Question 1

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 that is printed on the face of the bond and is used to calculate the bond's coupon payments. It is also sometimes referred to as the nominal rate of interest. Market interest rates may be higher or lower than the stated rate, depending on factors such as supply and demand for bonds and changes in economic conditions. Variable interest rates are not applicable to bonds, as they typically have fixed rates. Maturity refers to the length of time until the bond's principal is due to be repaid.

Question 2

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

Accepted Answer

The principal is the amount borrowed by the borrower and is the amount that must be repaid to the bondholders on the maturity date. The interest is the amount paid to the bondholders for the use of their money, stated value is the value assigned to a bond at the time of issuance, and market value is the current value of the bond in the market.

Question 3

The journal entry to record $200,000 of bonds that were issued at 104 would be to:

Accepted Answer

The bonds were issued at 104, which means they were sold at a premium. Therefore, the cash received will be more than the face value of the bonds. The journal entry to record this transaction would be to debit Cash for $208,000 (200,000 x 104%) and credit Bonds payable for $200,000 (face value). The difference between the cash received and the face value of the bonds is a premium on bonds payable, which is credited for $8,000. Therefore, the complete journal entry would be to debit Cash for $208,000 and credit Bonds payable for $200,000 and credit Premium on bonds payable for $8,000.

Question 4

The journal entry to record $300,000 of bonds that were issued at 107 would be to:

Accepted Answer

Bonds were issued at a premium, as indicated by the selling price of $107. The premium is the difference between the selling price and the face value of the bonds. Therefore, the journal entry should be to debit Cash for $321,000 (the amount received), credit Bonds payable for the face value of the bonds ($300,000), and credit Premium on bonds payable for the premium amount of $21,000.

Question 5

$500,000 of 8%,10-year bonds were sold for $530,000 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 payment is calculated as follows: 
$500,000 x 8% x 6/12 = $20,000.

Since the bonds were sold at a premium, the premium amount is amortized over the life of the bonds. Each semiannual interest payment includes a portion of interest expense ($20,000) and a portion of the premium amortization ($1,500/2 = $750).

Therefore, the entry to record the June 30 interest payment would be to debit Interest Expense $18,500 ($20,000 - $750), debit Premium on bonds payable $1,500, and credit Cash $20,000.

Question 6

A $5,000 bond issue with a stated interest rate of 8%,when the market rate of interest is 8%,means that the bond will sell for:

Accepted Answer

When the stated interest rate and market rate of interest are the same, the bond will sell for its face value, which in this case is $5,000.

Question 7

The journal entry to record $300,000 of bonds that were issued at 95 would be to:

Accepted Answer

The bonds were issued at 95, meaning they were sold for 95% of their face value. Therefore, cash received is $285,000 (95% of $300,000), and there is a discount of $15,000. The entry debits Cash for $285,000, debits Discount on Bonds Payable for $15,000, and credits Bonds Payable for $300,000.

Question 8

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

Accepted Answer

If the bond's stated rate of interest is less than the market rate of interest, then investors will demand a higher return on investment to compensate for the lower stated rate. This means the bond will be issued at a discount, or less than the face value, in order to make the return on investment equal to the market rate.

Question 9

$300,000 of 10%,20-year bonds were sold for $320,000 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 premium ($320,000 - $300,000 = $20,000 premium). The semiannual interest payment is $15,000 ($300,000 * 10% / 2). The premium amortization for each period is $500 ($20,000 / 40 periods). Therefore, the entry is to debit Interest Expense $14,500, debit Premium on bonds payable $500, and credit Cash $15,000.

Question 10

A $150,000 bond issue sold at 93.8 will cost:

Accepted Answer

The bond sold at 93.8% of its face value, so the cost is 93.8% of $150,000, which is $140,700.

Question 11

The journal entry to record $200,000 of bonds that were issued at 97 would be to:

Accepted Answer

When bonds are issued at a price lower than their face value, a discount on bond payable account is created. In this journal entry, the cash received from issuing the bonds is first debited for the net amount, which is the face value minus the discount ($200,000 x 0.97 = $194,000). Then, the discount on bonds payable account is debited for the amount of the discount ($200,000 - $194,000 = $6,000), and the bonds payable account is credited for the full face value of the bonds ($200,000).

Question 12

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 market rate of interest is determined by the supply and demand of capital in the market, and represents the rate at which investors are currently willing to invest in bonds of similar risk. This rate fluctuates based on a variety of factors, including inflation, economic growth, and political events. Stated interest rates are set by the issuer of the bond, and may not always reflect the current market conditions. Variable interest rates may change over time based on predetermined factors, while maturity rates refer to the length of time until the bond reaches its full value.

Question 13

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 and the market rate of interest are equal, then the bond will be issued at par value. This means that the bond will be sold at face value, with no premium or discount.

Question 14

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 15

A $300,000 bond issue sold at 105 will cost:

Accepted Answer

When a bond issue is sold at a premium (in this case, 105), it means that investors are willing to pay more than the face value of the bond, in order to receive a higher interest rate than the current market rate.

To calculate the cost of the bond issue, we need to multiply the face value of the bonds by the sales price.

$300,000 x 1.05 = $315,000

Therefore, the cost of the bond issue sold at 105 will be $315,000.

Question 16

A $25,000 bond issue with a stated interest rate of 5%,when the market rate of interest is 4%,means that the bond will sell for:

Accepted Answer

When the stated interest rate is higher than the market rate, the bond will sell at a premium, meaning it will sell for more than its face value of $25,000.

Question 17

A $10,000 bond issue with a stated rate of interest of 7%,when the market rate of interest is 8%,means that the bond will be sold for:

Accepted Answer

When the market rate of interest is higher than the stated rate of interest on a bond, the bond will be sold at a discount (less than its face value) in order to make it more attractive to investors. In this case, since the market rate is 8% and the stated rate is 7%, the bond will be sold at a discount to make up for the difference in interest rates. Therefore, the bond will be sold for less than $10,000.

Question 18

Bonds that can be exchanged for stock are called:

Accepted Answer

Bonds that can be exchanged for stock are called convertible bonds, as they provide an option for the bondholder to convert their bond into shares of common stock. Callable bonds can be redeemed by the issuer before their maturity date, serial bonds are a type of bond that matures in installments over a specified period of time, and debenture bonds are unsecured bonds that are backed only by the creditworthiness of the issuer.

Question 19

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

Accepted Answer

If the bond's stated rate of interest is greater than the market rate of interest, it means that the bond is more attractive to investors than other bonds available at the same time. This, in turn, means that the demand for the bond will be high, and its price will increase. As a result, the bond will be issued at a premium, which is the amount by which its price exceeds its face or par value.

Question 20

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, it means that investors can earn a higher rate of return elsewhere in the market. As a result, the bond will be less attractive to investors and will need to be issued at a lower price (discount) in order to compensate for the lower stated rate of interest.

Quiz 9: Current Liabilities and Long-Term Debt