Question 1

On January 2,Andrew Corp.issued 1,000,$1,000 bonds to finance a new showroom.The bonds are 5-year,6% bonds that pay interest on December 31 each year.When issued,investors required 5% interest and the bonds are due December 31,Year 5.
Required:
1.Compute the selling price of the bonds.
2.Prepare the entry to record the sale of the bonds.
3.Prepare the amortization table for the bonds.
4.Prepare the journal entries for the first annual interest payment and the final repayment of the bonds.

Accepted Answer

The answer of On January 2,Andrew Corp.issued 1,000,$1,000 bonds to...

Question 2

Under U.S.GAAP,bond issue costs are capitalized and amortized over the life of the bonds.

Accepted Answer

Bond issue costs are considered a deferred charge and are capitalized as an asset on the balance sheet. The cost is then amortized over the life of the bonds as interest expense, reducing the asset and increasing the expense each period. This treatment is in accordance with U.S. GAAP.

Question 3

Wilson Corp.issued $1,000,000 of 4% bonds on April 30 at par value.The bonds were dated January 1.The company pays interest on June 30 and December 31 each year.How much will the buyer need to pay the company in accrued interest?

Accepted Answer

The answer of Wilson Corp.issued $1,000,000 of 4% bonds on...

Question 4

When bonds are sold between interest dates,the amount of accrued interest a buyer pays is equal to the face value of the bond times the market interest rate times the portion of a year since the prior interest date.

Accepted Answer

The answer of When bonds are sold between interest dates,the...

Question 5

Hudson,Inc.issued $500,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 4% interest for bonds of similar risk.The bonds pay interest on December 31 each year.The bonds sold at $532,744 including accrued interest.
Required: Prepare the journal entries for the sale of the bonds and the December 31 payment for the interest for these bonds.

Accepted Answer

The answer of Hudson,Inc.issued $500,000 of 5%,5-year bonds dated January...

Question 6

When bonds are sold between interest dates,the buyer must pay the issuer the amount of accrued interest from the prior interest date.

Accepted Answer

This is known as the accrued interest, which compensates the bondholder for the interest earned by the bond between the last interest payment and the sale date.

Question 7

Jorge Corp issued $500,000 of 6%,5-year bonds on January 2,2016 for par.The company incurred $25,000 in bond issue costs.What is the correct amount of bond issue expense to be recorded each semi-annual interest period using GAAP?

Accepted Answer

The answer of Jorge Corp issued $500,000 of 6%,5-year bonds...

Question 8

Samuel's,Inc.sold $15,000 of 6% bonds to an individual on April 1 at par value.The bonds pay interest on June 30 and December 31 each year.What are the proper entries for the sale of the bonds and the June 30 payment of the interest for these bonds?

Accepted Answer

The answer of Samuel's,Inc.sold $15,000 of 6% bonds to an...

Question 9

Clausen Corp.,an IFRS company,sold $1,000,000 of 6%,3-year bonds on January 1,2016.The bonds pay semi-annual interest each June 30 and December 31.It cost the company $32,000 in bond issue costs.Which one of the following is the correct journal entry to record the sale of the bonds?

Accepted Answer

The answer of Clausen Corp.,an IFRS company,sold $1,000,000 of 6%,3-year...

Question 10

A company's calculated effective borrowing rate is higher under IFRS than U.S.GAAP.

Accepted Answer

This is because under IFRS, interest and financing costs cannot be capitalized as part of an asset's cost, whereas under U.S. GAAP, certain interest costs can be capitalized. Therefore, the interest expense is higher under IFRS which leads to a higher effective borrowing rate.

Question 11

When working with bonds issued between interest dates,the accountant must ________.

Accepted Answer

When working with bonds issued between interest dates, the accountant must adjust the first period of the amortization table to ensure proper accounting for the interest accrued during that period. This is because the interest accrued from the date of issuance to the first interest payment date needs to be accounted for separately from the regular interest payments. Therefore, option C is the best choice. Option A is incorrect because the actual interest rate does not change based on the issue date. Option B is incorrect because assuming that the bonds were issued on the intended issue date would not accurately reflect the actual interest accrued. Option D is incorrect because the first interest period cannot be omitted from the amortization table.

Question 12

All companies capitalize bond issue costs which are amortized over the life of the bond issue.

Accepted Answer

The answer of All companies capitalize bond issue costs which...

Question 13

Walker,Inc.issued $600,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 6% interest for bonds of similar risk.The bonds pay interest on December 31 each year.
Required: Determine the selling price of the bonds and prepare the journal entries for the issuance of the bonds and the payment of the first interest payment.

Accepted Answer

The answer of Walker,Inc.issued $600,000 of 5%,5-year bonds dated January...

Question 14

In U.S.GAAP,Unamortized Bond Issue Costs have a debit balance and are considered ________.

Accepted Answer

Unamortized Bond Issue Costs are considered an element in determining the carrying value of the bonds outstanding, as they represent a reduction in the amount of cash received from the bonds' issuance. These costs are amortized over the life of the bonds and are included in determining the effective interest expense.

Question 15

Swanson,Inc.issued $600,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 4% interest for bonds of similar risk.The bonds pay interest on December 31 each year.
Required: Determine the selling price of the bonds and prepare the journal entries for the issuance of the bonds and the payment of the first interest payment.

Accepted Answer

The answer of Swanson,Inc.issued $600,000 of 5%,5-year bonds dated January...

Question 16

Zhang Company,an IFRS company,sold $1,000,000 of 6%,3-year bonds on January 1,2016.The bonds pay semi-annual interest each June 30 and December 31.It cost the company $30,000 in bond issue costs. What is the effective semi-annual interest rate for the bonds?

Accepted Answer

To calculate the effective semi-annual interest rate, we need to first calculate the present value of the bond. The bond issue costs of $30,000 need to be deducted from the bond proceeds of $1,000,000, leaving us with a net proceeds of $970,000. Using this amount, we can use the PV annuity formula to calculate the semi-annual interest payments:

PV = (C x (1 - (1+r)^-n)) / r + (FV / (1+r)^n)

where PV = present value of the bond, C = semi-annual interest payment, r = semi-annual interest rate, n= number of semi-annual periods, and FV = face value of the bond.

Plugging in the given values, we get:

$970,000 = (30,000 x (1 - (1+r)^-6)) / r + (1,000,000 / (1+r)^6)

Solving for r using trial and error or a financial calculator, we get an effective semi-annual interest rate of 3.56%. Therefore, the best choice is C.

Question 17

Wilson Corp.issued $1,000,000 of 5% bonds on April 1 at par value.The bonds were dated January 1.The company pays interest on June 30 and December 31 each year.How much will the buyer need to pay the company in accrued interest at purchase and how much will the buyer receive in interest on June 30?

Accepted Answer

The answer of Wilson Corp.issued $1,000,000 of 5% bonds on...

Question 18

When bonds are sold at a discount between interest dates,the buyer ________.

Accepted Answer

When bonds are sold at a discount between interest dates, the buyer does not receive any interest payments from the date of purchase until the next interest payment date, which means the buyer pays the issuer interest from the date of the bonds to the purchase date.

Question 19

Lincoln,Inc.issued $500,000 of 5%,5-year bonds dated January 1,2016 on July 1,2016 when the market required 6% interest for bonds of similar risk.The bonds pay interest on December 31 each year.The bonds sold at $493,251 including accrued interest.
Required: Prepare the journal entries for the sale of the bonds and the December 31 payment for the interest for these bonds.

Accepted Answer

The answer of Lincoln,Inc.issued $500,000 of 5%,5-year bonds dated January...

Question 20

When bonds are sold between interest dates,the issuer will pay the bondholder a lower amount of interest on the next interest date.

Accepted Answer

When bonds are sold between interest dates, the buyer pays the seller accrued interest, and the bondholder receives the full interest amount on the next interest date.

Quiz 16: Financing Liabilities