Question 1

When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year,the investment is reported on the balance sheet as:

Accepted Answer

An investment that is readily convertible to cash and is planned to be converted within one year is a current asset, as it is expected to be converted into cash or consumed within one year.

Question 2

Bond investments are initially recorded at cost.

Accepted Answer

Bond investments are initially recorded at cost, which is the amount paid to acquire the bonds.

Question 3

On January 1,2015,Centre Company purchases $100,000,6% bonds at a price of 95 and a maturity date of January 1,2025.Centre Company intends to hold the bonds until the maturity date.Interest is paid semiannually,on January 1 and July 1.Centre Company has a calendar year end.The journal entry on January 1,2016 is:

Accepted Answer

D

Question 4

An investment is a held-to-maturity investment in bonds if it is management's intent to sell the investment before the maturity date.

Accepted Answer

An investment is considered held-to-maturity if the intention is to hold it until maturity and not to sell it before then.

Question 5

If $100,000 face value bonds are issued at 103,the bonds are selling for $103,000.

Accepted Answer

When bonds are issued at a premium, the sale price is greater than the face value. In this case, the premium is $3,000 ($103,000 - $100,000). Therefore, the statement is true.

Question 6

The market prices of bonds fluctuate inversely with market interest rates.

Accepted Answer

This statement reflects the fundamental principle of bond pricing: as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. The relationship between bond prices and interest rates is often referred to as an inverse relationship or an interest rate risk.

Question 7

If the market interest rate is greater than the coupon rate of interest on a bond,the bond will sell at a discount.

Accepted Answer

When the market interest rate is greater than the coupon rate of interest on a bond, investors will demand a higher rate of return to compensate for the lower coupon payments. This decreases the demand for the bond, driving down its price and resulting in the bond selling at a discount.

Question 8

If bonds are issued at a premium,the carrying amount of the bonds will be greater than the face value of the bonds until the maturity date.

Accepted Answer

When bonds are issued at a premium, it means that the issue price (sale price) of the bond is greater than its face value. As a result, the carrying amount (book value) of the bonds will be greater than the face value until the maturity date. This is because the premium amount is amortized (spread out) over the life of the bond and reduces the effective interest expense, thereby increasing the carrying amount of the bond.

Question 9

On January 1,2015,Benson Company purchases $100,000,6% bonds at a price of 95 and a maturity date of January 1,2020.Benson Company plans to hold the bonds until their maturity date.Interest is paid semiannually,on January 1 and July 1.Benson Company has a calendar year end.The adjusting entry on December 31,2015 is:

Accepted Answer

Since interest is paid semiannually, half a year's interest of $3,000 ($100,000 x 6% x 1/2) should have been recognized and recorded as interest revenue at the end of June 30, 2015. Therefore, as of December 31, 2015, there is $3,000 of accrued interest that needs to be recorded with a debit to Interest Receivable. However, since the bonds were purchased at a discount (95), the company would also need to adjust the investment in the bonds to reflect the amortization of the discount. The discount amortized over one year would be $5,000 ($100,000 x 0.05), so the company should record a debit to Held-to-Maturity Investment in Bonds for $500 ($5,000/10 periods) to recognize the interest expense. Therefore, the adjusting entry on December 31, 2015 should be a debit to Interest Receivable for $3,000, a debit to Held-to-Maturity Investment in Bonds for $500, and a credit to Interest Revenue for $3,500.

Question 10

The stated interest rate on a bond determines the amount of interest the issuer is expected to pay annually or semiannually.

Accepted Answer

This statement is true. The stated interest rate, also known as the coupon rate, is the rate at which the issuer agrees to pay interest to bondholders annually or semiannually. This rate is typically fixed at the time the bond is issued and remains the same for the life of the bond. The amount of interest paid to bondholders is calculated by multiplying the face value of the bond by the coupon rate.

Question 11

Investments are classified as available-for-sale securities,trading securities or held-to-maturity securities.

Accepted Answer

This statement is true. Investments can be classified into these three categories based on the intention of the investor and the type of investment. Available-for-sale securities are investments that the investor may sell in the near future, trading securities are bought and sold frequently for profit, and held-to-maturity securities are investments that the investor intends to hold until maturity.

Question 12

On January 1,2014,Winston Company purchased 6% bonds with a face value of $50,000 for par.Winston Company intends to hold the bonds until maturity.Interest is payable semiannually on July 1 and January 1.The company's fiscal year ends on December 31.The journal entry on July 1,2014 is:

Accepted Answer

Since the interest is payable semiannually, on July 1, the company will receive half of the annual interest payment. The bonds have a face value of $50,000 and a coupon rate of 6%, meaning the annual interest payment is $3,000 (i.e., 0.06 x $50,000). Therefore, the journal entry on July 1 is to debit Cash for $1,500 (i.e., $3,000/2) and credit Interest Revenue for $1,500.

Question 13

If the stated rate of interest on a bond exceeds the market rate of interest,the bond will sell at a premium.

Accepted Answer

When the stated rate of interest on a bond exceeds the market rate of interest, investors will be willing to pay a higher price for the bond in order to receive the higher interest payments. This will result in the bond selling at a premium, which is a price that is above the face value of the bond.

Question 14

On January 1,2015,Dooley Company purchases $100,000,6% bonds at a price of 90.4 and a maturity date of January 1,2025.Dooley Company intends to hold the bonds until their maturity date.Interest is paid semiannually,on January 1 and July 1.Dooley Company has a calendar year end.The entry for the receipt of interest on July 1,2015 is:

Accepted Answer

Since the bonds were purchased at a discount, interest revenue should be recognized on the effective interest method. Under this method, interest revenue is calculated by multiplying the carrying value of the bonds (which includes the discount) by the effective interest rate. In this case, the effective interest rate is 6.31% ($6,000 in interest payments divided by the $95,960 carrying value of the bonds at purchase). Therefore, the interest revenue for the six-month period ending June 30, 2015 is $3,030 ($95,960 x 6.31% x 6/12). Since the interest is received on July 1, 2015, the journal entry is a debit to Cash and a credit to Interest Revenue, both for $3,000.

Question 15

On January 1,2015,Brooklyn Company purchases $100,000,6% bonds at a price of 95 and a maturity date of January 1,2025.Brooklyn Company intends to hold the bonds until maturity.Interest is paid semiannually,on January 1 and July 1.Brooklyn Company has a calendar year end.The adjusting entry to amortize the bond investment on December 31,2015 is:

Accepted Answer

The correct answer is C because the bond investment is held to maturity, and the amortization is calculated as the difference between the cost of the investment and the maturity value, divided by the number of interest periods. In this case, the cost of the investment is $95,000, the maturity value is $100,000, and the number of interest periods is 20 (10 years x 2 interest payments per year). Therefore, the amortization is $500 per period ($5,000 / 10).

Question 16

On the balance sheet,Interest Receivable is reported as a long-term asset.

Accepted Answer

The answer of On the balance sheet,Interest Receivable is reported...

Question 17

The carrying amount of bonds at maturity should be equal to the face value of the bonds.

Accepted Answer

The carrying amount of bonds at maturity should be equal to the face value of the bonds because all of the principal (face value) will be repaid to the bondholders at maturity.

Question 18

Marathon Corporation owns 500 shares of Mini Company's common stock.Mini Company has 100,000 shares of common stock outstanding.Marathon Corporation is the ________ and Mini Company is the ________.

Accepted Answer

Marathon Corporation is the investor because they own shares in Mini Company's common stock. Mini Company is the investee because they issued the common stock that Marathon Corporation owns.

Question 19

On January 1,2015,Dodge Company purchases $100,000,6% bonds at a price of 90.4 and a maturity date of January 1,2025.Dodge Company intends to hold the bonds until their maturity date.Interest is paid semiannually,on January 1 and July 1.Dodge Company has a calendar year end.The entry to record the purchase of the bond investment on January 1,2015,is:

Accepted Answer

The entry to record the purchase of a bond investment is a debit to Held-to-Maturity Investment in Bonds for the purchase price of the bonds, which is $90,400, and a credit to Cash for the same amount. The Bonds Payable account is not affected since the company is not the issuer of the bonds.

Question 20

On January 1,2015,Corbin Company purchases $100,000,5% bonds at a price of 99 and a maturity date of January 1,2025.Corbin Company intends to hold the bonds until their maturity date.Interest is paid semiannually,on January 1 and July 1.Corbin Company has a calendar year end.The entry to amortize the bond investment on July 1,2015 is:

Accepted Answer

The entry to amortize the bond investment on July 1, 2015, would involve recording the semi-annual interest earned on the bonds. Since the bonds were purchased at a discount, the interest income earned each period will be higher than the cash received from the bond issuer. The entry would involve debiting the Held-to-Maturity Investment in Bonds account for the amortized portion of the discount, which is $50 ($100,000 x 5% x 6/12 x 1/2), and crediting the Interest Revenue account for the same amount. Therefore, Choice C is correct.

Choice A is incorrect because it only records the interest receivable and not the amortization of the bond discount.

Choice B is incorrect because it records the entire cash received from the bond issuer as interest revenue, without taking into account the bond discount.

Choice D is incorrect because it overstates the interest revenue earned on the bonds and does not account for the amortized discount.

Quiz 8: Long-Term Investments: The Time Value of Money