Question 1

The entry to record an installment payment on a long-term note payable is

Accepted Answer

Installment payments on a long-term note payable include both a portion of the principal amount and interest expense. Hence, the entry should be to debit the Mortgage Payable account for the principal portion, credit Interest Expense for the interest portion, and credit Cash for the total amount paid. Choice C correctly records these transactions.

Question 2

Thirty $1,000 bonds with a carrying value of $39,600 are converted into 4,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is

Accepted Answer

When converting bonds into common stock, the carrying value of the bonds is transferred to the common stock account, and any excess is recorded as paid-in capital in excess of par.

First, we need to determine the carrying value of the bonds:
30 bonds x $1,000 = $30,000
Premium on bonds payable = $39,600 - $30,000 = $9,600

Next, we calculate the number of shares issued:
30 bonds x $1,000 = 30,000
$30,000 / $5 par value per share = 6,000 shares
6,000 shares x 4,000 shares = 4,000 shares

Therefore, the journal entry is:

Bonds Payable                      $30,000
Premium on Bonds Payable  $9,600
Common Stock                    $20,000
Paid-in Capital in Excess of Par  $19,600

Note that the market value of the common stock is not used in the journal entry. It is only provided to give additional information about the company's financial position.

Question 3

In the balance sheet, mortgage notes payable are reported as

Accepted Answer

Mortgage notes payable are reported as both a current and a long-term liability on the balance sheet. The portion due within the next year is classified as a current liability, while the remaining balance is classified as a long-term liability.

Question 4

On December 1, 2014, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2014. The portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is:

Accepted Answer

For the first payment made on December 31, 2014:
Interest = $600,000 x 0.12 x 1/12 = $6,000
Principal repayment = $7,200 - $6,000 = $1,200

Therefore, the mortgage balance at the end of December 2014 is $598,800 ($600,000 - $1,200).

For the second payment made on January 31, 2015:
Interest = $598,800 x 0.12 x 1/12 = $5,986.40 (rounded)
Principal repayment = $7,200 - $5,986.40 = $1,213.60 (rounded)

Therefore, the portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is $1,212 (rounded). The correct answer is B.

Question 5

Premium on Bonds Payable

Accepted Answer

Premium on Bonds Payable is an account that represents the excess amount paid above the face value of the bond. It is considered to be a reduction in the cost of borrowing because it lowers the effective interest rate of the bond. Therefore, option C is the best choice. A) has a debit balance, which is true for all asset and expense accounts. B) is incorrect because Premium on Bonds Payable is not a contra account, it is a separate account. D) is incorrect because premium on Bonds Payable is added to Bonds Payable on the balance sheet.

Question 6

Winter Company purchased a building on January 2 by signing a long-term $630,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a

Accepted Answer

The answer of Winter Company purchased a building on January...

Question 7

Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $20 million of these bonds it will report:

Accepted Answer

If Townson Co. calls $20 million of the bonds, they will have to pay $20.8 million (104% of $20 million) to retire the debt. However, the market value of those bonds is only $18.8 million (94% of $20 million). Therefore, they will suffer a loss of $2 million ($20.8 million - $18.8 million), which would be reported on their financial statements.

Question 8

A $600,000 bond was retired at 102 when the carrying value of the bond was $622,000. The entry to record the retirement would include a

Accepted Answer

The answer of A $600,000 bond was retired at 102...

Question 9

A corporation recognizes a gain or loss

Accepted Answer

The answer of A corporation recognizes a gain or loss
...

Question 10

If there is a loss on bonds redeemed early, it is

Accepted Answer

The answer of If there is a loss on bonds...

Question 11

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?

Accepted Answer

The answer of The current carrying value of Kane's $800,000...

Question 12

If bonds can be converted into common stock,

Accepted Answer

Bonds with a conversion feature allow bondholders to convert their bonds into common stock at a predetermined ratio. If the market price of the common stock increases substantially, the bondholder may benefit by converting their bonds and selling the common stock at a higher price. Therefore, the fact that the bonds can be converted into common stock provides potential upside for the bondholder, making them more attractive and likely to sell at a premium compared to bonds without a conversion feature. Thus, option D is the correct answer.

Question 13

A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal. Portion Allocated Portion Allocated
To Interest Expense to Payment of Principal

Accepted Answer

As the loan is paid down, the interest portion of each payment decreases because it is calculated on a smaller remaining principal balance, while the portion allocated to the principal increases.

Question 14

If sixty $1,000 convertible bonds with a carrying value of $70,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is

Accepted Answer

The carrying value of the bonds is $70,000, which is the amount that needs to be accounted for in the conversion. The par value of the common stock is $5 per share, so 9,000 shares would have a par value of $45,000. The remaining $25,000 is the premium on the bonds payable, which is recorded in the stockholders' equity section as Paid-in Capital in Excess of Par. Therefore, the entry to record the conversion is Bonds Payable $60,000, Premium on Bonds Payable $10,000, Common Stock $45,000, Paid-in Capital in Excess of Par $25,000.

Question 15

Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be

Accepted Answer

The answer of Horton Company purchased a building on January...

Question 16

When bonds are converted into common stock,

Accepted Answer

When bonds are converted into common stock, the market price of the stock and the bonds is ignored. The book value of the bonds is transferred to the common stock and additional paid-in capital accounts, without recognizing any gain or loss.

Question 17

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

Accepted Answer

When a company redeems its bonds, it must compare the carrying value of the bonds (the book value of the bonds on the balance sheet) to the redemption price (the amount paid to bondholders to retire the bonds). If the redemption price is greater than the carrying value, the company incurs a loss on the redemption.

In this case, the redemption price is $832,000 (face value of $800,000 plus 4% premium), and the carrying value is $829,960. Therefore, Lark Corporation incurs a loss of $2,040 ($832,000 - $829,960). The entry to record the redemption will include a debit to the bonds payable account to retire the bonds and a debit to Loss on Bond Redemption for $2,040, which represents the loss incurred. Therefore, the answer is B, debit of $2,040 to Loss on Bond Redemption.

Question 18

Which one of the following amounts increases each period when accounting for long-term notes payable?

Accepted Answer

The answer of Which one of the following amounts increases...

Question 19

A $600,000 bond was retired at 98 when the carrying value of the bond was $590,000. The entry to record the retirement would include a

Accepted Answer

The bond was retired for $588,000 ($600,000 x 98%), which is $2,000 less than its carrying value of $590,000, resulting in a gain on bond redemption of $2,000.

Question 20

If bonds with a face value of $140,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to

Accepted Answer

When bonds are converted into common stock, the entry to record the conversion includes debiting Bonds Payable for the face value of the bonds, which is $140,000 in this case, regardless of their carrying value or market price at the time of conversion.

Quiz 10: Liabilities