Question 1

Schmid Corporation issues $500,000,10%,5-year bonds on January 1,2014 for $479,000.Interest is paid semiannually on January 1 and July 1.If Schmid uses the straight-line method of amortization of bond discount,the amount of bond interest expense on July 1,2014 is:

Accepted Answer

The bond discount is $21,000 ($500,000 - $479,000). Over 5 years, with semiannual payments, there are 10 periods. The discount amortization per period is $2,100 ($21,000 / 10). The cash interest payment is $25,000 ($500,000 * 10% / 2). Therefore, the bond interest expense is $27,100 ($25,000 + $2,100).

Question 2

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

Accepted Answer

Under the effective-interest method, the amount of bond discount amortized each interest period is the difference between the interest expense (calculated by multiplying the current carrying value of the bond by the market interest rate) and the cash paid for interest. This is because the bond discount represents the difference between the face value of the bond and its initial selling price, and it needs to be gradually reduced over the life of the bond through periodic interest expense recognition.

Question 3

On July 1,2014,Brownlee Corporation issues $1,500,000 of 10-year,7% bonds dated July 1,2014 at 90.Brownlee uses the straight-line method of amortization.Interest is paid each July 1 and January 1.Brownlee Corporation's fiscal year end is June 30.The interest expense recognized for the first semiannual interest payment on January 1,2015 is:

Accepted Answer

The answer of On July 1,2014,Brownlee Corporation issues $1,500,000 of...

Question 4

Over the term of a bond,the amortization of the premium on bonds payable:

Accepted Answer

Amortization of bond premium decreases interest expense because it reduces the amount of premium recorded as an expense each period. This is because premium is recorded as an expense over the term of the bond as a reduction of interest expense. Therefore, the correct answer is D.

Question 5

On January 1,2015,Anthony Corporation issued $800,000 of 6%,5-year bonds at 98,with interest paid annually.Using the straight-line amortization method,what is the carrying value of the bonds one year later on January 1,2016?

Accepted Answer

Using the straight-line method, the bond discount of $800,000 - ($800,000 x 98%) = $16,000 will be amortized over 5 years, which means an annual amortization of $16,000 ÷ 5 = $3,200.

After one year, the accumulated amortization will be $3,200, and the carrying value of the bond will be $784,000 ($800,000 - $16,000 amortization). Therefore, the answer is (C) $787,200.

Question 6

On January 1,2014,Chin Corporation issued $3,000,000,14%,5-year bonds.The bond interest is payable on January 1 and July 1.The bonds sold for $3,219,600.The market rate of interest for these bonds was 12%.Under the effective-interest method,what is the interest expense for the six months ending July 1,2014?

Accepted Answer

The interest expense under the effective-interest method is calculated by multiplying the carrying amount of the bonds at the beginning of the period by the market rate of interest. For the six months ending July 1, 2014, the carrying amount is $3,219,600 and the market rate is 12% annually, or 6% for six months. Therefore, the interest expense is $3,219,600 * 6% = $193,176.

Question 7

A bond was issued at a discount.The journal entry to record payment of this bond payable at maturity will include a:

Accepted Answer

When a bond is issued at a discount, the Bond Payable account is recorded for the bond's face value, while the Discount on Bonds Payable is recorded for the difference between the face value and the price at which the bond was issued. When the bond matures and is paid off, the company only needs to pay back the face value of the bond. Therefore, the journal entry to record payment of the bond payable at maturity will debit Bonds Payable and credit Cash, as the company is reducing its liability by paying off the bond, and increasing its cash balance simultaneously.

Question 8

On January 1,2014,Naperville Corporation issued $2,000,000,14%,5-year bonds with interest payable on January 1 and July 1.The bonds sold for $2,146,400.The market rate of interest was 12%.Using the effective-interest method,the debit entry to interest expense on July 1,2014 is (round to the nearest dollar):

Accepted Answer

Using the effective-interest method, we calculate the interest expense as follows:

Interest expense = Bond carrying value at beginning of period x Market interest rate x Time

For the first interest payment on July 1, 2014:
Bond carrying value at beginning of period = $2,146,400 (original issue price)
Market interest rate = 12%
Time = 6/12 = 0.5 (since interest is paid semi-annually)

Interest expense = $2,146,400 x 12% x 0.5 = $128,784

Therefore, the debit entry to interest expense on July 1, 2014 is $128,784, which is closest to answer choice C ($128,784).

Question 9

Fenway Corporation issued a $20,000,10-year,10% bond dated January 1,at 102.The journal entry to record the issuance of the bond will include a:

Accepted Answer

The journal entry to record the issuance of the bond will include a debit to Cash for $20,400 (20,000 x 102%) and a credit to Bonds Payable for $20,000. The difference between the proceeds received and the face value of the bond is the bond premium, which in this case is $400. Therefore, there is no debit to Discount on Bonds Payable.

Question 10

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

Accepted Answer

Under the effective-interest method, the interest expense is calculated by multiplying the carrying value of the bond at the beginning of the period by the effective interest rate. When bonds are issued at a discount, the effective interest rate is greater than the stated interest rate, resulting in interest expense that increases each period as the bond moves towards maturity. This is because the carrying value of the bond increases each period as the discount is amortized, and the effective interest rate applied to that carrying value is constant. As a result, the amount of interest expense increases each period until it equals the stated interest payment at maturity.

Question 11

Cubs Corporation issues $500,000,10%,5-year bonds on January 1,2014 for $479,000.Interest is paid annually on January 1.If Cubs Corporation uses the straight-line method of amortization of bond discount,the amount of interest expense recorded at December 31,2014 would be:

Accepted Answer

The bond discount is $21,000 ($500,000 - $479,000). Using the straight-line method, the annual amortization of the discount is $4,200 ($21,000 / 5 years). The annual interest payment is $50,000 (10% of $500,000). Therefore, the total interest expense is $54,200 ($50,000 + $4,200).

Question 12

On January 1,2015,Brewers Corporation issued $800,000 of 6%,5-year bonds at 98,with interest paid annually.Using the straight-line amortization method,what is the carrying value of the bonds on January 1,2015?

Accepted Answer

The bonds were issued at 98, meaning they were issued at 98% of the face value. Therefore, the initial carrying value is 98% of $800,000, which is $784,000.

Question 13

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

Accepted Answer

The bond cash payment on each interest date is calculated by multiplying the face value of the bonds times the stated interest rate for the appropriate time period. This calculation determines the actual cash amount paid to bondholders, which remains constant over the life of the bond.

Question 14

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

Accepted Answer

The effective-interest method of amortization involves calculating interest expense based on the carrying value of the bonds (not the face value) multiplied by the effective-interest rate for the appropriate time period. This method results in a more accurate representation of interest expense over the life of the bonds.

Question 15

On January 1,2014,a bond was issued at a discount.The journal entry to record the semiannual interest payment on July 1,2014 would include a:

Accepted Answer

When a bond is issued at a discount, the initial carrying value of the bond is less than its face value. As a result, the issuer records a discount on bonds payable account. When interest is paid on the bond, the issuer records interest expense and debits the discount on bonds payable account to amortize the discount and increase the carrying value of the bond.

Question 16

Lisle Corporation issued $200,000 of 10% bonds on January 1,2014.The bonds pay interest semiannually on January 1 and July 1.The company has a fiscal year end of May 31.On May 31,2014,the Lisle Corporation will:

Accepted Answer

Lisle Corporation needs to accrue interest expense from January 1 through May 31, as the fiscal year ends on May 31 and interest is paid semiannually on January 1 and July 1.

Question 17

Solderman Company issued $500,000,6%,10-year bonds for $432,800 with a market rate of 8%.The effective-interest method of amortization is to be used and interest is paid annually.The journal entry on the first interest payment date would include a:

Accepted Answer

The interest expense is calculated using the market rate (8%) on the carrying amount of the bonds. The cash paid is the coupon rate (6%) on the face value. The difference is credited to Discount on Bonds Payable.

Question 18

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 to use when amortizing a bond discount or premium as it results in a more accurate amortization of the bond compared to the straight-line method. The effective-interest method considers the actual interest rate on the bond and produces a larger interest expense and a smaller amortization for a discount bond compared to the straight-line method. It also produces a smaller interest expense and a larger amortization for a premium bond compared to the straight-line method. The market-interest rate method is not preferred because it assumes a constant interest rate over the life of the bond and may result in fluctuations in the amount of interest expense and bond amortization.

Question 19

NBC Corporation issued $600,000,10%,5-year bonds on January 1,2014 for $648,930 when the market interest rate was 8%.Interest is paid semiannually on January 1 and July 1.The corporation uses the effective-interest method to amortize bond premium.The total amount of bond interest expense recognized on July 1,2014 is:

Accepted Answer

The annual interest payment is $60,000 ($600,000 x 10%). 
The effective interest rate is 8.16% [2 x 0.08 x (1 + 0.08/2)].

To calculate interest expense from January 1, 2014, to July 1, 2014, we need to find the interest accrued during that period.

Interest accrued during the period = Carrying value at the beginning of the period x Effective interest rate x Time 
= $648,930 x 8.16% x 6/12 = $26,057

Bond interest expense recognized on July 1, 2014, consists of the interest payment of $30,000 and the amortization of bond premium.

Amortization of bond premium = Total bond premium / Number of interest payment periods 
= ($648,930 - $600,000) / 10 = $4,893

Therefore, bond interest expense recognized on July 1, 2014 = $30,000 + $4,893 = $25,957.

Question 20

Over the term of the bonds,the balance in the Premium on Bonds Payable account will:

Accepted Answer

The balance in the Premium on Bonds Payable account decreases over the term of the bonds as it is amortized. This amortization process reduces the premium balance until the bond matures.

Quiz 9: Liabilities