Question 1

On January 1,2012,Breaker,Inc.issued $400,000,10-year,10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.What is the carrying value of the bonds after the first interest payment is made on June 30,2012?

Accepted Answer

The carrying value of the bonds at the time of issuance is given by the issue price, which is $354,200.
For the first interest payment, the interest expense would be calculated as:
Interest expense = Carrying value of bonds at the beginning * Market rate * Time
= $354,200 * 0.12 * 6/12 (since 6 months have passed)
= $21,252
The carrying value of the bonds after the first interest payment would be:
Carrying value = Carrying value at the beginning + Interest expense - Interest paid
= $354,200 + $21,252 - $20,000 (10% of face value)
= $355,452, which is option C.

Question 2

On January 2,2012,Dock Master Construction,Inc.issued $500,000,10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.The annual cash payment (paid in semiannual payments)on the bonds is

Accepted Answer

The annual interest payment can be calculated using the following formula:

Annual interest payment = Face value of the bond * Coupon rate
where the coupon rate is the face rate of 8%.

For $500,000 bond, the annual interest payment is:
= $500,000 * 8%
= $40,000

Since the bonds pay interest semi-annually, the payment can be divided into two equal parts of $20,000 each, to be paid on June 30 and December 31. Therefore, the annual cash payment (paid in semi-annual payments) on the bonds is $40,000.

Question 3

On January 1,2012,Breaker,Inc.issued $400,000,10-year,10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.The interest expense on the bonds at June 30,2013 is

Accepted Answer

First, we need to calculate the bond's carrying value as of June 30, 2013:

Carrying value = Issue price – Amortization of discount + Amortized bond premium
Carrying value = $354,200 - $35,420 + $1,972 (you can confirm these numbers using the straight-line method for amortization)

Carrying value = $320,752

Next, we calculate the interest expense for the period:

Interest expense = Carrying value x Market rate x Time
Time = 6/12 (since the bonds pay interest semi-annually)

Interest expense = $320,752 x 12% x 6/12 = $19,245.12

Therefore, the closest answer choice is C) $21,252.

Question 4

Under the effective interest method,the cash paid on each interest payment date will

Accepted Answer

The cash paid on each interest payment date remains constant regardless of whether the bonds are issued at a premium, discount, or at par value. This is because the cash interest payment is based on the bond's stated (or nominal) interest rate and its face value, not on its carrying amount.

Question 5

Which of the following statements regarding amortization is true?

Accepted Answer

Amortization of premium on bonds payable is a process where the premium amount (the amount by which the bond's selling price exceeds its face value) is gradually reduced over the life of the bond. This reduction is done by allocating a portion of the premium to reduce the amount of interest expense recognized in each period. Therefore, the correct statement is that the amortization of premium continues over the life of the bond until the balance in the account is reduced to zero, which aligns with choice D. This process ensures that by the time the bond matures, the book value of the bond equals its face value.

Question 6

With the effective interest method of amortization,the amortization of bond discount results in a(n)

Accepted Answer

The effective interest method of amortization results in an increase in interest expense because it allocates the bond discount over the life of the bond, resulting in a higher interest expense in the earlier years of the bond's life. This is because the interest expense is calculated by multiplying the carrying value of the bond by the effective interest rate, which is higher than the stated coupon rate of the bond when the bond is issued at a discount. As a result, the discount is gradually amortized over the life of the bond, and interest expense is higher in the earlier years when the carrying value of the bond is higher. The increase in interest expense does not affect stockholders' equity.

Question 7

On January 2,2012,Dock Master Construction,Inc.issued $500,000,10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.What is the carryingvalue of the bonds at the end of ten years before the final maturity payment is made?

Accepted Answer

The carrying value of the bonds at the end of ten years before the final maturity payment is made is the face value of the bonds, which is $500,000. This is because the bonds will be fully amortized by the end of the term, and the carrying value will equal the face value.

Question 8

If bonds were initially issued at a discount,the interest expense on the bonds calculated using the effective interest method will

Accepted Answer

When bonds are issued at a discount, the interest expense calculated using the effective interest method will increase as the bonds approach their maturity date. This is because the difference between the face value and the issuance price will be amortized (recognized as interest expense) over the life of the bond using the effective interest method. As the bond approaches its maturity, the unamortized discount decreases, resulting in a higher interest expense.

Question 9

On January 2,2012,Dock Master Construction,Inc.issued $500,000,10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.What is the carrying value of the bonds after the first interest payment is made on June 30,2012?

Accepted Answer

The carrying value of a bond is the present value of future cash flows, discounted at the market rate. After the first interest payment on June 30, 2012, the carrying value of the bonds would be calculated as follows:
- The face value of the bonds is still $500,000.
- The semi-annual interest payment is $20,000 ($500,000 x 8% x 6/12).
- The market rate has not changed, so it remains at 6%.
Using the present value formula, we can calculate the carrying value:
Carrying value = PV of face value + PV of interest payments
PV of face value = $500,000 / (1 + 6%/2)^1 = $471,275.94
PV of interest payments = $20,000 / (1 + 6%/2)^1 + $20,000 / (1 + 6%/2)^2 = $11,500.06
Carrying value = $471,275.94 + $11,500.06 = $482,776.00, which rounds down to $571,776 (B).

Question 10

Amortization of bond premium results in a(n)

Accepted Answer

The amortization of bond premium results in a decrease in the carrying value of bonds, as the premium is gradually reduced over the life of the bond. This is because the premium represents an amount paid above the face value of the bond, which must be amortized over the bond's life. The decrease in carrying value also results in a decrease in interest expense, as the effective interest rate on the bond is reduced by the amortization of the premium. However, there is no impact on stockholders' equity or the cash account.

Question 11

On January 1,2012,Breaker,Inc.issued $400,000,10-year,10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.What is the carryingvalue of the bonds at the end of the ten years?

Accepted Answer

At the end of the ten years, the carrying value of the bonds will be equal to the face value of the bonds, which is $400,000, as the bonds will be fully amortized.

Question 12

On January 2,2012,Dock Master Construction,Inc.issued $500,000,10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.The interest expense on the bonds at June 30,2012 is

Accepted Answer

First, we need to calculate the bond interest expense using the effective interest rate method.

Step 1: Calculate the semi-annual interest payment on the face value of the bond 
= $500,000 x 8% x 6/12 
= $20,000

Step 2: Calculate the effective interest rate 
i = 3% (6% / 2) 
n = 20 (10 years x 2 semi-annual periods)

PVIFA(3%,20) = 16.4241

Effective interest rate = (1 - 1/(1 + i)^n) / i x P 
= (1 - 1/(1 + 3%)^20) / 3% x $500,000 
= 10.5477 x $500,000 
= $5,273,847

Step 3: Calculate the interest expense for the first semi-annual period 
= $5,273,847 x 3% 
= $158,215

Since the bonds were issued on January 2, 2012, there is only one semi-annual period before June 30, 2012. Therefore, the interest expense for the first period is also the interest expense at June 30, 2012.

Answer: B) $17,236.

Question 13

Amortization of bond discount results in a(n)

Accepted Answer

The answer of Amortization of bond discount results in a(n)
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Question 14

In 2012,Park Company issued $200,000 of bonds for $189,640.If the face rate of interest was 8% and the effective rate of interest was 6.73%,how would Park calculate the interest expense for the first year on the bonds using the effective interest method?

Accepted Answer

The effective interest method calculates interest expense based on the carrying amount of the bond and the effective interest rate. Therefore, the interest expense for the first year is $189,640 (the carrying amount) multiplied by 6.73% (the effective interest rate).

Question 15

Neville Company issued $100,000 of 6%,10 year bonds when the market rate of interest was 5%.The proceeds from this bond issue were $107,732.Using the effective interest method of amortization,which of the following statements is true? Assume interest is paid annually.

Accepted Answer

First, we need to calculate the premium on the bonds. The premium is the difference between the proceeds and the face value of the bonds:
Premium = Proceeds - Face Value
Premium = $107,732 - $100,000
Premium = $7,732

Next, we need to calculate the annual interest payment on the bonds. The coupon rate is 6% and the face value is $100,000, so the annual interest payment is:
Interest Payment = Coupon Rate x Face Value
Interest Payment = 6% x $100,000
Interest Payment = $6,000

Since the market rate of interest is 5%, the bonds are issued at a premium. This means that the effective interest rate is less than the coupon rate. To calculate the amortization of the premium, we need to subtract the annual interest payment from the effective interest expense. The effective interest expense is the interest paid on the bonds based on the market rate of interest. We can calculate the effective interest expense using the following formula:

Effective Interest Expense = Beginning Carrying Value x Market Rate of Interest

In the first year, the beginning carrying value is the face value of the bonds minus the premium:
Beginning Carrying Value = Face Value - Premium
Beginning Carrying Value = $100,000 - $7,732
Beginning Carrying Value = $92,268

The market rate of interest is 5%, so the effective interest expense is:
Effective Interest Expense = $92,268 x 5%
Effective Interest Expense = $4,613.40

To calculate the amortization of the premium for the first interest period, we need to subtract the annual interest payment from the effective interest expense:
Amortization of Premium = Effective Interest Expense - Annual Interest Payment
Amortization of Premium = $4,613.40 - $6,000
Amortization of Premium = -$1,386.60

Since the bonds are issued at a premium, the amortization of the premium for each interest period will be a negative number. This represents a reduction in the premium over time as it is amortized to interest expense. We divide -$1,386.60 by 2 to get the answer:
Amortization of Premium for the first interest period will be $613.

Question 16

The result of using the effective interest method of amortization of discount on bonds is that the

Accepted Answer

The effective interest method of amortization of discount on bonds results in a constant effective interest rate for each amortization period. This is because the interest expense is calculated based on the carrying amount of the bond each period, which includes the amortized discount. As a result, the interest expense gradually increases over time as the discount is amortized and the carrying amount of the bond increases. The cash interest payment remains the same throughout the life of the bond.

Question 17

On January 2,2013,Morrisville Corporation sold $750,000 of bonds for $745,000.The bonds will mature in 10 years and pay interest annually on December 31.Morrisville properly recorded the payment of interest and amortization of the discount using the effective interest method.Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of 2013?

Accepted Answer

The carrying value of the bonds will increase over time as the discount is amortized. Since the bonds were sold at a discount, the carrying value at the end of 2013 will be greater than the initial carrying value of $745,000.

Question 18

If bonds were initially issued at a premium,the carrying value of the bonds on the issuer's books will

Accepted Answer

If bonds were initially issued at a premium, the carrying value of the bonds on the issuer's books will decrease as the bonds approach their maturity date. This is because the premium amount will gradually decrease to zero as the bonds near their maturity and will be fully amortized by the end of the bond term. Therefore, the issuer will gradually amortize the premium amount over the life of the bond, which results in a lower carrying value of the bond.

Question 19

On January 1,2012,Breaker,Inc.issued $400,000,10-year,10% bonds for $354,200.The bonds pay interest on June 30 and December 31.The market rate is 12%.The cash payment on June 30,2012 is

Accepted Answer

The cash payment on June 30, 2012, is calculated based on the bond's face value and the stated interest rate. The face value is $400,000 and the stated interest rate is 10%, so the semi-annual interest payment is $400,000 * 10% / 2 = $20,000.

Question 20

With the effective interest method of amortization,the amortization of bond premium results in a(n)

Accepted Answer

The effective interest method results in a decrease in interest expense over time as the bond premium is amortized, reducing the carrying amount of the bond.

Quiz 10: Long-Term Liabilities