Question 1

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

The gain on retirement is calculated by comparing the net carrying amount of the bonds to the call price. The net carrying amount is the par value plus the unamortized premium, which is $100,000 + $2,700 = $102,700. The call price of 99 means the bonds are retired at 99% of their par value, which is $100,000 * 99% = $99,000. The gain is the difference between the net carrying amount and the retirement price, which is $102,700 - $99,000 = $3,700.

Question 2

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond is:
A)Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
B)Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
C)Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
D)Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.
E)Debit Cash $312,177; credit Bonds Payable $312,177.

Accepted Answer

The answer of On January 1, a company issues bonds...

Question 3

A corporation issued 8% bonds with a par value of $1,000,000 at $1,020,000. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, 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

The corporation issued the bonds at a premium of $20,000 ($1,020,000 - $1,000,000). After 5 years, 40% of the premium has been amortized, which is $8,000 (40% of $20,000). The remaining premium is $12,000 ($20,000 - $8,000). The carrying value of the bonds at retirement is $1,012,000 ($1,000,000 + $12,000). The corporation repurchased the bonds at 99% of par value, which is $990,000 (99% of $1,000,000). The gain on retirement is the difference between the carrying value and the repurchase price: $1,012,000 - $990,000 = $22,000 gain.

Question 4

Bonds that give the issuer an option of retiring them before they mature 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 the bond before maturity, usually for a premium price.

Question 5

On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton 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, Year 1 is:
A)Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B)Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C)Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
D)Debit Notes Payable $14,238; credit Cash $14,238.
E)Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

Accepted Answer

The answer of On January 1, Year 1, Stratton Company...

Question 6

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?
A)$20,000
B)$37,258
C)$25,000
D)$17,258
E)$232,742

Accepted Answer

The answer of On July 1, Shady Creek Resort borrowed...

Question 7

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of premium amortization per semi-annual interest period is:
A)$3,289.50.
B)$3,500.00.
C)$210.50.
D)$181.59.
E)$421.00.

Accepted Answer

The answer of A company issued 5-year, 7% bonds with...

Question 8

A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4 months after the most recent interest date. The journal entry to record the bond issue includes a:
A)$100,000 debit to Cash.
B)$3,000 debit to Interest Expense.
C)$100,000 credit to Bonds Payable.
D)$103,000 credit to Bonds Payable.
E)$3,000 debit to Interest PayablE.$100,000 * .09 * 4/12 year = $3,000 accrued interest

Accepted Answer

The answer of A company issues 9% bonds with a...

Question 9

A company may retire bonds by all but which of the following means?
A)Exercising a call option.
B)The holders converting them to stock.
C)Purchasing the bonds on the open market.
D)Paying them off at maturity.
E)Paying all future interest and cancelling the debt.

Accepted Answer

Exercising a call option, converting bonds to stock, purchasing bonds on the open market, and paying them off at maturity are all ways a company can retire bonds. However, paying all future interest and cancelling the debt is not a recognized means of retiring bonds.

Question 10

A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:
A)Debit to Premium on Bonds $3,745.
B)Credit to Premium on Bonds $3,745.
C)Debit to Discount on Bonds $5,000.
D)Credit to Gain on Bond Retirement $1,255.
E)Credit to Bonds Payable $100,000.

Accepted Answer

The answer of A company retires its bonds at 105....

Question 11

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:
A)$3,500.00.
B)$7,000.00.
C)$3,318.41.
D)$6,573.90.
E)$1,750.00.

Accepted Answer

Step 1: Calculate the total interest expense over the life of the bond.
Interest = Par value x Coupon rate x Time
Interest = $100,000 x 7% x 5 years
Interest = $35,000

Step 2: Calculate the bond discount.
Bond discount = Face value - Issue price
Bond discount = $100,000 - $102,105
Bond discount = $2,105

Step 3: Calculate the semiannual interest payment.
Semiannual interest payment = (Face value x Coupon rate) / 2
Semiannual interest payment = ($100,000 x 7%) / 2
Semiannual interest payment = $3,500

Step 4: Calculate the interest expense for the first semiannual period using the effective interest method.
Interest expense = Bond discount x Effective interest rate
Effective interest rate = (1 + Market rate / 2)^2 - 1
Effective interest rate = (1 + 6.5% / 2)^2 - 1
Effective interest rate = 6.68%
Interest expense = $2,105 x 6.68%
Interest expense = $140.68

Total interest expense over 5 years = $35,000
Total semiannual interest payments = $3,500 x 10 = $35,000
Therefore, recorded interest expense for the first semiannual period = ($35,000 / 10) x Effective interest rate = $3,318.41.

Question 12

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:
A)$5,000 loss
B)$2,700 gain
C)$2,700 loss
D)$2,300 loss
E)$2,300 gain

Accepted Answer

The answer of Clabber Company has bonds outstanding with a...

Question 13

A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?
A)Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B)Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C)Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D)Debit Notes Payable $32,136; credit Cash $32,136.
E)Debit Notes Payable $11,250; credit Cash $11,250.

Accepted Answer

For the first payment, the corporation would need to pay both the interest expense and a portion of the principal amount. The interest expense can be determined by multiplying the outstanding principal balance ($125,000) by the interest rate (9%) and dividing by 12 months, since the interest is calculated on a monthly basis. Therefore, the interest expense for the first payment would be $9,375 ($125,000 x 9% ÷ 12 months).

The remaining amount of the payment would go towards reducing the principal balance of the loan. This can be calculated by subtracting the interest expense from the total payment: $32,136 - $9,375 = $22,761.

The journal entry would be:
Debit Interest Expense $9,375
Debit Notes Payable $22,761
Credit Cash $32,136

Question 14

A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:
A)$1,500.
B)$3,000.
C)$4,500.
D)$6,000.
E)$7,500.

Accepted Answer

The answer of A company issues 9% bonds with a...

Question 15

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the issuance of the note?
A)Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B)Debit Notes Payable $250,000; credit Cash $250,000.
C)Debit Cash $37,258; credit Notes Payable $37,258.
D)Debit Cash $250,000; credit Notes Payable $250,000.
E)Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.

Accepted Answer

The answer of On July 1, Shady Creek Resort borrowed...

Question 16

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

The carrying value of the bonds, including the unamortized discount, is:
$100,000 - $4,500 = $95,500
The company bought back the bonds for:
$100,000 x 0.97 = $97,000
The loss on retirement is:
$95,500 - $97,000 = $1,500

Question 17

On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be:
A)$10,000.00.
B)$11,223.34.
C)$10,800.00.
D)$10,400.00.
E)$1,223.34.

Accepted Answer

The payment each July 31 will be $11,223.34. This is calculated as follows:Payment = (Present value of an annuity factor x Face amount of note) / Number of paymentsPayment = (2.6730 x $30,000) / 3Payment = $11,223.34

Question 18

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:
A)$1,000 gain
B)$2,000 loss
C)$3,000 gain
D)$1,000 loss
E)$2,000 gain

Accepted Answer

The answer of Chang Industries has bonds outstanding with a...

Question 19

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principle will be included in the first annual payment?
A)$20,000
B)$37,258
C)$25,000
D)$232,742
E)$17,258

Accepted Answer

The answer of On July 1, Shady Creek Resort borrowed...

Question 20

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:
A)$3,289.50.
B)$3,500.00.
C)$3,613.70.
D)$6,633.70.
E)$7,000.00.

Accepted Answer

The answer of A company issued 5-year, 7% bonds with...

Quiz 10: Reporting and Analyzing Long-Term Liabilities

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:

Bonds that give the issuer an option of retiring them before they mature are:

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of premium amortization per semi-annual interest period is:

A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4 months after the most recent interest date. The journal entry to record the bond issue includes a:

A company may retire bonds by all but which of the following means?

A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the issuance of the note?

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 August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be:

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principle will be included in the first annual payment?

A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is: