Question 1

On January 2,20x5,Fresh Inc.issued 20-year bonds payable with a face value of $1,000,000 and a face interest rate of 10 percent.The bonds were issued to yield a market interest rate of 9 percent.Interest is payable semi-annually on January 1 and July 1.In calculating the present value of the bond issue of January 2,20x5.
-The factor used to calculate the present value of the $1,000,000 is

Accepted Answer

Since the bonds have a semi-annual interest payment and were issued to yield a market interest rate of 9% annually, the effective interest rate per period is 4.5% (half of 9%). The bond term is 20 years, but with semi-annual payments, this translates to 40 periods (20 years * 2). Therefore, the correct factor for calculating the present value of the bond's face value is 4.5% for 40 periods.

Question 2

Lassen Corporation issued ten-year term bonds on January 1,20x5,with a face value of $800,000.The face interest rate is 8 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $690,960 to yield an effective annual rate of 10 percent.The effective interest method of amortization is to be used.The entry on June 30,20x5,to record the payment of interest and amortization of discount is:

Accepted Answer

On June 30, 20x5, the entry to record the payment of interest and amortization of discount is:

Interest expense = 800,000 x 8% x 6/12 = $32,000
Discount amortization = ($690,960 - $800,000) / 20 = $5,506

Therefore, the entry would be:
Debit Interest Expense $32,000
Debit Discount on Bonds Payable $5,506
Credit Cash $37,506

Option A is incorrect because it only records the interest expense and does not account for the amortization of discount.
Option C is incorrect because it only records the amortization of discount and does not account for the interest expense.
Option D is incorrect because it records the incorrect amount of discount amortization.

Question 3

Knollwood Corporation issued $286,000 of 30-year,8 percent bonds at 106 on one of its semiannual 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 answer of Knollwood Corporation issued $286,000 of 30-year,8 percent...

Question 4

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

Accepted Answer

The future value of periodic interest payments is not needed in calculating the value of a bond. Instead, the present value of these payments should be calculated using the market interest rate to determine the bond's value. The face interest rate and present value of face (maturity) amount are also necessary inputs for bond valuation.

Question 5

Lassen Corporation issued ten-year term bonds on January 1,20x5,with a face value of $800,000.The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31.The bonds were issued for $690,960 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The entry to record the bond interest expense on the first interest payment date is: (Round answer to the nearest dollar. )

Accepted Answer

The semiannual interest payment on the bonds is calculated by multiplying the face value of the bonds by the face interest rate and dividing by two. So, the semiannual interest payment is ($800,000 x 6%)/2 = $24,000. Using the effective interest method of amortization, the bond interest expense is calculated by multiplying the carrying value of the bonds (which starts at $690,960) by the effective interest rate of 8%, and dividing by two (since interest is paid semiannually). The total bond interest expense for the first six months is therefore ($690,960 x 8%)/2 = $27,638. To record this expense, the company would debit Interest Expense for $27,638 and credit Discount on Bonds Payable for $2,638 and Cash for $24,000. So, the correct answer is option B).

Question 6

Knollwood Corporation issued $278,000 of 30-year,8 percent bonds at 106 on one of its semiannual 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 $278,000 of 30-year,8 percent...

Question 7

Pelican Company issued $200,000 of 20-year,6 percent bonds at 98 on one of its semiannual interest dates.The straight-line method of amortization is to be used.
-What is the total interest cost of the bonds?

Accepted Answer

The total interest cost of the bonds can be calculated as follows:
- Face value of bonds: $200,000
- Annual interest payment: 6% of face value = 0.06 x $200,000 = $12,000
- Semiannual interest payment: $12,000 / 2 = $6,000
- Number of semiannual periods: 20 x 2 = 40
- Total interest payments: 40 x $6,000 = $240,000
Since the bonds were issued at 98, which is a discount from face value, the company will gradually increase the bond carrying value to $200,000 over the life of the bonds using the straight-line method of amortization. Therefore, the total interest cost of $240,000 will be spread out over the life of the bonds, resulting in an effective interest rate higher than the stated 6%. The option that reflects this total interest cost is B) $244,000.

Question 8

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

Accepted Answer

While the future value of the face or maturity amount can be useful in determining the overall value of a bond, it is not necessary in calculating the current value of the bond. The important factors to consider are the face interest rate, market interest rate, and dollar amount of periodic interest payments.

Question 9

Weller Co.issued $600,000 of 30-year,8 percent bonds at 106 on one of its semiannual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

Accepted Answer

The total interest cost of the bonds can be calculated using the formula:
Total interest cost = (Total bond payments) - (Total proceeds from bond issuance)

Total bond payments can be calculated using the formula:
Total bond payments = (Face value of bonds) x (Annual coupon rate) x (Number of years)

= $600,000 x 0.08 x 30 = $1,440,000

Total proceeds from bond issuance can be calculated by multiplying the bond price (106) by the face value of the bonds ($600,000) and dividing by 100:

Total proceeds from bond issuance = (106/100) x $600,000 = $636,000

Using the straight-line method of amortization, each semiannual interest payment will be $24,000 ($600,000 x 0.08 x 0.5), with half of that amount ($12,000) going towards interest expense each semiannual period.

To calculate the amount of bond discount being amortized each period, we subtract the semiannual interest payment from the face amount of the bond and divide by the number of periods in the life of the bond:

Discount amortization = ($636,000 - $600,000) / (2 x 30) = $200

The total interest cost over the life of the bond will be the sum of the semiannual interest payments and the total discount amortization:

Total interest cost = (60 x $24,000) + (60 x $200) = $1,404,000

Question 10

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, leading to a lower effective interest rate compared to the face interest rate because the issuer effectively pays less interest over the bond's life when considering the premium paid by the bondholders.

Question 11

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 12

In 20x5,Horwitz Corporation issued ten-year,9 percent bonds when the market interest rate was 11 percent.Interest is payable annually.During 20x8,the market rate of interest for similar bonds was 12 percent.Using the effective interest method of amortization,what interest rate will be used to calculate interest expense for 20x8?

Accepted Answer

The effective interest method of amortization uses the market interest rate at the time the bonds were issued to calculate interest expense, which was 11 percent in this case.

Question 13

Pelican Company issued $200,000 of 20-year,6 percent bonds at 98 on one of its semiannual 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 discount on the bonds is $200,000 - ($200,000 * 0.98) = $4,000. The straight-line amortization amount per year is $4,000 / 20 = $200. After 7 years, the total amortized amount is $200 * 7 = $1,400. The carrying value after 7 years is $200,000 - $4,000 + $1,400 = $197,400.

Question 14

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

Accepted Answer

The total interest cost of bonds issued at a discount includes both the interest payments made over the life of the bonds and the amount of the issuance discount. This is because the discount increases the effective interest rate paid by the issuer beyond the stated rate on the bond.

Question 15

Which of the following is correct regarding the present value calculations associated with bonds?

Accepted Answer

All of the choices are correct. A bond's interest rate is fixed, but its present value changes as the market interest rate fluctuates. As the market interest rate rises, the present value of the bond decreases, and investors may be willing to pay less for the bond. Conversely, as the market interest rate falls, the present value of the bond increases, and investors may be willing to pay more for the bond.

Question 16

Suffolk Corporation issued $92,000 of 20-year,6 percent bonds at 98 on one of its semiannual 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 answer of Suffolk Corporation issued $92,000 of 20-year,6 percent...

Question 17

On January 2,20x5,Fresh Inc.issued 20-year bonds payable with a face value of $1,000,000 and a face interest rate of 10 percent.The bonds were issued to yield a market interest rate of 9 percent.Interest is payable semi-annually on January 1 and July 1.In calculating the present value of the bond issue of January 2,20x5.
-The periodic interest payments to be used are

Accepted Answer

The face interest rate of 10% on the bonds payable means that the annual interest payment per bond is $100,000 ($1,000,000 x 10%). However, since the market interest rate is 9%, the bonds will have been issued at a discount, meaning their present value will be less than their face value. Therefore, the semi-annual interest payment per bond will be less than $50,000 ($100,000 divided by 2), which eliminates choices A and C. The periodic interest payments to be used for bond valuation should be based on the market interest rate, which is 4.5% (9% divided by 2, since interest is paid semi-annually). Therefore, the correct choice is B ($50,000).

Question 18

The total interest cost on forty-six (46),ten-year,6 percent,$1,000 bonds that are issued at 98 is

Accepted Answer

The total interest cost is calculated by adding the interest payments over the life of the bonds to the discount at which they were issued. Each bond has a face value of $1,000, an annual interest rate of 6%, and they are issued at 98% of their face value, meaning each bond is sold for $980. The annual interest payment per bond is $1,000 * 6% = $60. Over ten years, the total interest per bond is $60 * 10 = $600. For 46 bonds, the total interest is $600 * 46 = $27,600. The discount on each bond is $1,000 - $980 = $20; for 46 bonds, the total discount is $20 * 46 = $920. The total interest cost is the sum of the total interest payments and the total discount, which is $27,600 + $920 = $28,520.

Question 19

A ten-year bond has a face value of $10,000,a face interest rate of 11 percent,an unamortized bond premium of $400,and an effective interest rate of 10 percent.The bonds were issued on one of its semi-annual interest payment dates.The entry to record the bond interest expense on the first semi-annual interest payment date is : (assuming the effective interest method of amortization),

Accepted Answer

The answer of A ten-year bond has a face value...

Question 20

A company issued $300,000 of 20-year,8 percent bonds at 96.If interest is paid semiannually,the entry to record the amount of bond interest expense recorded (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...

Quiz 11: Long-Term Liabilities

Knollwood Corporation issued $286,000 of 30-year,8 percent bonds at 106 on one of its semiannual 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:

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

Knollwood Corporation issued $278,000 of 30-year,8 percent bonds at 106 on one of its semiannual interest dates.The straight-line method of amortization is to be used.After 11 years,what is the carrying value of the bonds?

Pelican Company issued $200,000 of 20-year,6 percent bonds at 98 on one of its semiannual interest dates.The straight-line method of amortization is to be used. -What is the total interest cost of the bonds?

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

Weller Co.issued $600,000 of 30-year,8 percent bonds at 106 on one of its semiannual interest dates.The straight-line method of amortization is to be used.What is the total interest cost of the bonds?

A bond premium has the effect of

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

Pelican Company issued $200,000 of 20-year,6 percent bonds at 98 on one of its semiannual interest dates.The straight-line method of amortization is to be used. -After seven years,what is the carrying value of the bonds?

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

Which of the following is correct regarding the present value calculations associated with bonds?

Suffolk Corporation issued $92,000 of 20-year,6 percent bonds at 98 on one of its semiannual 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: .

The total interest cost on forty-six (46) ,ten-year,6 percent,$1,000 bonds that are issued at 98 is

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