Question 1

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

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Question 2

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

Under the effective interest method, the interest expense is calculated by using the market rate of interest at the time of issuance to discount the cash flows associated with the bond. The difference between the cash interest payment and the interest expense is used to either reduce the premium or increase the discount on bonds payable.

For the first interest payment, the interest expense is calculated as follows:

First, calculate the semi-annual interest payment: 
$400,000 x 7% x 6/12 = $14,000

Next, calculate the interest expense: 
Interest expense = $383,793 x 8% x 6/12 = $15,351.72

The difference between the interest expense and the cash payment is a reduction in the discount on bonds payable.

Therefore, the journal entry to record the first interest payment is: 
Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.

Question 3

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the second interest payment using the effective interest method of amortization is:

Accepted Answer

Under the effective interest method, the interest expense is calculated by multiplying the carrying value of the bond at the beginning of the period by the effective interest rate. The effective interest rate is the rate that will discount the future cash flows of the bond to the present value of the bond's net carrying amount.

Step 1: Calculate the effective interest rate
PV of bond = $383,793
PMT = $20,000 ($400,000 x 7% x 1/2)
N = 10 periods (5 years x 2 payments per year)
FV = $400,000
Solve for i = 8.5%
Since the contract rate is lower than the market rate, the bond is sold at a discount.

Step 2: Calculate the interest expense for the period
Carrying value at beginning of period = $383,793 - $1,405.79 (amortization of discount from previous period) = $382,387.21
Interest expense = $382,387.21 x 8.5% = $32,548.60
Less: Interest paid = $20,000
Amortization of discount = $1,405.79
Total = $21,405.79
Therefore, the journal entry to record the second interest payment is:
Debit Interest Expense $15,405.79
Credit Discount on Bonds Payable $1,405.79
Credit Cash $14,000.00

Question 4

On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

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Question 5

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 first interest payment using straight-line amortization is:

Accepted Answer

To record the first interest payment using straight-line amortization, we need to calculate the total bond interest expense for the period. 
Total bond interest expense = (Par value x Contract rate x Time) / n 
where 
Par value = $300,000 
Contract rate = 9% 
Time = 6/12 (for six months) 
n = 10 (number of semiannual periods)

So, total bond interest expense = ($300,000 x 9% x 6/12) / 10 = $13,500.

Next, we need to calculate the bond premium amortized for the period. 
Bond premium amortized = Bond premium / n = ($312,177 - $300,000) / 10 = $1,217.70

Therefore, the journal entry to record the first interest payment using straight-line amortization is: 
Debit Bond Interest Expense $12,282.30 (=$13,500 - $1,217.70) 
Debit Premium on Bonds Payable $1,217.70 
Credit Cash $13,500.00

Question 6

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

In straight-line amortization, the discount on bonds payable is allocated evenly over the life of the bonds. Using the given information, the annual interest payment is $28,000 ($400,000 * 7%) and the semi-annual interest payment is $14,000 ($28,000/2). The discount on bonds payable is the difference between the par value and the selling price ($400,000 - $383,793 = $16,207), which is amortized over 10 semi-annual periods ($16,207 ÷ 10 = $1,620.70).

Therefore, the journal entry to record the first interest payment would be:
Debit Interest Expense $15,620.70 (=$14,000 + $1,620.70)
Credit Discount on Bonds Payable $1,620.70
Credit Cash $14,000.00

Question 7

Sharmer Company issues 5%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling)price, assuming the following factors: $\begin{array}{rlll}
&&\text { Present Value of an }\
n=&i=&\text { Annuity }&\text { Present value of } \mathbb{\$1}\
5 & 5 \% & 4.3295 & 0.7835 \
10 & 3 \% & 8.7521 & 0.7812 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5307 & 0.7441
\end{array}$

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The answer of Sharmer Company issues 5%, 5-year bonds with...

Question 8

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 first interest payment using the effective interest method of amortization is:

Accepted Answer

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Question 9

On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

The interest payment can be calculated using the straight-line amortization method. The discount on bonds payable of $36,000 ($600,000 - $564,000) needs to be amortized over the life of the bonds. The annual amortization amount is calculated as $36,000/3 years = $12,000. The semiannual amortization is $12,000/2 = $6,000. 
The interest payment is calculated as ($600,000 x 7% x 6/12) = $21,000. 
Therefore, the journal entry to record the first interest payment using straight-line amortization would be: 
Debit Interest Expense $27,000 (21,000 + 6,000); credit Discount on Bonds Payable $6,000; credit Cash $21,000.

Question 10

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 payment on the note on December 31, Year 2 is:

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Question 11

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 journal entry to record the first annual payment?

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Question 12

Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling)price, assuming the following Present Value factors: $\begin{array}{rlll}
&&\text { Present Value of an }\
n=&i=&\text { Annuity }&\text { Present value of } \mathbb{\$1}\
5 & 8 \% & 3.9927 & 0.6806 \
10 & 4 \% & 8.1109 & 0.6756 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5307 & 0.7441
\end{array}$

Accepted Answer

The bond's issue price is calculated using the present value of the annuity of interest payments and the present value of the principal. The semiannual market rate is 3% (half of 6%), and there are 10 periods (5 years x 2). Using the present value factors for 10 periods at 3%, the calculation is: (Interest payment of $40,000 x 8.5307) + (Principal of $1,000,000 x 0.7441) = $1,085,308.

Question 13

On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30 and December 31. The market rate is 5%. Using the present value factors below, the issue (selling)price of the bonds is: $\begin{array}{llll}&&\text { Present Value of an }\
n=&i=&\text { Annuity }&\text { Present value of } \mathbb{\$1}\
3 & 4.0 \% & 2.7751 & 0.8890 \
6 & 2.0 \% & 5.6014 & 0.8880 \
3 & 5.0 \% & 2.7232 & 0.8638 \
6 & 2.5 \% & 5.5081 & 0.8623
\end{array}$

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Question 14

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?

Accepted Answer

The journal entry to record the issuance of the note should debit Cash for the amount received, which is $250,000, and credit Notes Payable for the same amount since this is the amount borrowed. No interest expense or interest payable is recorded at this point. Therefore, choice D is the correct answer as it reflects this journal entry.

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 amount of interest expense will be included in the first annual payment?

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Question 16

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:

Accepted Answer

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

Question 17

All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are true except:

Accepted Answer

The statement that the use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS is false. Both U.S. GAAP and IFRS allow companies to use the fair value option for certain financial instruments, including bonds and notes.

Question 18

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?

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The answer of A corporation borrowed $125,000 cash by signing...

Question 19

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:

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Question 20

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 principal will be included in the first annual payment?

Accepted Answer

The first annual payment includes both interest and principal. To find the amount of principal included in the first payment, we need to subtract the interest portion from the total payment.

Interest portion = Beginning balance x Annual interest rate
= $250,000 x 8%
= $20,000

Principal portion = Total payment - Interest portion
= $37,258 - $20,000
= $17,258

Therefore, the amount of principal included in the first annual payment is $17,258.

Quiz 14: Long-Term Liabilities

On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

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 journal entry to record the first annual payment?

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?

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?

All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are true except:

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?

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 principal will be included in the first annual payment?