Question 1

Which of the following is not needed in calculating the value of a bond?

Accepted Answer

The face interest rate, market interest rate, and present value of face amount are all necessary components in calculating the value of a bond. However, the future value of periodic interest payments is not needed as this is already incorporated into the calculation of the present value of those payments.

Question 2

The total interest cost on thirty-nine,ten-year,6 percent,$1,000 bonds that are issued at 98 is

Accepted Answer

The answer of The total interest cost on thirty-nine,ten-year,6 percent,$1,000...

Question 3

Knollwood Corporation issued $278,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.The entry to record the bond interest expense on the next interest payment date is:

Accepted Answer

The bond premium is amortized over the life of the bond. The premium is $278,000 * 6% = $16,680. The semi-annual amortization is $16,680 / 60 = $278. The cash interest payment is $278,000 * 4% = $11,120. The bond interest expense is $11,120 - $278 = $10,842.

Question 4

If Rex Corporation issued Ten bonds of $1,000 at 99.75 on the interest date.The entry to record this transaction is:

Accepted Answer

Rex Corporation issued bonds at 99.75% of the face value, so the cash received is $9,975 (10 bonds x $1,000 x 0.9975). The bonds payable is recorded at the face value of $10,000, and the difference of $25 is recorded as an unamortized bond discount.

Question 5

Suffolk Corporation issued $100,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.The entry to record the bond interest expense on the next interest payment date is:

Accepted Answer

Since the straight-line method of amortization is being used, the bond premium of $2,000 ($100,000 - $98,000) will be spread evenly over the 20-year life of the bonds, resulting in an annual amortization of $100 ($2,000/20). The bond interest expense for each semi-annual interest payment will be the cash interest payment ($3,000 = $100,000 x 6% x 6/12) minus the amortization of the bond premium ($100). Therefore, the entry to record the bond interest expense on the next interest payment date would be:
Interest expense 2,900
Premium on bonds payable 100
Cash 3,000

Question 6

Knollwood Corporation issued $281,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.After 11 years,what is the carrying value of the bonds?

Accepted Answer

The answer of Knollwood Corporation issued $281,000 of 30-year,8 percent...

Question 7

Bond issue costs

Accepted Answer

Bond issue costs must be amortized over the life of the bonds as a reduction of the carrying value of the bond liability.

Question 8

Knollwood Corporation issued $300,000 of 30-year,8 percent bonds at 106 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

Accepted Answer

- The face value of the bonds is $300,000, and they were sold at 106, so the total amount received by the company was $318,000.
- The bonds have an 8% interest rate, which means the semi-annual coupon payment is $12,000 (=$300,000 x 8% x 1/2).
- The bonds mature in 30 years, which means there will be 60 semi-annual interest payments.
- To amortize the premium of $18,000 (= $318,000 - $300,000), the company needs to reduce the carrying value of the bonds by $300 ($18,000 / 60).
- Therefore, the first semi-annual interest payment will be $12,300 ($12,000 + $300), and the last semi-annual interest payment will be $12,000 ($12,000 + $0).
- The total interest cost of the bonds is the sum of all semi-annual interest payments, which is $702,000 ($12,300 x 59 + $12,000 x 1).

Question 9

Bonds Payable should be classified as a long-term liability on a balance sheet unless the issue is

Accepted Answer

The answer of Bonds Payable should be classified as a...

Question 10

On January 2,2010,Barham Corporation issued ten-year bonds payable with a face value of $400,000 and a face interest rate of 9 percent.The bonds were issued to yield a market interest rate of 10 percent.Interest is payable semi-annually on January 2 and July 1.In calculating the present value of the bond issue on January 2,2010,

Accepted Answer

The answer of On January 2,2010,Barham Corporation issued ten-year bonds...

Question 11

Any unamortized bond discount should be reported on the balance sheet of the issuing corporation as a(n)

Accepted Answer

Unamortized bond discount represents a liability that will eventually have to be paid off, but is being spread out over the life of the bond through amortization. Therefore, it should be deducted directly from the face amount of the bonds in the liability section.

Question 12

The entry to record the issuance of bonds at a discount on an interest payment date should include a

Accepted Answer

When bonds are issued at a discount, the cash received will be less than the face amount of the bonds because the company must offer a discount to compensate investors for the lower interest rate. Therefore, the entry should debit Cash for the face amount of the bonds minus the amount of discount. This will reflect the actual amount of cash received by the company.

Question 13

Suffolk Corporation issued $100,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.After seven years,what is the carrying value of the bonds?

Accepted Answer

The annual amortization of the discount is $1,000 ($100,000 bond amount x 0.02 discount rate). Using the straight-line method, the semi-annual amortization is $500 ($1,000/2). After seven years (14 semi-annual periods), the total amortization would be $7,000 ($500 x 14). 
The carrying value of the bonds would be the bond's face value minus the accumulated amortization, which would be $93,000 ($100,000 face value - $7,000 accumulated amortization). 
However, since the bonds were issued at a discount, we need to add the amount of the discount to the carrying value to get the actual carrying value. The discount was $2,000 ($100,000 face value x 0.02 discount rate x 7 years), so the actual carrying value would be $95,000 ($93,000 carrying value + $2,000 discount) or $98.70 per bond ($95,000 carrying value / 960 bonds outstanding).

Question 14

The effective interest method of amortization of bond premiums and discounts is superior to the straight-line method because it results in a(n)

Accepted Answer

The answer of The effective interest method of amortization of...

Question 15

When bonds are issued at a premium,the total interest cost of the bonds over the life of the bonds is equal to the amount of

Accepted Answer

When bonds are issued at a premium, the interest payments made over the life of the bonds are less than the face value of the bonds. The difference between the face value and the issue price is the premium. As a result, the interest cost of the bonds over their life is equal to the interest payments made minus the amount of issuance premium, as stated in option A.

Question 16

A company issued $300,000 of 20-year,8 percent bonds at 96.If interest is paid semi-annually,the entry to record the amount of bond interest expense (assuming the straight-line method of amortization)on any interest date is

Accepted Answer

The answer of A company issued $300,000 of 20-year,8 percent...

Question 17

Suffolk Corporation issued $100,000 of 20-year,6 percent bonds at 98 on one of its semi-annual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

Accepted Answer

The answer of Suffolk Corporation issued $100,000 of 20-year,6 percent...

Question 18

Bond issue costs have the effect of

Accepted Answer

The answer of Bond issue costs have the effect of
...

Question 19

On January 2,2010,McGowan Corporation issued 20-year bonds payable with a face value of $300,000 and a face interest rate of 8 percent.The bonds were issued to yield a market interest rate of 9 percent.Interest is payable annually on January 2.In calculating the present value of the bond issue of January 2,2010,the

Accepted Answer

The present value of the bond issue will be calculated using the market interest rate of 9 percent for both the face amount and the periodic interest payments. This is because the market rate is the rate that investors require for lending money, and it is the rate that determines the price of the bond. The face interest rate of 8 percent is only used to determine the amount of periodic interest payments that need to be made to the bondholders.

Question 20

A bond premium has the effect of

Accepted Answer

A bond premium occurs when the bond's selling price is higher than its face value, which effectively lowers the bond's yield or effective interest rate below the stated (face) interest rate because the investor pays more upfront for the bond but still receives the same nominal interest payments.

Quiz 10: Long-Term Liabilities