Question 1

Gardner Corporation issues $2,000,000, 10-year, 8% bonds payable at a price of 98. The journal entry to record the issuance will include a:

Accepted Answer

The answer of Gardner Corporation issues $2,000,000, 10-year, 8% bonds...

Question 2

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, the interest expense is calculated as a constant percentage of the bond's carrying value, which changes over time as the bond is amortized.

Question 3

On January 1, Charlie Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on January 1 and July 1. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. Under the effective-interest method, the debit entry to interest expense on July 1 is for (rounded to the nearest dollar):

Accepted Answer

Under the effective-interest method, interest expense is calculated by multiplying the carrying value of the bond at the beginning of the period by the market rate of interest. The carrying value of the bond at the beginning of the first period is $3,216,288 (the price at which the bonds were sold). 
For the first interest payment on July 1, the carrying value of the bond will be the issue price minus the amortized premium. The premium amortization for the first six months is calculated as follows:

Premium amortization = (Effective interest rate - Stated interest rate) x Carrying value 
= (0.12 - 0.14) x $3,216,288 
= -$7,605.60 (rounded to nearest cent)

This negative amount indicates that the premium is being reduced. Therefore, the carrying value of the bond at the beginning of the first interest period will be:

Carrying value = Issue price - Premium amortization 
= $3,216,288 - $7,605.60 
= $3,208,682.40

The interest expense for the first interest period can now be calculated as:

Interest expense = Market rate of interest x Carrying value 
= 0.12 x $3,208,682.40 
= $385,641.89

The interest expense to be recognized on July 1 is half of this amount, or:

Interest expense = $385,641.89 / 2 
= $192,978.

Question 4

The journal entry to record a semiannual interest payment on a bond payable:

Accepted Answer

Semiannual interest payments on a bond payable represent an expense for the company that issues the bond, and the payment is typically made in cash. Therefore, the journal entry to record the payment would include a debit to interest expense (to recognize the cost) and a credit to cash (to document the payment). The other choices are incorrect because they do not reflect the proper accounting treatment for an interest payment on a bond payable.

Question 5

Which of the following statements regarding the time value of money is not true?

Accepted Answer

The future value is the amount you expect to receive in the future, not the amount to invest now. The amount to invest now to receive more in the future is called the present value.

Question 6

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 amount of interest expense increases each period as the bonds move towards maturity because the discount on the bond is gradually amortized over the life of the bond. This means that a portion of the discount is added to the interest expense each period to reflect the effective interest rate of the bond. Therefore, choice A is the correct answer.

Question 7

The discount on bonds payable:

Accepted Answer

The discount on bonds payable represents additional interest expense that is amortized over the life of the bond, thus increasing the total interest expense reported on the income statement.

Question 8

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

Accepted Answer

The Premium on Bonds Payable account will increase over the term of the bonds because the bonds were sold at a price higher than their face value. As a result, the company received more cash than the bond's par value, and the difference is recorded as a premium on the bonds payable. The premium is amortized over the life of the bonds as an adjustment to interest expense, causing the balance to decrease. However, since the bond is sold at a premium and will be repaid at par value, the balance of the Premium on Bonds Payable account will still be higher than zero at the end of the term. Therefore, the correct answer is B.

Question 9

The carrying value of a bond immediately after the bond was issued was $245,000. The bond price was 98. The face value of the bond was:

Accepted Answer

The bond price of 98 means that the bond was issued at 98% of its face value, which is the amount that the bond will be worth at maturity. Therefore, we can set up the equation:

$245,000 = 0.98(Face Value)

Solving for the face value:

Face Value = $250,000

Question 10

Either the effective-interest method or the straight-line method of amortization will always result in:

Accepted Answer

The answer of Either the effective-interest method or the straight-line...

Question 11

The journal entry to record payment of bond payable at maturity will include a:

Accepted Answer

When a bond is paid off at maturity, the bond issuer will debit bonds payable to remove the liability from its books and credit cash to reflect the payment made. Thus, the correct option is to debit bonds payable and credit cash. There will be no recognition of any premium or discount on the bond payable, as it has matured and no longer carries any market value adjustments.

Question 12

Premium on Bonds Payable:

Accepted Answer

Premium on Bonds Payable decreases towards maturity value as it is amortized over the life of the bond, reducing the carrying amount of the bond liability.

Question 13

Sisco Company issued $500,000, 6%, 10-year bonds for $425,000 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 effective-interest method of amortization allocates the discount over the life of the bonds. The first interest payment would include a credit to Discount on Bonds Payable of $4,000, which represents the portion of the discount that is being amortized for the year.

Question 14

Sage Company issued $600,000, 8%, 5-year bonds for 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

Accepted Answer

The bond's face value is $600,000, and it was issued at 106%, meaning the company received $600,000 x 106% = $636,000 in cash. The bond has a 5-year term, and the interest is paid annually at a rate of 8% per year. Therefore, the annual interest payment is $600,000 x 8% = $48,000.

To amortize the bond, we need to calculate the total interest expense over the bond's term ($48,000 x 5 = $240,000) and the total premium paid ($636,000 - $600,000 = $36,000). We then divide the premium by the number of years to get the annual amortization ($36,000 ÷ 5 = $7,200).

After one year, the carrying value of the bond would be the face value minus the portion of the premium that has been amortized. The amount of premium amortization for the first year would be $7,200, so the carrying value of the bond after one year would be:

Carrying value = Face value - Premium amortization
Carrying value = $600,000 - $7,200
Carrying value = $592,800

Therefore, the best choice is C, $628,800, which is the carrying value of the bond after one year.

Question 15

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 16

The premium on bonds payable:

Accepted Answer

The premium on bonds payable decreases interest expense on the income statement because it represents the amount by which the bond's issue price exceeds its face value, effectively reducing the cost of borrowing.

Question 17

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

Accepted Answer

The effective-interest method of amortization requires the discount to be amortized over the life of the bond, which means that the amount of discount amortized each interest period is calculated based on the interest expense and the cash paid. Specifically, it is equal to the interest expense for the period minus the cash paid during the period. This results in a reducing balance of the discount over the life of the bond. Choice B is incorrect because adding the cash paid to the interest expense would result in an overstatement of the discount amortization. Choices C and D are incorrect because they do not take into account the effective interest rate, which is the rate that equates the present value of the bond's cash flows to its initial carrying amount.

Question 18

If bonds have been issued at a premium, over the life of the bonds, the:

Accepted Answer

When bonds are issued at a premium, it means the selling price is higher than the face value or the amount of the bond. Over the life of the bonds, the premium will amortize or decrease. As a result, the carrying value of the bonds will decrease. This is because the premium amortization is a reduction in the bond liability, which affects the carrying value.

Question 19

ABC Corporation issued $600,000, 10%, 5-year bonds on January 1, 2012 for $612,000 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 amount of bond interest expense recognized on July 1, 2012 is:

Accepted Answer

First, we need to calculate the amount of annual interest the bondholders will receive:

$600,000 x 10% = $60,000 per year

Since interest is paid semiannually, the bondholders will receive $30,000 on January 1 and $30,000 on July 1.

Next, we need to calculate the amount of interest expense that ABC Corporation will recognize on July 1 using the effective-interest method. This method calculates interest expense based on the carrying value of the bonds and the market interest rate at the time of issuance.

The carrying value of the bonds on July 1, 2012 will be:

Carrying value on January 1, 2012 = $612,000 
Amortization of bond premium for first 6 months = $612,000 x (8% ÷ 2) = $24,480 
Carrying value on July 1, 2012 = $612,000 + $24,480 = $636,480

The interest expense for the second 6 months of the year will be:

Carrying value on July 1, 2012 = $636,480 
Market interest rate at time of issuance = 8% 
Effective interest for the second 6 months = $636,480 x (8% ÷ 2) = $25,459.20

Therefore, the amount of bond interest expense recognized on July 1, 2012 is $24,480 + $25,459.20 = $49,939.20, which is closest to choice letter C.

Question 20

When the effective-interest method of bond premium amortization is used, the:

Accepted Answer

When the effective-interest method of bond premium amortization is used, the amount of premium amortized increases with each amortization. This is because the premium is amortized over the life of the bond using the effective-interest rate, which results in a higher amortization expense each period. The carrying value of the bonds will decrease with each amortization, and the interest payment to bondholders will remain the same or decrease after each interest payment, depending on whether the bond's coupon rate is higher or lower than the effective-interest rate.

Quiz 9: Liabilities