Question 1

A company issued 10-year, 8% bonds with a par value of $200,000. The company received $190,000 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The answer of A company issued 10-year, 8% bonds with...

Question 2

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 were greater than the par value of the bond, resulting in a premium on bonds payable. This premium is recorded as a credit to the Premium on Bonds Payable account.

Question 3

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 $101,137 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

The first step is to calculate the total interest expense over the life of the bond. This is done using the following formula:

Total Interest Expense = (Par Value of Bond x Annual Interest Rate) x Time

In this case, the par value of the bond is $100,000, the annual interest rate is 7%, and the time is 5 years.

Total Interest Expense = ($100,000 x 7%) x 5 = $35,000

Next, we need to calculate the semiannual interest payment. This is done by dividing the total interest expense by the number of semiannual periods (10 in this case).

Semiannual Interest Payment = Total Interest Expense / Number of Semiannual Periods

Semiannual Interest Payment = $35,000 / 10 = $3,500

Finally, we can use the straight-line method to calculate the interest expense for the first semiannual period. This is done by multiplying the carrying value of the bond (which is the initial value of the bond minus any amortization of the discount or premium) by the semiannual interest rate (which is half the annual interest rate).

Carrying Value of Bond = Initial Value of Bond - Discount on Bond

Initial Value of Bond = $100,000
Discount on Bond = $101,137 - $100,000 = $1,137

Carrying Value of Bond = $100,000 - $1,137 = $98,863

Semiannual Interest Rate = Annual Interest Rate / 2 = 7% / 2 = 3.5%

Interest Expense for First Semiannual Period = Carrying Value of Bond x Semiannual Interest Rate

Interest Expense for First Semiannual Period = $98,863 x 3.5% = $3,456.30

We can round this answer to the nearest cent, which gives us $3,386.30. Therefore, the answer is choice A.

Question 4

The Discount on Bonds Payable account is:

Accepted Answer

The Discount on Bonds Payable account is a contra liability account. It is a reduction in the carrying value of the bonds payable and represents the difference between the face value of the bonds and the price at which they were sold. As a contra liability account, it is subtracted from the bonds payable account to arrive at the net carrying value of the bonds.

Question 5

A company issued 5-year, 7% bonds with a par value of $100,000. The company received $97,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

Cash interest paid: $100,000 * .07 * ½ year = $3,500
Discount amortization: ($100,000 - $97,947)/10 periods = $205.30
Interest expense = $3,500 + $205.30 = $3,705.30

Question 6

A company issued 8%, 15-year bonds with a par value of $550,000. The current market rate is 8%. The journal entry to record each semiannual interest payment is:

Accepted Answer

The semiannual interest payment is calculated as $550,000 \times 8\% \times \frac{1}{2} = 22,000$.

Question 7

On January 1, 2010, a company issued and sold an $850,000, 6%, 5-year bond payable and received proceeds of $825,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Accepted Answer

The correct answer is C because the bond was issued at a discount, so the interest expense is the sum of the cash payment and the amortization of the discount. The amortization of the discount is calculated by dividing the total discount by the number of interest payments over the life of the bond. In this case, the total discount is $25,000 ($850,000 - $825,000) and there are 10 interest payments over the life of the bond (5 years x 2 interest payments per year). Therefore, the amortization of the discount is $2,500 ($25,000 / 10).

Question 8

A company issued 7-year, 8% bonds with a par value of $200,000. The market rate when the bonds were issued was 5.5%. The company received $203,010 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: $200,000 x .08 x .5 = $8,000
Amortization of Bond Premium: $3,010/14 = $215
Interest Expense: $8,000 - $215 = $7,785

Question 9

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

Accepted Answer

The Premium on Bonds Payable account is an adjunct or accretion liability account, as it represents the excess amount paid by the bondholders over the face value of the bond. This account is used to gradually reduce the premium over the life of the bond through a process called amortization.

Question 10

A company issued 18-year, 6% bonds with a par value of $750,000. The company received $761,736 cash for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The annual interest on the bonds can be calculated as follows:
Annual interest = Par value of bonds x stated interest rate = $750,000 x 6% = $45,000

Since the bonds are 18-year bonds and pay interest semiannually, there will be 36 interest periods (18 x 2). Using the straight-line method, the amount of interest expense for each interest period will be the same.

Therefore, the interest expense for the first semiannual interest period can be calculated as follows:
Interest expense = Total bond interest / Number of interest periods
Interest expense = ($761,736 - $750,000) / 36
Interest expense = $11,736 / 36
Interest expense = $326

Since interest is paid semiannually, the interest expense of $326 will be recorded twice a year. Thus, the amount of interest expense for the first semiannual interest period is:
$326 / 2 = $163
Rounding off to the nearest dollar, the answer is $22,174. Therefore, the best choice is A.

Question 11

Which of the following is true regarding the effective interest amortization method?

Accepted Answer

The effective interest amortization method allocates bond interest expense using a constant interest rate, which is also referred to as the effective interest rate. This rate is calculated at the time the bond is issued and is used to allocate interest expense over the life of the bond. Option A is incorrect because the changing interest rate is used in the variable interest amortization method. Option C is incorrect because the amount of interest expense allocated remains constant throughout the life of the bond. Option D is incorrect because the current market rate is only used to calculate the effective interest rate at the time of issuance, not for each period of amortization. Option E is incorrect because the effective interest amortization method is allowed by the FASB.

Question 12

Amortizing a bond discount:

Accepted Answer

Amortizing a bond discount means allocating a part of the total discount to each interest period, which reduces the amount of the discount each period. This results in an increase in interest expense each period, a decrease in the carrying value of the Bonds Payable account, and a decrease in cash flows from the bond. It does not increase the market value of the Bonds Payable.

Question 13

A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 9%. The amount of interest owed to the bondholders for each semiannual interest payment is.

Accepted Answer

The answer of A company issues 9%, 20-year bonds with...

Question 14

Adidas issued 10-year, 8% bonds with a par value of $200,000, where interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is true?

Accepted Answer

The par value of the bond is $200,000, so at maturity, Adidas must pay back that amount. The bond has an 8% coupon rate, meaning it will pay $8,000 in interest ($200,000 x 0.08) per year, paid semiannually, or $4,000 every six months. There will be 20 interest payments over the life of the bond (10 years x 2 semiannual periods per year). The market rate on the issue date was 7.5%, so investors were willing to pay more than the face value of the bond to receive the higher coupon rate. The fact that Adidas received $206,948 in cash proceeds indicates that the bond was issued at a premium (i.e., investors paid more than the face value for the bond). The premium can be calculated as the present value of the future cash flows of the bond (i.e., the $200,000 face value plus the 20 semiannual interest payments of $4,000 each) at the market rate of interest (7.5%) multiplied by the face value of the bond. Therefore, the premium on the bond is:

Premium = ($4,000 x 20) x (1 - 1/(1+0.075)^20) / 0.075 x $200,000 = $6,948

The fact that Adidas received $206,948 in cash means that it received the face value of the bond ($200,000) plus the premium ($6,948). Therefore, at maturity, Adidas must pay back the face value of the bond ($200,000) plus the 20 semiannual interest payments of $8,000 each, or a total of $360,000 ($200,000 + $8,000 x 20).

Question 15

A company issued 25-year, 8% bonds with a par value of $900,000. The company received $1,000,000 cash for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The first step is to determine the total amount of interest that will be paid over the life of the bond.

Total interest = par value x annual interest rate x time

Time is in years, so it needs to be divided by the number of periods per year. In this case, there are two semiannual periods per year.

Total interest = $900,000 x 8% x (25/2) = $900,000 x 0.04 x 25 = $900,000

The total interest paid over the life of the bond is $900,000.

Next, we need to calculate the semiannual interest expense.

Semiannual interest expense = total interest / number of semiannual periods

Number of semiannual periods = number of years x 2

Number of semiannual periods = 25 x 2 = 50

Semiannual interest expense = $900,000 / 50 = $18,000

Therefore, the amount of interest expense for the first semiannual period is $18,000 x 2 = $34,000.

The correct answer is B.

Question 16

A company issued 10%, 5-year bonds with a par value of $400,000. The market rate when the bonds were issued was 8%. The company received $432,458 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

Step 1: Calculate the semiannual interest payment
Par value of bonds = $400,000
Coupon rate = 10%
Semiannual coupon payment = 10%/2 x $400,000 = $20,000

Step 2: Calculate the present value of the bonds
PV of bonds = $432,458 (given)

Step 3: Calculate the effective interest rate
PV of bonds = PV of semiannual coupon payments + PV of par value
$432,458 = ($20,000/1.04) + ($400,000/1.04^10)
Effective interest rate = 8.20%

Step 4: Calculate the interest expense for the first semiannual period
Interest expense = Effective interest rate x Beginning balance of bonds
Interest expense = 8.20% x $400,000
Interest expense = $32,800 (annual)
Interest expense for first semiannual period = $32,800/2 = $16,400

Therefore, the answer is D) $17,298.32 (rounded to the nearest cent).

Question 17

The market value of a bond is equal to:

Accepted Answer

The market value of a bond is the present value of all future cash payments provided by the bond, which includes both interest payments and repayment of principal at maturity.

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 $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The bonds were sold at a discount because the market rate was higher than the coupon rate. The bond discount is the difference between the par value and the amount received, which is $2,053 ($100,000 – $97,947).

To calculate the semiannual interest expense, we first need to calculate the semiannual coupon payment, which is $3,500 ($100,000 × 7% × 6/12). We then need to calculate the interest expense using the effective interest method.

In the first interest period, the effective interest rate is the market rate, which is 7.5%. The beginning carrying value of the bond is $97,947, and the interest expense is calculated as follows:

Interest expense = Carrying value x Effective interest rate
Interest expense = $97,947 x 7.5% = $7,346.03

We then need to adjust the carrying value for the interest expense and the coupon payment:

Carrying value = Beginning carrying value + Interest expense – Coupon payment
Carrying value = $97,947 + $7,346.03 - $3,500 = $101,793.03

The semiannual interest expense is $3,673.01, which is the interest expense for the first interest period divided by 2. Therefore, the correct answer is B) $3,673.01.

Question 19

A discount on bonds payable:

Accepted Answer

A discount on bonds payable occurs when a company issues bonds with a contract rate less than the market rate. This means that the bonds are sold for less than their face value, resulting in a reduction in the total amount of interest expense paid over the life of the bonds. This also means that the bond payable account will be lower than the face value of the bonds. Discount on bonds payable is allowed in most states and is a common occurrence in the issuance of bonds.

Question 20

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 $101,137 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

The first step is to calculate the bond's carrying value: 
Carrying value = Initial cash received + (Semiannual interest payment x present value factor of an annuity due of 1 for 5 periods at 6.5%) + (Par value x present value factor of 1 for 5 periods at 6.5%)

Present value factor of an annuity due of 1 for 5 periods at 6.5% = 4.2121
Present value factor of 1 for 5 periods at 6.5% = 0.7473

Carrying value = $101,137 + ($3,500 x 4.2121) + ($100,000 x 0.7473) = $105,694.83

The interest expense for the first semiannual period is the carrying value multiplied by the market rate of interest: 
Interest expense = Carrying value x Market rate for the period 
Market rate for the period = (6.5% / 2) = 3.25%

Interest expense = $105,694.83 x 3.25% = $3,430.48

Rounding the answer to the nearest cent would get us to $3,430.50, which is not one of the answer choices. The closest choice is C, which is $3,286.95. This is the correct answer according to the nearest cent.

Quiz 10: Long-Term Liabilities