Question 1

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

Cash interest paid: $100,000 * .07 * ½ year = $3,500
Premium amortized: ($102,105 - $100,000)/10 = $210.50
Interest expense: $3,500 - $210.50 = $3,289.50

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 effective interest method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

$102,105 * 0.065 * ½ = $3,318.41

Question 3

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 for semiannual payments). There are 20 interest payments over the 10-year period (2 per year).

Question 4

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 method for retiring bonds. Bonds can be retired through exercising a call option, conversion to stock by holders, purchasing them on the open market, or paying them off at maturity. However, simply paying future interest without repaying the principal does not retire the bond.

Question 5

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

$97,947 * .075 * ½ year = $3,673.01

Question 6

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

$100,000 * .09 *6/12 year = $4,500

Question 7

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?

Accepted Answer

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Question 8

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 purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:

Accepted Answer

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Question 9

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

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Question 10

The market value (price)of a bond is equal to:

Accepted Answer

The market value (price) of a bond is determined by the present value of all future cash payments provided by the bond, including both the principal and interest payments.

Question 11

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. This interest rate is calculated by taking the present value of all future payments of principal and interest and solving for the rate that makes the sum of those payments equal to the sale price of the bond. The interest expense is allocated based on the carrying value of the bond at the beginning of each interest period.

Question 12

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

Accepted Answer

The Premium on Bonds Payable account is an adjunct liability account. It represents the excess amount paid by investors over the face value of the bond, which is amortized over the life of the bond and reduces the effective interest rate.

Question 13

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.

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

$40,000 * .08* 1/2 year = $1,600

Question 15

A company retires its bonds at 105.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

11ea84bb_e9f5_00fc_bd15_c3a1a6d88c3e_TB6946_00 Journal Entry:
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Question 16

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,the gain or loss on this retirement is:

Accepted Answer

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Question 17

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 gain on retirement is calculated as the difference between the carrying value of the bonds and the call price. Here, the carrying value is $203,000 and the call price is $201,000, resulting in a $2,000 gain.

Question 18

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

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Question 19

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 exceeded the par value of the bond, indicating that the bond was issued at a premium. The difference between the par value and issue price is recorded as a credit to Premium on Bonds Payable. Therefore, the correct answer is B.

Question 20

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

Accepted Answer

Callable bonds give the issuer the option to retire the bonds before maturity.

Quiz 10: Accounting for Long-Term Liabilities