Question 1

Bonds that give the issuer an option of retiring them prior to the date of maturity are:
A) Debentures
B) Serial bonds
C) Sinking fund bonds
D) Registered bonds
E) Callable bonds

Accepted Answer

Callable bonds give the issuer the option to retire them prior to the date of maturity.

Question 2

A corporation borrowed $125,000 cash by signing a five-year,9% installment note requiring annual payments each December 31 of accrued interest plus equal amounts of principal.What journal entry would the issuer record for the first payment?
A) $$\begin{array} { | c | r | r | } 
\hline \text { Interest Expense } & 2,250 & \
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 27,250 \
\hline
\end{array}$$
B) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 27,250 & \
\hline \text { Interest Payable } & & 2,250 \
\hline \text { Cash } & & 25,000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | r | r | } 
\hline \text { Interest Expense } & 11,250 & \
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 36,250 \
\hline
\end{array}$$
D) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 25,000 \
\hline
\end{array}$
E) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 11,250 & \
\hline \text { Cash } & & 11,250 \
\hline
\end{array}$$

Accepted Answer

The first payment includes the interest for the first year (9% of $125,000 = $11,250) and a principal payment of $25,000 ($125,000/5 years). The total cash payment is $36,250.

Question 3

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99,the gain or loss on this retirement is:
A) $1,000 gain
B) $1,000 loss
C) $2,700 loss
D) $2,700 gain
E) $3,700 gain

Accepted Answer

11ea8897_dee4_fe93_a96f_093c75079816_TB6312_00_TB6312_00_TB6312_00

Question 4

On October 1,a $30,000,6%,three-year installment note payable is issued by a company.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30.The issuer's journal entry to record the second annual interest payment would include:
A) A debit to Interest Expense for $1,800.
B) A debit to Interest Expense for $1,200.
C) A credit to Cash for $11,800.
D) A credit to Cash for $10,000.
E) A debit to Notes Payable for $1,200.

Accepted Answer

Interest expense = ($30,000 - $10,000) x 6% = $1,200

Question 5

On January 1,2013,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2019,Jacob retires 20% of these bonds by buying them on the open market at 105½.All interest is accounted for and paid through December 31,2018,the day before the purchase.The straight-line method is used to amortize any bond discount or premium.What is the journal entry to record the issuance of the bonds on January 1,2013?
A) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 8 0 0 , 0 0 0& \
\hline \text { Bonds Payable } & &8 0 0 , 0 0 0 \
\hline
\end{array}$$
B) $$\begin{array} { | c | r | r | } 
\hline \text { Bonds Payable } & 8 0 0 , 0 0 0 & \
\hline \text { Cash } & & 8 0 0 , 0 0 0 \
\hline
\end{array}$$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 8 0 0 , 0 0 0 & \
\hline \text { Bonds Payable } & & 772,000 \
\hline \text { Discount on Bonds Payable } & &2 8 , 0 0 0  \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Premium on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & &8 0 0  , 000 \
\hline
\end{array}$$
E) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 772,000 & \
\hline \text { Discount on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & &  8 0 0 , 000 \
\hline
\end{array}$$

Accepted Answer

The bonds were issued at 96½, which means they were issued at a discount. The cash received is 96.5% of $800,000, which is $772,000. The discount on bonds payable is the difference between the face value and the cash received, which is $28,000.

Question 6

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond discount or premium.What is the journal entry to record the first interest semi-annual interest payment on June 30,2013?
A) $$\begin{array} { | c | r | r | } 
\hline \text { Interest Expense } & 33,000 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 33,000 & \
\hline \text { Interest Expense } & & 33,000 \
\hline
\end{array}$$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 32,500 & \
\hline \text { Discount on Bonds Payable } & 500 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 32,500 & \
\hline \text { Premium on Bonds Payable } & 500 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$$
E) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 33,000 & \
\hline \text { Discount on Bonds Payable } & & 500 \
\hline \text { Cash } & & 32,500 \
\hline
\end{array}$$

Accepted Answer

The bonds were issued at a premium (102.5% of $600,000 = $615,000). The premium of $15,000 ($615,000 - $600,000) is amortized over 30 periods (15 years, semi-annual), resulting in $500 per period. The cash interest payment is $33,000 (11% of $600,000 / 2). The interest expense is reduced by the amortized premium, resulting in $32,500.

Question 7

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?
A) $0 gain or loss
B) $1,500 gain
C) $1,500 loss
D) $3,000 gain
E) $3,000 loss

Accepted Answer

11ea8897_dee4_8960_a96f_a5b992f0474e_TB6312_00_TB6312_00_TB6312_00

Question 8

On January 1,2013,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2019,Jacob retires 20% of these bonds by buying them on the open market at 105½.All interest is accounted for and paid through December 31,2018,the day before the purchase.The straight-line method is used to amortize any bond discount or premium.What is the carrying value of the bond on January 1,2019?
A) $772,000
B) $831,076
C) $784,924
D) $277,000
E) $800,000

Accepted Answer

Issue price: $800,000 * .965 = $772,000
Total discount: $800,000 - $772,000 = $28,000
Amortization of bond discount per payment: $28,000/26 = $1,077
Amortized discount on 1/1/2019: $1,077 *12 payments = $12,924
Remaining discount on 1/1/2019: $28,000 - $12,924 = $15,076
Carrying value: $800,000 - $15,076 = $784,924

Question 9

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.What is the journal entry to record the issuance of these bonds? 
A) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 600,000 & \
\hline \text { Bonds Payable } & & 600,000 \
\hline
\end{array}$$
B) $\begin{array}{|c|r|l|}
\hline \text { Bonds Payable } & 600,000 & \
\hline \text { Cash } & & 600,000 \
\hline
\end{array}$
C) $$\begin{array} { |l | r | r | } 
\hline \text { Cash } & 615,000 & \
\hline \text { Bonds Payable } & & 600,000 \
\hline \text { Premium on Bonds Payable } & & 15,000 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Cash } & 600,000 & \
\hline \text { Premium on Bonds Payable } & 15,000 & \
\hline \text { Bonds Payable } & & 615,000 \
\hline
\end{array}$$
E) $$\begin{array} { | l| r | r | } 
\hline \text { Cash } & 600,000 & \
\hline \text { Discount on Bonds Payable } & 9,000 & \
\hline \text { Bonds Payable } & & 609,000 \
\hline
\end{array}$$

Accepted Answer

The bonds are issued at 102½, which means 102.5% of the face value. The cash received is $600,000 * 102.5% = $615,000. The bonds payable is recorded at face value, $600,000, and the premium on bonds payable is the difference, $15,000.

Question 10

On April 1,2013,Jared Enterprises issues bonds dated January 1,2013,that have a $2,430,000 par value,mature in 20 years,and pay 7% interest semiannually on June 30 and December 31.The bonds are sold at par plus three months' accrued interest.What is the total amount of cash Jared Enterprises will collect on April 1,2013?
A) $2,600,100
B) $2,430,000
C) $2,472,525
D) $2,750,000
E) $2,515,050

Accepted Answer

Interest for Jan. -Apr.: $2,430,000 * .07 * 3/12 = $42,525
Par value plus accrued interest: $2,430,000 + $42,525 = $2,472,525

Question 11

A company has bonds outstanding with a par value of $600,000.The unamortized discount on these bonds is $3,000.The company retired these bonds by buying them on the open market at 98.What is the gain or loss on this retirement?
A) $0 gain or loss
B) $9,000 gain
C) $9,000 loss
D) $14,500 gain
E) $14,500 loss

Accepted Answer

11ea8897_dee4_b071_a96f_47a29e9310db_TB6312_00_TB6312_00_TB6312_00

Question 12

A company retires its bonds at 105.The carrying value of the bonds at the date of is $103,745.The issuer's journal entry to record the retirement will include a:
A) Debit to Premium on Bonds.
B) Credit to Premium on Bonds.
C) Debit to Discount on Bonds.
D) Credit to Gain on Bond Retirement.
E) Credit to Bonds Payable.

Accepted Answer

When bonds are retired at a price higher than their carrying value, a gain on retirement of bonds is recognized. Therefore, the issuer's journal entry will include a debit to Bonds Payable (to decrease the liability), a debit to Premium on Bonds (to decrease the premium account), and a credit to Cash for the amount paid to retire the bonds.

Question 13

On January 1,2013,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2019,Jacob retires 20% of these bonds by buying them on the open market at 105½.All interest is accounted for and paid through December 31,2018,the day before the purchase.The straight-line method is used to amortize any bond discount or premium.What is the journal entry to record the first semiannual interest payment on June 30,2013?
A) $\begin{array}{|l|r|r|}
\hline \text { Interest Expense } & 36,000 & \
\hline \text { Cash } & & 36,000 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 36,000 & \
\hline \text { Interest Expense } & & 36,000 \
\hline
\end{array}$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 36,000 & \
\hline \text { Discount on Bonds Payable } & 1,077 & \
\hline \text { Cash } & & 37,077 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Experse } & 36,000 & \
\hline \text { Prermium on Bonds Payable } & 1,077 & \
\hline \text { Cash } & & 37,077 \
\hline
\end{array}$$
E) $$\begin{array} { | l | r | r | } 
\hline \text { Interest Expense } & 37,077 & \
\hline \text { Discount on Bonds Payable } & & 1,077 \
\hline \text { Cash } & & 36,000 \
\hline
\end{array}$$

Accepted Answer

The answer of On January 1,2013,Jacob issues $800,000 of 9%,13-year...

Question 14

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond premium or discount.What is the total interest expense for the life of these bonds?
A) $975,000
B) $964,000
C) $936,000
D) $772,000
E) $990,000

Accepted Answer

Cash paid: ($600,000*.11) = $66,000 * 15 = $990,000 - Prem.$15,000 = $975,000

Question 15

On January 1,2013,Jacob issued $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually.If all interest has been accounted for properly,what is the carrying value of these bonds on January 1,2019?
A) $472,000
B) $531,076
C) $584,924
D) $609,000
E) $600,000

Accepted Answer

Issue price: $600,000 * 1.025 = $615,000
Premium: $615,000 - $600,000 = $15,000
Amortized premium: $500 * 12 = $6,000
Unamortized premium: $15,000 - $6000 = $9,000
Carrying value: $600,000 + $9,000 = $609,000

Question 16

On January 1,2013,Jacob issued $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually.All interest has been accounted for (and paid)through December 31,2018.The company retires 30% of these bonds by buying them on the open market at 98½.
What is the journal entry to record the retirement of 30% of the bonds on January 1,2019?
A) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Cash } & & 177,300 \
\hline \text { Discount on Bonds Payable } & & 2,700 \
\hline
\end{array}$$
B) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Loss on Retirement } & 11,815 & \
\hline \text { Discount on Bonds Payable } & & 2,700 \
\hline \text { Cash } & & 177,300 \
\hline
\end{array}$$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Discount on Bonds Payable } & 2,700 & \
\hline \text { Gain on Retirement } & & 177,300 \
\hline \text { Cash } & & 5,400 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Premium on Bonds Payable } & 2,700 & \
\hline \text { Gain on Retirement } & & 5,400 \
\hline \text { Cash } & & 177,300 \
\hline
\end{array}$$
E) $\begin{array}{|c|r|l|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Cash } & & 180,000 \
\hline
\end{array}$

Accepted Answer

The bonds were issued at a premium (102.5%), and 30% of the bonds are retired. The premium amortized over 6 years needs to be considered. The cash paid is 98.5% of the face value of the retired bonds. The difference between the book value and the cash paid results in a gain on retirement.

Question 17

On January 1,2013,Jacob issues $800,000 of 9%,13-year bonds at a price of 96½.Six years later,on January 1,2019,Jacob retires 20% of these bonds by buying them on the open market at 105½.All semiannual interest is accounted for and paid through December 31,2018,the day before the purchase.The straight-line method is used to amortize any bond discount or premium.What is the journal entry to record the retirement of 20% of the bonds on January 1,2019?
A) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Cash } & & 156,985 \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline
\end{array}$$
B) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Loss on Retirement } & 11,815 & \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline \text { Cash } & & 168,800 \
\hline
\end{array}$$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Discount on Bonds Payable } & 3,015 & \
\hline \text { Cash } & & 168,800 \
\hline \text { Gain on Retirement } & & 5,785 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Premium on Bonds Payable } & 2,585 & \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline \text { Cash } & & 154,400 \
\hline
\end{array}$$
E) $$\begin{array} { | c | r | r | } 
\hline \text { Bonds Payable } & 168,800 & \
\hline \text { Cash } & & 168,800 \
\hline
\end{array}$$

Accepted Answer

The bonds payable amount is 20% of $800,000, which is $160,000. The discount on bonds payable is calculated based on the unamortized discount. The cash paid is 20% of $800,000 at 105½, which is $168,800. The loss on retirement is the difference between the cash paid and the book value of the bonds retired.

Question 18

A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date five years later,after the bond interest was paid and after 40% of the premium had been written off,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:
A) $0
B) $10,000 gain
C) $10,000 loss
D) $22,000 gain
E) $22,000 loss

Accepted Answer

11ea8897_dee5_25a4_a96f_67205955c3c7_TB6312_00_TB6312_00_TB6312_00

Question 19

On January 1,2013,Merrill Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Merrill to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,2013 is:
A)  $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 7,238 & \
\hline \text { Interest expense } & 7,000 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$$
B) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 7,000 & \
\hline \text { Interest expense } & 7,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$$
C) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 10,000 & \
\hline \text { Interest expense } & 7,000 & \
\hline \text { Cash } & & 17,000 \
\hline
\end{array}$$
D) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 14,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$$
E) $$\begin{array} { | l | r | r | } 
\hline \text { Notes Payable } & 10,000 & \
\hline \text { Interest expense } & 4,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$$

Accepted Answer

The interest expense for the first year is $7,000 (7% of $100,000). The remaining amount of the payment ($14,238 - $7,000 = $7,238) reduces the principal, so the entry is: Debit Notes Payable $7,238, Debit Interest Expense $7,000, Credit Cash $14,238.

Question 20

A company has bonds outstanding with a par value of $400,000.The unamortized premium on these bonds is $2,000.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?
A) $0 gain or loss
B) $10,000 gain
C) $10,000 loss
D) $14,000 gain
E) $14,000 loss

Accepted Answer

11ea8897_dee4_d782_a96f_797881643721_TB6312_00_TB6312_00_TB6312_00

Quiz 10: Long-Term Liabilities

Bonds that give the issuer an option of retiring them prior to the date of maturity are:

A corporation borrowed $125,000 cash by signing a five-year,9% installment note requiring annual payments each December 31 of accrued interest plus equal amounts of principal.What journal entry would the issuer record for the first payment?

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99,the gain or loss on this retirement is:

On October 1,a $30,000,6%,three-year installment note payable is issued by a company.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30.The issuer's journal entry to record the second annual interest payment would include:

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond discount or premium.What is the journal entry to record the first interest semi-annual interest payment on June 30,2013?

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.What is the journal entry to record the issuance of these bonds?

A company has bonds outstanding with a par value of $600,000.The unamortized discount on these bonds is $3,000.The company retired these bonds by buying them on the open market at 98.What is the gain or loss on this retirement?

A company retires its bonds at 105.The carrying value of the bonds at the date of is $103,745.The issuer's journal entry to record the retirement will include a:

On January 1,2013,Jacob issues $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond premium or discount.What is the total interest expense for the life of these bonds?

On January 1,2013,Jacob issued $600,000 of 11%,15-year bonds at a price of 102½.The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually.If all interest has been accounted for properly,what is the carrying value of these bonds on January 1,2019?

On January 1,2013,Merrill Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Merrill to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,2013 is:

A company has bonds outstanding with a par value of $400,000.The unamortized premium on these bonds is $2,000.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?