Question 1

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

Accepted Answer

The answer of On January 1, a company issued and...

Question 2

Amortizing a bond discount:

Accepted Answer

Amortizing a bond discount means allocating a portion of the total discount to interest expense each interest period. This reduces the amount of the discount recorded as a liability on the balance sheet and increases the amount of interest expense recorded on the income statement. This process continues until the bond reaches maturity and the discount is fully amortized.

Question 3

On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months.After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

Accepted Answer

The answer of On January 1 of Year 1, Congo...

Question 4

On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

Accepted Answer

The answer of On January 1, Parson Freight Company issues...

Question 5

A bond sells at a discount when the:

Accepted Answer

Bonds sell at a discount when the contract rate is below the market rate because investors can earn a higher return by buying other bonds that pay higher interest rates. This causes the bond's price to fall until the yield to maturity equals the market rate.

Question 6

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Accepted Answer

The answer of On January 1, a company issued and...

Question 7

The Discount on Bonds Payable account is:

Accepted Answer

The Discount on Bonds Payable account is a contra liability account because it offsets the balance in the Bonds Payable account. It represents the difference between the face value of the bond and the amount actually received when the bond was issued at a discount.

Question 8

A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

First, we need to calculate the total amount of interest to be paid over the 10-year period.

The annual interest payment will be 7% of the par value, which is $7,000.

Over 10 years, there will be 20 semiannual interest periods (2 per year).

Therefore, the total interest to be paid will be:

$7,000 x 20 = $140,000

Next, we need to calculate the amount of interest expense for the first semiannual interest period.

Using the straight-line method, we can simply divide the total interest by the number of semiannual periods:

$140,000 / 20 = $7,000

However, since the company only received $96,526 for the bonds, we need to adjust the interest expense for the discount on the bonds.

The discount is the difference between the par value and the amount received:

$100,000 - $96,526 = $3,474

Since the bonds are being amortized over 20 periods, the discount amortization for the first period will be:

$3,474 / 20 = $173.70

Therefore, the amount of interest expense for the first semiannual period will be:

$7,000 - $173.70 = $3,673.70

Question 9

When a bond sells at a premium:

Accepted Answer

When a bond sells at a premium, it means that the contract rate (also known as the coupon rate) is above the market rate. This is because investors are willing to pay more for the bond in order to receive a higher rate of interest than what is currently available in the market.

Question 10

A bond is issued at par value when:

Accepted Answer

A bond is issued at par value when the market rate of interest is the same as the contract rate of interest. This means that investors are willing to buy the bond at its face value, which is known as par value. If the market rate of interest is higher than the contract rate, the bond will be issued at a discount. If the market rate is lower, the bond will be issued at a premium.

Question 11

Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by stockholders' equity. Currently, Saffron Industries has a debt-to-equity ratio of .62 ($16,000,000/$26,000,000). If they use $3,000,000 of excess cash to pay off $3,000,000 of outstanding bonds, their total liabilities will decrease by $3,000,000 and their stockholders' equity will remain the same. This would result in total liabilities of $13,000,000 and stockholders' equity of $26,000,000, giving them a new debt-to-equity ratio of .50 ($13,000,000/$26,000,000). Therefore, prepaying the bonds would cause the firm's debt-to-equity ratio to improve from .62 to .50.

Question 12

Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):

Accepted Answer

Debt to equity ratio is calculated by dividing total liabilities by total equity.
Debt to equity ratio = Total liabilities / Total equity
= 15,000,000 / 12,000,000
= 1.25
Therefore, the answer is C) 1.25

Question 13

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

Accepted Answer

First, we need to calculate the semiannual interest payment using the formula:
Semiannual interest payment = (Par value of bond x interest rate)/2
= ($750,000 x 0.09)/2
= $33,750

Since the market rate is 8%, which is lower than the coupon rate of 9%, the bond is issued at a premium. This means that the bondholders will receive an additional amount of money along with the interest payment to compensate for the higher coupon rate.

To calculate the amount paid to the bondholders for each semiannual interest payment, we need to use the following formula:
Amount paid to bondholders = Semiannual interest payment + Amortization of premium
Amortization of premium = (Premium per bond x Number of bonds outstanding)/Number of total interest payments
Premium per bond = Par value of bond - Issue price of bond
Issue price of bond = Par value of bond x (1 + Market rate/2)n, where n is the number of total interest payments

In this case, n = 20 years x 2 = 40 semiannual periods
Issue price of bond = $750,000 x (1 + 0.08/2)^40
= $2,075,938.31
Premium per bond = $2,075,938.31 - $750,000
= $1,325,938.31

Amortization of premium = ($1,325,938.31 x 1)/40
= $33,148.46

Amount paid to bondholders = $33,750 + $33,148.46
= $67,898.46
≈ $33,750 (rounded to the nearest dollar)

Therefore, the answer is choice C, $33,750.

Question 14

On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

Accepted Answer

The answer of On January 1 of Year 1, Congo...

Question 15

A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

Accepted Answer

The answer of A company issued 8%, 15-year bonds with...

Question 16

The debt-to-equity ratio:

Accepted Answer

The debt-to-equity ratio is a financial metric that assesses a company's risk related to its financing structure. It measures the amount of debt a company has relative to its equity, and a high debt-to-equity ratio indicates that a significant portion of the company's operations are funded through debt, which may increase the risk of default. Therefore, this ratio is an essential tool for investors, creditors, and analysts to evaluate a company's financial health and make informed decisions. The other choices are incorrect because the debt-to-equity ratio is relevant to all creditors, is calculated by dividing total liabilities by shareholders' equity, cannot always be calculated from the income statement, and is usually based on book values, not market values.

Question 17

A discount on bonds payable:

Accepted Answer

A discount on bonds payable occurs when a company issues bonds with a contract rate less than the market rate. This means that the bonds are sold at a lower price than face value, resulting in a discount. This discount is recorded as a contra liability account that reduces the carrying value of the bonds and increases the interest expense over the life of the bond.

Question 18

On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,087 every six months. The life of these bonds is:

Accepted Answer

The answer of On January 1 of Year 1, Congo...

Question 19

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is:

Accepted Answer

The answer of On January 1, a company issued and...

Question 20

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par)with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

Accepted Answer

The answer of Seedly Corporation's most recent balance sheet reports...

Quiz 14: Long-Term Liabilities

Amortizing a bond discount:

On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

A bond sells at a discount when the:

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

The Discount on Bonds Payable account is:

A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

When a bond sells at a premium:

A bond is issued at par value when:

Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals) :

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

The debt-to-equity ratio:

A discount on bonds payable: