 + $300).

Question 10

When the effective interest method of amortization is used for a bond premium,the amount of interest expense for an interest period is calculated by multiplying the

Accepted Answer

The effective interest method of amortization is used when a bond is issued at a premium or discount. In case of a bond premium, the interest expense for an interest period is calculated by multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate. This ensures that the amount of interest expense recognized each period is a constant percentage of the carrying value of the bond, which decreases over time due to the amortization of the premium. Therefore, option C is the correct answer.

Question 11

The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that

Accepted Answer

When a company purchases a bond at a premium, it pays more to acquire the bond than the face value. This premium amount is amortized over the life of the bond as an interest expense. As a result, the amount of interest expense recognized on the income statement for an interest period will be less than the amount of cash paid for interest in that period. Therefore, the best choice is B, which states that the amount of interest expense recognized will be less than the amount of cash to be paid for interest for the period.

Question 12

If bonds payable were issued initially at a discount,the carrying value of the bonds at a balance sheet date will be calculated by

Accepted Answer

If bonds payable were issued initially at a discount, the carrying value of the bonds at a balance sheet date will be calculated by deducting the amount of discount amortized between the issuance date and the balance sheet date from the carrying value at the previous balance sheet date.

Question 13

Spencer Corporation issued 30-year term bonds at a premium in 2013.Interest is payable semi-annually.Which of the following statements is true,assuming that the effective interest method of amortization is used for the bond premium?

Accepted Answer

Under the effective interest method, interest expense decreases each period because the bond premium is amortized, reducing the book value of the bond over time.

Question 14

Kenton Corporation issued $556,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.The entry to record the bond interest expense on the next interest payment date is:

Accepted Answer

The bond premium is amortized over the bond's life. The premium is $33,360 ($556,000 * 6%). Over 60 periods (30 years semi-annual), the amortization per period is $556. The interest expense is the cash interest ($22,240) minus the amortization ($556), which equals $21,684.

Question 15

When the straight-line method of amortization is used for a bond discount,the amount of interest expense for an interest period is calculated by

Accepted Answer

The straight-line method of amortization evenly spreads the bond discount over the life of the bond. Therefore, the amount of discount amortization for each period would be the total discount divided by the number of periods. To calculate the interest expense for the period, this amount of discount amortization is added to the amount of cash paid for interest during the period, as the bond issuer is still responsible for paying the full face interest rate to bondholders. Therefore, choice A is the correct answer.

Question 16

A $10,000,8%,5-year bond pays fixed interest of $400 every 6 months.If the current market rate of interest is 6%,what is the present value of the bond? (Round to the nearest dollar.)

Accepted Answer

To compute the present value of the bond, we need to discount the future cash flows (i.e. interest payments and principal repayment) using the current market rate of interest.
Every 6 months, the bond pays an interest of $400, so for 5 years, there will be 10 payments in total:
Year 0: -$10,000 (principal payment)
Year 0.5: $400
Year 1: $400
Year 1.5: $400
Year 2: $400
Year 2.5: $400
Year 3: $400
Year 3.5: $400
Year 4: $400
Year 4.5: $400
Year 5: $10,400 ($10,000 of principal repayment and the last interest payment of $400)
To find the present value, we need to discount each of the 10 cash flows using the current market rate of interest of 6%. We can use the formula:
Present Value = Cash flow / (1 + r)^n
where r is the rate of interest and n is the number of periods. For example, the present value of the first interest payment of $400 received after 6 months is:
Present Value of first interest payment = $400 / (1 + 0.06/2)^1
= $377.36
Similarly, the present value of each of the other 9 cash flows can be computed and then added up to find the total present value of the bond. Using this method, we find that the present value is closest to $10,852, which is answer choice C.

Question 17

Suffolk Corporation issued $100,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.After seven years,what is the carrying value of the bonds?

Accepted Answer

The bonds were issued at 98, meaning they were issued at a discount of $2,000 ($100,000 - $98,000). The discount is amortized over 40 periods (20 years x 2). Each period, $50 ($2,000/40) is amortized. After 14 periods (7 years x 2), $700 ($50 x 14) is amortized. The carrying value is $98,000 + $700 = $98,700.

Question 18

Kenton Corporation issued $600,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

Accepted Answer

The total interest cost of the bonds is the difference between the total amount of interest paid over the life of the bonds and the proceeds received from issuing the bonds. 
The annual interest payment for the bonds is $600,000 x 8% = $48,000. Since the bonds are semi-annual, each interest payment is $24,000. 
The total amount of interest paid over the life of the bonds is 60 x $24,000 = $1,440,000. 
The proceeds from issuing the bonds are $600,000 x 106% = $636,000. 
The amortization schedule will show how much of the bond discount will be amortized to interest expense each period. 
Using the straight-line method of amortization, the bond discount of $36,000 will be amortized evenly over the life of the bonds. 
Thus, the total interest cost of the bonds is $1,440,000 - $36,000 = $1,404,000. 
Therefore, the best choice is B.

Question 19

Suffolk Corporation issued $100,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

Accepted Answer

The total interest cost includes both the cash interest payments and the discount on the bonds. The cash interest payments over 20 years are $120,000 (6% of $100,000 annually for 20 years). The bonds were issued at 98, meaning there is a $2,000 discount ($100,000 - $98,000). The total interest cost is $120,000 + $2,000 = $122,000.

Question 20

When bonds are issued at a premium,the total interest cost of the bonds over the life of the bonds is equal to the amount of

Accepted Answer

When bonds are issued at a premium, the interest payments made over the life of the bonds are less than the face value of the bonds. The difference between the face value and the issue price is the premium. As a result, the interest cost of the bonds over their life is equal to the interest payments made minus the amount of issuance premium, as stated in option A.

Quiz 11: Long-Term Liabilities