Question 1

If a bond's stated rate of interest is equal to the market rate of interest, the bond will be issued at:

Accepted Answer

If the stated rate of interest of the bond is the same as the market rate of interest, then the bond will be issued at par value. This means that the bond will be sold at face value, which is equal to the amount the bond will pay at maturity. Any deviation from par value would occur if the bond's stated interest rate differed from the market rate of interest.

Question 2

The journal entry to record $400,000 of bonds that were issued at 107 would be to:

Accepted Answer

The bonds were issued at 107, which means that they were sold at a premium (i.e., at a price higher than their face value). Therefore, the cash received from the bond issuance is more than the face value of the bonds. To record this transaction, we need to debit Cash for the total amount received ($428,000), credit Bonds payable for the face value of the bonds ($400,000), and credit Premium on bonds payable for the difference between the cash received and the face value of the bonds ($28,000). Option A does not account for the premium received, option B overstates the amount of bonds payable, and option D records a discount on bonds payable, which is not applicable in this case.

Question 3

$500,000 of 8%, 10-year bonds were sold for $520,000 on January 1. The bonds require semiannual interest payments on June 30 and December 31. The entry to record the June 30 interest payment on the bonds would be to:

Accepted Answer

The semiannual interest payments on the bonds can be calculated as follows:

$500,000 x 8% x 6/12 = $20,000

Since the bonds were sold at a premium, the premium on bonds payable will amortize over the life of the bonds. The premium amortization for the first six months can be calculated as follows:

($520,000 - $500,000) / 20 = $1,000

Therefore, the entry to record the June 30 interest payment on the bonds would be to debit Interest Expense for $19,000, debit Premium on bonds payable for $1,000, and credit Cash for $20,000.

Question 4

A $45,000 bond issue with a stated interest rate of 10%, when the market rate of interest is 7%, means that the bond will sell for:

Accepted Answer

When the stated interest rate on a bond (10% in this case) is higher than the market interest rate (7% here), the bond is more attractive to investors because it pays more interest than what is currently available in the market. Therefore, investors are willing to pay more than the face value of the bond, meaning it will sell for more than $45,000.

Question 5

The journal entry to record $300,000 of bonds that were issued at 104 would be to:

Accepted Answer

When bonds are issued at a premium or discount, the company needs to record the transaction by debiting or crediting both the Cash account and the Bonds Payable account. In this case, the bonds were issued at 104, which means that the company received more cash than the face value of the bonds. Therefore, the entry should credit Bonds Payable for the face value of $300,000 and credit Premium on Bonds Payable for the extra $12,000. The entry should look like this:

Debit Cash, $312,000
Credit Bonds Payable, $300,000
Credit Premium on Bonds Payable, $12,000

Question 6

The journal entry to record $330,000 of bonds that were issued at 97 would be to:

Accepted Answer

When bonds are issued at a discount (in this case, at 97% of their face value), the cash received is less than the face value of the bonds. The correct entry debits Cash for the amount received ($330,000 x 97% = $320,100), debits Discount on Bonds Payable for the difference between the face value and the cash received ($9,900), and credits Bonds Payable for the face value of the bonds ($330,000).

Question 7

A $330,000 bond issue sold at 110 will cost: (Round your final answer to the nearest dollar.)

Accepted Answer

The bond issue sold at 110 means the investors are willing to pay 110% of the face value of the bonds, which is the principal amount of $330,000. 
So, the total cost of the bond issue would be:
$330,000 x 110% or 1.1 = $363,000 (rounded to the nearest dollar)

Question 8

$300,000 of 6%, 20-year bonds were sold for $330,000 on January 1. The bonds require semiannual interest payments on June 30 and December 31. The entry to record the June 30 interest payment on the bonds would be to: (Round your final answer to the nearest dollar.)

Accepted Answer

The bonds were sold at a premium ($330,000 - $300,000 = $30,000 premium). The semiannual interest payment is $9,000 ($300,000 * 6% / 2). The premium amortization is $750 ($30,000 / 40 periods). Therefore, the interest expense is $8,250 ($9,000 - $750).

Question 9

A $9,000 bond issue with a stated interest rate of 9%, when the market rate of interest is 9%, means that the bond will sell for:

Accepted Answer

If the stated interest rate is the same as the market rate of interest, then the bond will sell for its face value, which in this case is $9,000.

Question 10

A $30,000 bond issue with a stated rate of interest of 6%, when the market rate of interest is 7%, means that the bond will be sold for:

Accepted Answer

When the stated rate of interest is less than the market rate of interest, the bond will be sold for less than its face value (in this case $30,000) in order to make it a more attractive investment for buyers. Therefore, the bond will be sold for less than $30,000.

Question 11

$200,000 of 6%, 25-year bonds were sold for $160,000 on January 1. The bonds require semiannual interest payments on June 30 and December 31. The entry to record the June 30 interest payment on the bonds would be to:

Accepted Answer

The bonds were sold at a discount ($160,000 instead of $200,000), so the interest expense includes both the cash interest payment and the amortization of the discount. The cash interest payment is $6,000 (6% of $200,000 divided by 2 for semiannual), and the discount amortization is $800, making the total interest expense $6,800.

Question 12

The rate of interest that is printed on the bond is called the ________ rate of interest.

Accepted Answer

The stated rate of interest is the rate printed on the bond and is the rate at which the issuer agrees to pay interest to the bondholder over the life of the bond. The market rate of interest may be different from the stated rate and is determined by supply and demand factors in the financial markets. The variable rate of interest may change over the life of the bond based on some underlying index or benchmark. The maturity rate is not a relevant term when discussing the rate of interest on a bond.

Question 13

The journal entry to record $230,000 of bonds that were issued at 98 would be to:

Accepted Answer

When bonds are issued at a discount, the cash received from selling the bonds is less than their face value. The discount is recorded as a contra-liability account to the bonds payable account. In this case, since the bonds were issued at 98, the cash received would be $230,000 x 0.98 = $225,400. The entry to record this transaction would be to debit Cash for $225,400 and Discount on bonds payable for $4,600 (which is $230,000 - $225,400). Finally, credit Bonds payable for the full face value of the bonds, which is $230,000.

Question 14

A $170,000 bond issue sold at 97 will cost: (Round your final answer to the nearest dollar.)

Accepted Answer

When a bond issue is sold at 97, it means it is sold at 97% of its face value. Therefore, the cost is 97% of $170,000, which is $170,000 * 0.97 = $164,900.

Question 15

If the market rate of interest is less than the bond's stated rate of interest, the bond will be issued at:

Accepted Answer

When the market rate of interest is lower than the bond's stated rate of interest, investors are willing to pay more for the bond because it offers a higher return than what is currently available in the market, leading to the bond being issued at a premium.

Question 16

The amount that a borrower must pay back to the bondholders on the maturity date is the:

Accepted Answer

Principal is the original amount borrowed, which must be paid back to the bondholders on the maturity date. This amount does not include interest or any other fees that may be associated with the bond. Therefore, option A is the correct answer.

Question 17

A $30,000 bond issue with a stated interest rate of 5%, when the market rate of interest is 6%, means that the bond will sell for:

Accepted Answer

When the stated interest rate is lower than the market rate, the bond will sell for less than its face value. This is because investors will require a higher return on their investment and will only be willing to pay a lower price for the bond. Therefore, the bond will sell for less than $30,000 in order to compensate for the difference in interest rates.

Question 18

Bonds that can be exchanged for stock are called:

Accepted Answer

Convertible bonds are the only type of bonds listed that have the option to exchange the bond for stock. Callable bonds can be redeemed before maturity by the issuer, serial bonds are paid off in installments, and debenture bonds are unsecured bonds backed only by the issuer's creditworthiness.

Question 19

If the market rate of interest is greater than the bond's stated rate of interest, the bond will be issued at:

Accepted Answer

When the market rate of interest is greater than the bond's stated rate of interest, the bond will be issued at a discount. This is because investors will demand a higher rate of return to compensate for the lower stated interest rate on the bond. The discount reflects the difference between the market rate and the stated rate of interest on the bond.

Question 20

The rate of interest that investors are willing to receive for similar bonds of equal risk at the current time is the ________ rate of interest.

Accepted Answer

The rate of interest that investors are willing to receive for similar bonds of equal risk at the current time is the market rate of interest. The market rate of interest is determined by supply and demand in the market for a particular type of bond. It may be different from the stated rate of interest on the bond and may fluctuate over time.

Quiz 9: Current Liabilities and Long-Term Debt