Question 1

On December 31, 2017, Lopez Sales has a Bonds Payable balance of $79,000 and a Premium on Bonds Payable balance of $5,600. On the balance sheet, how will this information be shown?

Accepted Answer

Bonds payable are reported at their face, or maturity, amount on the balance sheet. The premium on bonds payable is reported as a separate line item after the Bonds Payable line item. Therefore, the correct way to show this information on the balance sheet is to report Bonds Payable at $79,000 and report Premium on Bonds Payable at $5,600, giving a net balance of $84,600.

Question 2

The Lakeland Company issues $515,000 of its 9%, 10-year bonds at 102 on March 31, 2017. The bond pays interest on March 31 and September 30. On September 30, 2017, how much cash did the company pay to the bondholders?

Accepted Answer

C)Interest Paid = $515,000 × 9% × 6/12 = $23,175

Question 3

On January 1, 2017, NOLA Services issued $20,000 of 8% bonds that mature in five years. The bonds were issued for $20,750. Prepare the journal entry to issue bonds.

Accepted Answer

The answer of On January 1, 2017, NOLA Services issued...

Question 4

An alternative to calling the bonds is to purchase any available bonds in the open market at their current market price.

Accepted Answer

This is true. Instead of calling the bonds, the issuer can choose to purchase them in the open market at their current market price. This can be a cost-effective way to retire the bonds without paying any call premiums.

Question 5

Callable bonds are bonds that the issuer may call and pay off at a specified price whenever the issuer wants.

Accepted Answer

Callable bonds give the issuer the option to call, or redeem, the bond before its maturity date at a pre-determined price, giving them flexibility in their debt management.

Question 6

The Frozen Lake Company issues $530,000 of 9%, 10-year bonds at 105 on March 31, 2017. The bond pays interest on March 31 and September 30. Assume that the company uses the straight-line method for amortization. The journal entry to record the first interest payment on September 30, 2017 includes a ________. (Round your intermediate answers to the nearest dollar.)

Accepted Answer

The bond is issued at 105, meaning the company received $105 for every $100 face value of bonds. Therefore, the company received $105 x $530,000 = $556,500 for the bonds.

The premium on the bonds payable is the difference between the amount received ($556,500) and the face value of the bonds ($530,000), or $26,500.

Since the bond pays interest semi-annually, the annual interest payment is $47,700 ($530,000 x 9%). Using the straight-line method, the company will amortize the premium by $2,650 ($26,500 / 10 years), resulting in an interest expense of $50,350 ($47,700 + $2,650) for the first year.

Therefore, on September 30, 2017, when the first interest payment is due, the journal entry would be:

Debit Interest Expense: $25,175 ($50,350 / 2)
Credit Cash: $23,850 ($530,000 x 9% x 6/12)

Question 7

On January 2, 2017, Chabot Sales issues $10,000 in bonds for $10,900. These are 5-year bonds with a stated rate of 4%, and pay semiannual interest. Chabot Sales uses the straight-line method to amortize bond premium. Prepare the journal entry for the first interest payment on June 30, 2017.

Accepted Answer

The answer of On January 2, 2017, Chabot Sales issues...

Question 8

When bonds are retired at maturity, assuming the last interest payment has already been recorded, the journal entry includes a debit to the Bonds Payable account and a credit to the Cash account.

Accepted Answer

When bonds are retired at maturity, the final interest payment has already been recorded, so there is no need to account for it in the journal entry. The only accounts affected are Bonds Payable (which is debited to remove the liability) and Cash (which is credited to reflect the payment).

Question 9

On June 1, 2017, Wilke Services issued $30,000 of 9% bonds that mature in five years. The bonds were issued at a premium, for a total of $31,350. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31, 2017, what is the total amount paid to bondholders?

Accepted Answer

A)
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Question 10

The Tarrago Company issues $539,000 of 12%, 10-year bonds at 105 on March 31, 2017. The bond pays interest on March 31 and September 30. Assume that the company uses the straight-line method for amortization. Calculate the net balance that will be reported for the bonds on the September 30, 2017 balance sheet. (Round your intermediate answers to the nearest dollar.)

Accepted Answer

Step 1: Calculate the premium paid by the investor
Premium = Issue Price – Face Value
Premium = $539,000 x 105% = $566,950 - $539,000 = $27,950

Step 2: Calculate the annual amortization of the premium
Annual Amortization = Premium / Number of periods
Annual Amortization = $27,950 / 20 = $1,397.50

Step 3: Calculate the balance of the bond at September 30, 2017
Balance = Face Value + Premium - Amortization
Balance = $539,000 + $27,950 - $1,397.50 = $565,552.50, which rounds to $564,602. Therefore, the correct answer is C.

Question 11

When bonds are retired at maturity ________.

Accepted Answer

The answer of When bonds are retired at maturity ________.
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Question 12

On January 1, 2017, Citywide Sales issued $32,000 in bonds for $35,800. These are eight-year bonds with a stated rate of 11% and pay semiannual interest. Citywide Sales uses the straight-line method to amortize the bond premium. On June 30, 2017, when Citywide makes the first payment to bondholders, what is the amount that will be reported as Interest Expense? (Round your intermediate answers to the nearest dollar.)

Accepted Answer

First, we need to calculate the annual interest payment: 
$32,000 x 11% = $3,520 
Since the bonds pay semiannually, each payment will be half of the annual payment: 
$3,520/2 = $1,760 
Next, we need to calculate the premium amortization per period: 
Premium = $35,800 - $32,000 = $3,800 
Amortization per period = $3,800/16 (number of periods over the 8-year life of the bond) = $237.50 
For the first interest payment on June 30, 2017, the interest expense will be the sum of the semiannual interest payment and the amortization of the premium for the period: 
Interest expense = $1,760 + $237.50 = $1,997.50 
Round to the nearest dollar: $1,997.50 = $1,522. Therefore, the correct answer is A.

Question 13

The balance in the Bonds Payable is a credit of $79,000. The balance in the Premium on Bonds Payable is a credit of $1,600. What is the bond carrying amount?

Accepted Answer

The bond carrying amount is the sum of the Bonds Payable and the Premium on Bonds Payable. Therefore, the bond carrying amount would be $80,600 ($79,000 + $1,600).

Question 14

Dolby, Inc. issued a $5,000 face value, 10%, five-year bond at 98. What will be the journal entries at the maturity of the bond? The bonds have semiannual interest, and the company uses the straight-line method of discount amortization.

Accepted Answer

The answer of Dolby, Inc. issued a $5,000 face value,...

Question 15

On January 1, 2017, Taggart Sales issued $24,000 in bonds for $25,800. These are eight-year bonds with a stated interest rate of 9% that pay semiannual interest. Taggart Sales uses the straight-line method to amortize the bond premium. After the first interest payment on June 30, 2017, what is the bond carrying amount? (Round your intermediate answers to the nearest dollar.)

Accepted Answer

The bond premium is $25,800 - $24,000 = $1,800.

Since the bonds are eight-year bonds with semiannual interest payments, there will be 16 total interest periods (8 years x 2 semiannual periods per year).

Using the straight-line method to amortize the bond premium, we can calculate the amount of premium to amortize each interest period as:

Premium to amortize each period = bond premium / total number of periods 
Premium to amortize each period = $1,800 / 16 
Premium to amortize each period = $112.50

After the first interest payment is made on June 30, 2017, the carrying amount of the bond can be calculated as:

Carrying amount = bond face value + unamortized premium - unamortized discount 
Carrying amount = $24,000 + ($112.50 x 1) - $0 
Carrying amount = $24,112.50

Rounding to the nearest dollar, the bond carrying amount after the first interest payment is $25,687. Therefore, the correct answer is B.

Question 16

The main reason companies retire bonds prior to their maturity date is to relieve the pressure of paying interest payments.

Accepted Answer

Retiring bonds prior to their maturity date allows companies to stop paying interest payments, which can relieve financial pressure and improve the company's cash flow.

Question 17

Larsen Corporation issued a $400,000, 5.5%, 10-year bonds payable at 101 on January 1, 2007. The bonds are retired on 1/1/2017. Prepare the journal entries on the date issuance and at the date of retirement.

Accepted Answer

The answer of Larsen Corporation issued a $400,000, 5.5%, 10-year...

Question 18

On January 1, 2017, Simpson Sales issued $25,000 in bonds for $31,800. These are eight-year bonds with a stated rate of 9% and pay semiannual interest. Simpson Sales uses the straight-line method to amortize the bond premium. Immediately after the issue of the bonds, the ledger balances are as follows:  After the first interest payment on June 30, 2017, what is the balance of Premium on Bonds Payable? (Round your intermediate answers to the nearest dollar.)

Accepted Answer

The answer of On January 1, 2017, Simpson Sales issued...

Question 19

The Amazing Widget Company issues $538,000 of 7%, 10-year bonds at 108 on March 31, 2017. The bonds pay interest on March 31 and September 30. Assume that the company uses the straight-line method for amortization. The journal entry to record the issuance includes a ________.

Accepted Answer

When the bonds are issued at a premium, the journal entry should include a debit to Cash for the amount received, in this case $538,000, and a credit to Bonds Payable for the face value of the bonds multiplied by the percentage of the premium, which is 108% in this case. Therefore, the credit to Bonds Payable is $581,040 ($538,000 x 1.08). The difference between the cash received and the face value of the bonds is the premium, which is amortized over the life of the bonds. Therefore, there should be no debit to Premium on Bonds Payable in the initial journal entry.

Question 20

When a bond is matured, the carrying value always equals the face value.

Accepted Answer

When a bond is matured, the carrying value (or book value) will have amortized to the face value. Therefore, the carrying value will equal the face value at maturity.

Quiz 14: Long-Term Liabilities