Question 1

On January 2, 2015, Garage 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, 2015 is

Accepted Answer

The answer of On January 2, 2015, Garage Master Construction,...

Question 2

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 3

On January 1, 2015, Clarkson, 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, 2015?

Accepted Answer

The carrying value of the bonds is the initial issue price of $354,200 minus any discount or plus any premium amortized over the life of the bonds. 
Step 1: Calculate the semiannual interest payment: 
$400,000 x 10% x 6/12 = $20,000 
Step 2: Calculate the interest expense using the effective interest method: 
June 30, 2015: 
Carrying value = $354,200 
Effective interest rate = 12%/2 = 6% 
Interest expense = $354,200 x 6% = $21,252 
Amortization of discount = $21,252 - $20,000 = $1,252 
Carrying value after June 30, 2015 = $354,200 + $1,252 = $355,452 
Therefore, the answer is C.

Question 4

On January 1, 2015, Corner Store, 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, 2015 is

Accepted Answer

The answer of On January 1, 2015, Corner Store, Inc....

Question 5

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

Accepted Answer

When bonds are issued at a premium (meaning the price paid for the bond is higher than the face value of the bond), the premium is amortized over the life of the bond. As a result, the carrying value of the bond will decrease over time as the premium is gradually reduced. By the time the bond reaches maturity, the carrying value will be equal to the face value of the bond.

Question 6

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 7

On January 2, 2015, Hi-Tech 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 answer of On January 2, 2015, Hi-Tech Master Construction,...

Question 8

On January 1, 2015, Clark, 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 at the end of the ten years?

Accepted Answer

The answer of On January 1, 2015, Clark, Inc. issued...

Question 9

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

The answer of Neville Company issued $100,000 of 6%, 10...

Question 10

Amortization of bond discount results in an

Accepted Answer

The answer of Amortization of bond discount results in an
...

Question 11

On January 2, 2015, Concrete 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, 2015?

Accepted Answer

The carrying value of the bonds after the first interest payment is made on June 30, 2015, can be calculated using the effective interest method as follows:

1. Determine the semi-annual interest payment:
Face value of bonds x Semi-annual interest rate
= $500,000 x 8%/2
= $20,000

2. Determine the amount of interest expense:
Carrying value of bonds at the beginning x Market rate per period
= $574,540 x 6%/2
= $17,236

3. Determine the amortization of premium:
Interest payment - Interest expense
= $20,000 - $17,236
= $2,764

4. Determine the carrying value of bonds after interest payment:
Carrying value of bonds at the beginning + Amortization of premium
= $574,540 + $2,764
= $577,304

Therefore, the best choice is B ($571,776 is not the answer given by the calculation).

Question 12

On January 2, 2015, Wynn Corporation sold $750,000 of bonds for $745,000. The bonds will mature in 10 years and pay interest annually on December 31. Wynn 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 2015?

Accepted Answer

The answer of On January 2, 2015, Wynn Corporation sold...

Question 13

In 2015, Suez Company issued $200,000 of bonds for $189,640. If the face rate of interest was 6.73% and the effective rate of interest was 8%, how would Suez calculate the interest expense for the first year on the bonds using the effective interest method?

Accepted Answer

The answer of In 2015, Suez Company issued $200,000 of...

Question 14

On January 2, 2015, Lawn 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 at the end of ten years before the final maturity payment is made?

Accepted Answer

The answer of On January 2, 2015, Lawn Master Construction,...

Question 15

Amortization of bond premium results in an

Accepted Answer

Amortization of bond premium reduces the carrying value of bonds over time. This is because the premium paid for the bond is gradually expensed over the bond's life, reducing the effective interest rate over time. This reduces interest expense and increases the amount of interest that is applied to reduce the carrying value of the bonds. Therefore, the carrying value of the bonds is reduced, which is a decrease of an asset account, and there is no change in stockholder's equity as bond premium is not a component of equity.

Question 16

On January 1, 2015, Chain, 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, 2015 is

Accepted Answer

To calculate interest expense, we first need to determine the amount of interest payable for the first six months of the bond's life. 
Face value of bonds = $400,000 
Interest rate = 10% 
Semiannual interest payment = $400,000 × 10% × 1/2 = $20,000 
Since the bonds were issued on January 1, 2015, the first interest payment is due on June 30, 2015. 
We can now use the effective interest rate method to calculate interest expense for the first six months: 
Carrying value on Jan 1, 2015 = $354,200 (the amount the bonds were issued for) 
Interest expense for the first six months = Carrying value × effective interest rate 
Effective interest rate = (1 - 1/((1 + 12%/2)^2)) = 11.42% (using the market rate of 12%) 
Interest expense for the first six months = $354,200 × 11.42% = $40,452 
We only need to account for interest expense for the first six months, so the correct answer is C) $21,252 (half of $40,452).

Question 17

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 initially issued at a discount, the effective interest rate is higher than the coupon rate. As a result, the interest expense calculated using the effective interest method will increase over time as the discount on the bonds is amortized. Therefore, the interest expense will increase as the bonds approach their maturity date.

Question 18

Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of redemption was $15,000. The corporation's bond certificates indicated that the bonds could be retired early at 103. Friendly's retirement of the bonds would result in an

Accepted Answer

CThe redemption price of the bonds is 103% of the face value, which is $300,000 * 103% = $309,000. Since the bonds were issued at a discount, the book value of the bonds at the time of redemption is the face value minus the unamortized discount, which is $300,000 - $15,000 = $285,000. Therefore, retiring the bonds for $309,000 when their book value is $285,000 results in a loss of $24,000 (A). This loss decreases owners' equity (C), as losses reduce retained earnings, a component of owners' equity.

Question 19

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 ensures that the interest expense for each amortization period represents a constant percentage of the carrying value of the bond. This means that the effective interest rate for each period will vary depending on the bond's carrying value, but it will remain constant for each period. Therefore, choice B is the correct answer. Choices A, C, and D are all incorrect based on the explanation provided.

Question 20

With the effective interest method of amortization, the amortization of bond premium results in an

Accepted Answer

The effective interest method of amortization of bond premium decreases interest expense over the life of the bond, as the premium paid over par value is allocated against interest payments, effectively reducing the amount of interest expense recognized in each period.

Quiz 10: Long-Term Liabilities