Question 1

Greco Co.issued ten-year term bonds on January 1,20x5,with a face value of $1,600,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $1,381,920 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.The carrying value of the bonds payable on the December 31,20x5,balance sheet date should be

Accepted Answer

Using effective interest method of amortization, we calculate the interest expense for the year as follows:

Interest expense = Carrying value of bonds payable at beginning of the year * Effective interest rate
= $1,381,920 * 8% 
= $110,554.40

The semi-annual interest payment is $1,600,000 * 6% * 1/2 = $48,000. Therefore, the amortization of bond discount during the year is $110,554.40 - $48,000 = $62,554.40.

The carrying value of the bonds payable on December 31, 20x5 is calculated as follows:

Carrying value of bonds payable at beginning of the year = $1,381,920
Add: Amortization of bond discount during the year = $62,554.40
Less: Semi-annual interest payment on June 30, 20x5 = $48,000
Carrying value of bonds payable on December 31, 20x5 = $1,396,474.40 ≈ $1,396,764 (rounded to nearest dollar)

Therefore, the correct answer is C.

Question 2

A $200,000 bond issue with a carrying value of $206,000 is called at 101 and retired.The entry to record the retirement of bonds is:

Accepted Answer

The retirement of bonds at a call price of 101 means that the bonds are being redeemed at a premium. The premium is the difference between the call price and the carrying value, which is $6,000 in this case (101 - 100 x $200,000). The entry to record the retirement of bonds at a premium is to debit the Bonds Payable account for the face value of the bonds ($200,000), credit the Premium on Bonds Payable account for the premium amount ($6,000), and debit the Loss on Bond Retirement account for the difference between the carrying value and the call price ($206,000 - $202,000 = $4,000). The net effect is a decrease in liabilities of $200,000 and a decrease in assets of $206,000, representing the retirement of the bonds.

Option A: This entry does not include the premium on bonds payable and does not account for the loss on bond retirement.

Option B: This entry correctly includes the premium on bonds payable and the loss on bond retirement.

Option C: This entry correctly includes the premium on bonds payable but does not account for the loss on bond retirement.

Option D: This entry only includes the loss on bond retirement and does not account for the premium on bonds payable.

Question 3

Neville Co.issued 20-year term bonds at a discount in 20x5.Interest is payable semiannually.Which of the following statements is true,assuming that the effective interest method of amortization is used for the bond discount?

Accepted Answer

Interest expense increases each six-month interest period when using the effective interest method of amortization for a bond issued at a discount. This is because the book value of the bond increases with each interest payment due to the amortization of the discount, and interest expense is calculated on the increasing book value.

Question 4

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 is calculated as $800,000 x 6% x 6/12 = $24,000. 
The effective interest for the first period is calculated as $690,960 x 8% = $55,277. 
The bond interest expense for the first period is $55,277 - $24,000 = $31,277. 
Therefore, the entry to record the bond interest expense on the first interest payment date is:
Interest Expense               31,277
Cash                                24,000
Discount on Bonds Payable 7,277

Question 5

When bonds are converted to common stock,which of the following could be part of the entry?

Accepted Answer

When bonds are converted to common stock, any unamortized bond premium is debited to remove it from the books as part of the conversion process.

Question 6

A $200,000 bond issue with a carrying value of $194,000 is called at 101 and retired.The entry to record the retirement of bonds is:

Accepted Answer

The answer of A $200,000 bond issue with a carrying...

Question 7

Piper Company issued ten-year,8 percent bonds payable in 20x5 at a premium.During 20x5,the company's accountant failed to amortize any of the bond premium.The omission of the premium amortization will

Accepted Answer

The answer of Piper Company issued ten-year,8 percent bonds payable...

Question 8

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

Under the effective interest method of amortization, the interest expense is calculated by multiplying the carrying value of the bond at the beginning of the year with the effective interest rate. The effective interest rate is the market rate of interest at the time the bond was issued. Therefore, in 20x8, the interest rate used to calculate interest expense will still be 11 percent, which was the market rate of interest at the time the bond was issued. Hence, the correct choice is D, i.e., 11 percent.

Question 9

When bonds have been issued at a discount the periodic amortization of the discount will

Accepted Answer

The periodic amortization of the discount will decrease the discount and, as a result, increase the carrying value of the bonds. This is because the discount represents the difference between the face value and the price paid for the bonds, and the amortization reduces this difference over time.

Question 10

When the straight-line method of amortization is used for a bond premium,the amount of interest expense for an interest period is calculated by

Accepted Answer

Under the straight-line method of amortization, the amount of premium amortization for an interest period remains constant throughout the life of the bond. This amount is deducted from the face interest rate to calculate the effective interest rate for the period. The interest expense is then calculated by deducting the premium amortization from the cash paid for interest during the period. Therefore, the correct choice is B.

Question 11

When the effective interest method of amortization is used for a bond premium,the amount of interest expense for an interest period is calculated by multiplying the

Accepted Answer

When using the effective interest method of amortization for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate. This is because the effective interest rate method recognizes interest expense based on the actual market rate of interest, which is used to discount the future cash flows of the bond. As a result, the interest expense will vary from period to period, as the carrying value of the bonds changes over time due to the amortization of the premium.

Question 12

The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that

Accepted Answer

The amortization of a bond discount increases the amount of interest expense reported because it adds the amortized discount to the actual cash interest paid, resulting in a total interest expense that exceeds the cash interest payment for the period.

Question 13

Greco Co.issued ten-year term bonds on January 1,20x5,with a face value of $1,600,000.The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $1,381,920 to yield an effective annual rate of 8 percent.The effective interest method of amortization is to be used.How much bond interest expense (rounded to the nearest dollar)should be reported on the income statement for the year ended December 31,20x5?

Accepted Answer

The answer of Greco Co.issued ten-year term bonds on January...

Question 14

A $50,000 bond issue with a carrying value of $47,000 is called at 102 and retired.The entry to record the retirement of bonds is:

Accepted Answer

The answer of A $50,000 bond issue with a carrying...

Question 15

A company has $1,606,000 in bonds payable with an unamortized premium of $40,000.If one-fourth of the bonds are converted to common stock,the carrying value of the bonds will decrease by

Accepted Answer

The answer of A company has $1,606,000 in bonds payable...

Question 16

A company has $450,000 in bonds payable with an unamortized discount of $10,500.If two-thirds of the bonds are converted to common stock,the carrying value of the bonds payable will decrease by

Accepted Answer

The carrying value of the bonds payable is $450,000 - $10,500 = $439,500.

If two-thirds of the bonds are converted to common stock, then the remaining one-third of the bonds will still have a carrying value of (1/3)*$439,500 = $146,500.

Therefore, the carrying value of the bonds payable will decrease by $439,500 - $146,500 = $293,000.

Hence, the correct answer is (B) $293,000.

Question 17

A $300,000 bond issue with a carrying value of $311,000 is called at 103 and retired.The entry to record the retirement of bonds is:

Accepted Answer

The answer of A $300,000 bond issue with a carrying...

Question 18

If bonds payable were issued initially at a premium,the carrying value of the bonds at a balance sheet date will be calculated by

Accepted Answer

The carrying value of bonds issued at a premium is calculated by adding the balance of unamortized bond premium to the face value. This is because the premium represents an amount paid over the face value, which is amortized over the life of the bond.

Question 19

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 20

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 semi-annually 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 be recorded on December 31,20x5,for the payment of interest (rounded to the nearest dollar)and the amortization of discount is:

Accepted Answer

The semi-annual interest payment is $800,000 x 6%/2 = $24,000. The amortization of discount for the period is ($690,960 - $800,000 x 4% x 6/12) - ($690,960 - $800,000 x 4% x 0/12) = $8,040.

The entry to record the interest payment and discount amortization on December 31, 20x5, is:

Interest Expense	   $8,040
Discount on Bonds Payable   $1,960 ($24,000 - $22,040)
Cash	                                $24,000

Therefore, the correct answer is B.

Quiz 14: Long Term Liabilities