Question 1

A company issued 7%,5-year bonds with a par value of $100,000.The market rate when the bonds were issued was 7.5%.The company received $97,947 cash for the bonds.Using the effective interest method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

First, calculate the total interest payments for the bond:
$100,000 par value x 7% coupon rate x 5 years = $35,000 total interest

Next, calculate the semiannual interest payments:
$35,000 total interest / 10 semiannual periods = $3,500 semiannual interest

To calculate the interest expense for the first semiannual period using the effective interest method, we need to calculate the bond's carrying value. The carrying value is the present value of the remaining cash flows, discounted at the market rate of interest.

PV of principal = $100,000 / (1 + 7.5%/2)^1 = $94,025.46
PV of semiannual interest payments = $3,500 / (1 + 7.5%/2)^1 + $3,500 / (1 + 7.5%/2)^2 = $6,974.55
Carrying value = $94,025.46 + $6,974.55 = $101,000.01

The interest expense for the period is the difference between the semiannual interest payment and the change in the carrying value:
Interest expense = $3,500 - ($101,000.01 - $100,000) = $3,673.01

Therefore, the answer is B.

Question 2

A company issued 5-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $102,105 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

The interest expense using the straight-line method is calculated by first determining the total interest to be paid over the life of the bond, then dividing by the number of periods. The bond was issued at a premium (since it was sold for more than its par value), so the total interest expense will be the sum of the coupon payments plus the amortization of the premium. The coupon payment for each period is 7% of $100,000 divided by 2 (for semiannual), which is $3,500. The premium is $2,105 ($102,105 - $100,000), and it will be amortized over the life of the bond (5 years, or 10 semiannual periods), which is $210.50 per period. Thus, the interest expense for the first period is $3,500 (coupon payment) minus $210.50 (amortization of premium), which equals $3,289.50.

Question 3

A company issues 9%,5-year bonds with a par value of $100,000 on January 1 at a price of $106,160,when the market rate of interest was 8%.The bonds pay interest semiannually.The amount of each semiannual interest payment is:

Accepted Answer

The semiannual interest payment is calculated as follows: 
Interest payment = Par value x Coupon rate x Time period 
Since the coupon rate is 9% and the par value is $100,000, the annual interest payment is $9,000 ($100,000 x 9%). 
Since the bonds pay interest semiannually, the time period is 6 months (0.5 years). 
Therefore, the semiannual interest payment is $4,500 ($9,000 x 0.5). 
Hence, the correct answer is D.

Question 4

A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation called the bonds at $990,000.The gain or loss on this retirement is:

Accepted Answer

The gain on the retirement of the bonds is calculated by comparing the carrying amount of the bonds (par value plus unamortized premium) to the call price. Initially, the premium was $20,000. After 40% was amortized, $12,000 (60% of $20,000) remained. The carrying amount is $1,012,000 ($1,000,000 par value + $12,000 unamortized premium). The bonds were called for $990,000, so the gain is $22,000 ($1,012,000 - $990,000).

Question 5

A company issues bonds with a $100,000 par value,an 8% annual contract rate,semiannual interest payments,and a five year life.The bonds sold for $107,850.The entry to record the issuance of the bonds will include:

Accepted Answer

The bonds were issued at a premium (sold for more than their face value), so the entry to record the issuance of the bonds will include a credit to Premium on Bonds Payable. The entry will also include a debit to Cash for the amount received ($107,850) and a credit to Bonds Payable for the face value of the bonds ($100,000). There is no mention of a discount, so option B is incorrect. Finally, option E is incorrect as it refers to interest expense which would not be recorded until the first semi-annual interest payment is made.

Question 6

If an issuer sells bonds at a premium:

Accepted Answer

When bonds are sold at a premium, the carrying value (the book value of the bonds on the issuer's balance sheet) decreases over time from the issue price (which is above par value) to the par value, as the premium is amortized over the life of the bond.

Question 7

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000.The difference between par value and issue price for this bond is recorded as a:

Accepted Answer

The company received cash proceeds that were higher than the par value of the bond, indicating that the bond was issued at a premium. The difference between the par value and the cash proceeds ($6,948) is recorded as a credit to Premium on Bonds Payable. Therefore, the best choice is B.

Question 8

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000.If the company calls these bonds at a price of $201,000,the gain or loss on retirement is:

Accepted Answer

The answer of Chang Industries has bonds outstanding with a...

Question 9

Adonis Corporation issued 10-year,8% bonds with a par value of $200,000.Interest is paid semiannually.The market rate on the issue date was 7.5%.Adonis received $206,948 in cash proceeds.Which of the following statements is true?

Accepted Answer

Adonis must pay the par value of $200,000 at maturity. Since the bonds are 8% with semiannual payments on a $200,000 par value, the interest payment every six months is $8,000 (0.08 * $200,000 = $16,000 annually, divided by 2). There are 20 interest payments over the 10-year period.

Question 10

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company calls these bonds at a price of $97,000,the gain or loss on retirement is:

Accepted Answer

The book value of the bonds is calculated as follows:
Par value - unamortized discount
$100,000 - $4,500 = $95,500
Since the company is calling the bonds at a price of $97,000, they will receive a gain of:
Call price - book value
$97,000 - $95,500 = $1,500
However, since the book value is less than the par value, the company will have to recognize a loss on retirement of the bonds:
Par value - call price
$100,000 - $97,000 = $3,000
Therefore, the net effect of retiring the bonds is a loss of $1,500 ($3,000 loss on retirement minus $1,500 gain from the call). The answer is C.

Question 11

Bonds that give the issuer an option of retiring them before they mature are:

Accepted Answer

Callable bonds give the issuer the right to call (retire) the bonds before their maturity date, which can be beneficial to the issuer in a declining interest rate environment. The other options listed do not give the issuer this option.

Question 12

A company issued 5-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $102,105 cash for the bonds.Using the effective interest method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

Using the effective interest method, the interest expense for the first semiannual interest period can be calculated as follows:
Step 1: Calculate the semiannual coupon payment
Coupon rate = 7%
Par value = $100,000
Coupon payment = Coupon rate x Par value / 2 = 7% x $100,000 / 2 = $3,500
Step 2: Calculate the semiannual interest expense
Carrying value = $102,105 (the amount the company received for the bonds)
Effective interest rate = 6.5% / 2 = 3.25% (since it is a semiannual period)
Semiannual interest expense = Carrying value x Effective interest rate = $102,105 x 3.25% = $3,318.41
Therefore, the recorded interest expense for the first semiannual interest period is $3,318.41. 
Choice C is the correct answer.

Question 13

The effective interest amortization method:

Accepted Answer

The effective interest amortization method allocates bond interest expense over the bond's life using a constant interest rate, which is the rate at which the bond was issued. This rate is used to calculate the interest expense for each period, which is then added to the carrying value of the bond to arrive at the new carrying value for the next period. This method ensures that the interest expense is recognized in a systematic and consistent manner over the bond's life.

Question 14

A company issues 8% bonds with a par value of $40,000 at par on January 1.The market rate on the date of issuance was 7%.The bonds pay interest semiannually on January 1 and July 1.The cash paid on July 1 to the bond holder(s)is:

Accepted Answer

Since the bonds have an 8% annual interest rate and a par value of $40,000, the annual interest payment is 8% of $40,000, which equals $3,200. However, because interest is paid semiannually, this amount is divided by 2 for each payment, resulting in $1,600 per payment.

Question 15

The Premium on Bonds Payable account is a(n):

Accepted Answer

The Premium on Bonds Payable account is an adjunct liability account because it represents the amount paid by investors over and above the face value of the bond. It is a liability to the company because it must be repaid to investors at the end of the bond's term.

Question 16

A company may retire bonds by all but which of the following means?

Accepted Answer

Paying all future interest and cancelling the debt is not a conventional method for retiring bonds. It is not a guaranteed method as well, as the bondholders may not agree to cancel the debt even if all the interest is paid. The other options mentioned are all common means of retiring bonds.

Question 17

A company issued 7%,5-year bonds with a par value of $100,000.The market rate when the bonds were issued was 7.5%.The company received $97,946.80 cash for the bonds.Using the effective interest method,the amount of interest expense for the second semiannual interest period is:

Accepted Answer

The effective interest method takes into account the effective interest rate, which is the market rate of interest when the bonds were issued. 
The effective interest rate for this bond is 7.5%. 
For the first semiannual interest payment, the interest expense is calculated as: 
Interest expense = carrying value of bond x effective interest rate x time 
= $97,946.80 x 7.5% x 6/12 
= $3,672.97 
The carrying value of the bond at the end of the first semiannual period is: 
Carrying value = par value of bond - discount amortization 
= $100,000 - ($97,946.80 - $100,000) 
= $2,053.20 
For the second semiannual interest payment, the interest expense is calculated as: 
Interest expense = carrying value of bond x effective interest rate x time 
= $2,053.20 x 7.5% x 6/12 
= $6,821.64 
The discount amortization for the second semiannual period is: 
Discount amortization = total interest expense - interest expense for the first semiannual period 
= $6,821.64 - $3,672.97 
= $3,148.67 
Therefore, the amount of interest expense for the second semiannual interest period is $3,672.97 + $3,148.67 = $6,821.64, which is closest to option B, $3,679.49 after rounding.

Question 18

A company calls its bonds at a price of $105,000.The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745.The issuer's journal entry to record the retirement will include a:

Accepted Answer

The carrying value of the bonds is greater than the face value, indicating a premium. When the bonds are retired, the premium account is debited to remove it from the books.

Question 19

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.If the company calls these bonds at a price of $95,000,the gain or loss on retirement is:

Accepted Answer

The answer of Clabber Company has bonds outstanding with a...

Question 20

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of $99,000,the gain or loss on this retirement is:

Accepted Answer

The gain on retirement is calculated by comparing the call price to the carrying amount of the bonds. The carrying amount is the par value plus the unamortized premium, which is $100,000 + $2,700 = $102,700. The bonds were retired for $99,000, so the gain is $102,700 - $99,000 = $3,700.

Quiz 10: Accounting for Long-Term Liabilities