Question 1

A bond was issued at a premium. The journal entry to record the semiannual interest payment would include:

Accepted Answer

A bond issued at a premium means that the bond was sold for more than its face value, resulting in a premium on the bonds payable account. When recording the semiannual interest payment, a portion of the premium must be recognized as an expense along with the interest payment. Therefore, the journal entry should include a debit to both interest expense and premium on bonds payable, along with a credit to cash.

Question 2

Under the effective-interest method, if bonds are issued at a premium:

Accepted Answer

Under the effective-interest method of bond accounting, interest expense is calculated as a percentage of the carrying value (not the face value) of the bonds. When bonds are issued at a premium, it means that the market interest rate is less than the stated interest rate of the bonds. As a result, the effective interest rate is less than the stated interest rate.

Because interest expense is calculated using the effective interest rate, it decreases each period as the carrying value of the bonds decreases towards their maturity value. Hence, choice A is correct.

Question 3

Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to the:

Accepted Answer

Under the effective-interest method, the discount amortized each period is the difference between the interest expense (calculated using the effective interest rate) and the cash interest paid.

Question 4

Which is the preferred method to use when amortizing a bond discount or premium?

Accepted Answer

The effective-interest method of amortization is the preferred method for amortizing a bond discount or premium. It results in a more accurate and consistent allocation of interest expense over the life of the bond, as it takes into account the changing carrying value of the bond and the market interest rate at each interest payment date. The straight-line method may be easier to calculate, but it does not accurately reflect the changing interest expense and is therefore less preferable. The market-interest rate method is not a commonly used method of amortization.

Question 5

Under the effective-interest method of amortizing bond premium, the interest expense recorded for each semiannual interest payment:

Accepted Answer

The answer of Under the effective-interest method of amortizing bond...

Question 6

At the maturity date of a bond payable:

Accepted Answer

At the maturity date of a bond payable, both the discount and premium on bonds payable will have been fully amortized to zero, and the carrying value of the bonds will equal the par value.

Question 7

1.method of amortization and interest is paid each January 31, and July 31. Assuming no adjusting entries have been made to record interest expense, the entry to record the first semiannual interest payment on
January 31, 2012, will include a:

Accepted Answer

The entry to record the first semiannual interest payment would include a debit to Interest Expense for the amount of interest accrued over the period. Since no adjusting entries have been made, the full interest expense for the period needs to be recorded.

Question 8

A bond was issued at a discount. The journal entry to record the semiannual interest payment would include:

Accepted Answer

When a bond is issued at a discount, it means that the bond is sold for less than its face value. Therefore, the interest expense that the issuer of the bond will incur will be more than the interest payment due to the bondholder. To record the semiannual interest payment, the issuer will debit interest expense for the full amount of the interest payment, credit cash for the amount paid, and credit discount on bonds payable to reduce the balance of the bond liability. In this case, Choice B is the best option as it correctly records the interest expense as a debit, credits cash for the payment and credits discount on bonds payable to reduce the carrying amount of the bond liability.

Question 9

A company issued $100,000 of 10% bonds on January 1. The bonds pay interest semiannually on January 1 and July 1. The company has a fiscal year end of May 31. On May 31, the company will:

Accepted Answer

The company's fiscal year end is May 31, which falls within the semiannual interest payment period. Therefore, the company needs to accrue interest expense from January 1 (the issuance date) through May 31. The interest expense for June 1 through June 30 will be paid on the next interest payment date of July 1. Therefore, choice B is the correct option.

Question 10

Under the effective-interest method of amortization, the cash payment on each interest payment date will:

Accepted Answer

Under the effective-interest method, the cash payment remains the same for each interest period as it is based on the stated interest rate of the bond.

Question 11

Under the effective-interest method of amortizing bond discount, the interest expense recorded for each semiannual interest payment:

Accepted Answer

Under the effective-interest method of amortizing bond discount, the interest expense recorded for each semiannual interest payment increases over the life of the bond as the balance of the bond payable decreases. This produces a gradually increasing interest expense instead of a constant expense recognized under the straight-line method.

Question 12

Under the effective-interest method of amortization, the cash payment on each interest payment is calculated by multiplying the:

Accepted Answer

The cash payment for interest is calculated using the face value of the bonds and the stated interest rate, not the carrying value or the effective-interest rate.

Question 13

When a bond is issued at a premium:

Accepted Answer

When a bond is issued at a premium, the carrying value decreases each semiannual interest period as the premium is amortized over the life of the bond.

Question 14

Under the effective-interest method of amortization, interest expense each period can be calculated by multiplying the:

Accepted Answer

The effective-interest method of amortization uses the carrying value of the bonds and the effective-interest rate to calculate interest expense each period. This method results in a constant interest expense each period, even though the bond's carrying value and remaining balance changes over time. Therefore, choice A, which multiplies the carrying value of the bonds times the effective-interest rate for the appropriate time period, is the correct answer.

Question 15

Sam's Shoe Factory issued a $10,000, 10-year, 10% bond dated January 1, at 97. The journal entry to record the issuance of the bond will include a:

Accepted Answer

The bond is issued at 97, which means it is issued at 97% of its face value. Therefore, the cash received is 97% of $10,000, which is $9,700.

Question 16

The total interest expense over the life of a bond is:

Accepted Answer

The total interest expense over the life of a bond is equal to the sum of the interest payments plus the total discount. This is because the discount is essentially additional interest paid to the purchaser of the bond to compensate for the lower purchase price. Therefore, the total interest expense includes both the stated interest payments and the additional interest paid through the discount. Option B is incorrect because premium is the amount paid above the face value of the bond, and is therefore not relevant to the calculation of total interest expense. Option A is incorrect because it deducts the discount from the interest payments, which would result in an understated total interest expense. Option D is incorrect because it does not account for the impact of the discount on the total interest expense.

Question 17

To determine the carrying value of a bond:

Accepted Answer

The carrying value of a bond is the sum of the face value of the bond and any unamortized premium or discount. A premium on bonds payable increases the carrying value, while a discount on bonds payable decreases the carrying value.

Question 18

If bonds are issued at a discount:

Accepted Answer

When bonds are issued at a discount, the amortization of the discount will increase interest expense over the life of the bond. This is because the discount represents a reduction in the amount of cash received by the issuer, and therefore has the effect of increasing the effective interest rate on the bond. As a result, the amount of interest expense recognized each year will be higher than it would be if the bond had been issued at face value.

Question 19

When a bond is issued at a discount:

Accepted Answer

When a bond is issued at a discount, the carrying value increases each period as the discount is amortized over the life of the bond, bringing the carrying value closer to the par value at maturity.

Question 20

Under the effective-interest method, if bonds are issued at a discount:

Accepted Answer

Under the effective-interest method, when bonds are issued at a discount, the interest expense increases each period as the bond's carrying amount increases towards its face value at maturity.

Quiz 8: Liabilities