Question 1

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

Accepted Answer

This is correct as the semiannual interest payment on an 8% annual contract rate on a $100,000 bond would be $4,000, and there would be 20 such payments over the course of the 10-year bond.

Question 2

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Accepted Answer

This is because the interest expense should be recognized in the period it is earned, regardless of when the company's accounting period ends.

Question 3

The market value or issue price of a bond is equal to the present value of all future cash payments provided by the bond.

Accepted Answer

This statement is true. The market value or issue price of a bond is determined by discounting all future cash payments (interest and principal) at the bond's yield to maturity. This present value calculation takes into account the time value of money, resulting in a lower price for bonds with lower coupon payments or longer maturities.

Question 4

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Accepted Answer

A discount on bonds payable occurs when the bonds are issued at a price that is below their par value. This means the company receives less cash upfront but must pay back the full par value at maturity, resulting in a discount.

Question 5

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
Interest Expense = (Cash Paid) + (Discount Amortization) = ($500,000 x 10% x 6/12) + ($13,000/16) = $25,812.50

Accepted Answer

The interest expense calculation is incorrect. It should be:

Interest Expense = (Bond Face Value) x (Annual Interest Rate) x (Time Period) + (Discount Amortization)

= ($500,000 x 10% x 6/12) + ($13,000/16)

= $25,750

Therefore, the statement "The amount of interest expense to be recorded on June 30 is $25,000" is incorrect.

Question 6

The carrying (book) value of a bond at the time when it is issued is always equal to its par value.

Accepted Answer

The answer of The carrying (book) value of a bond...

Question 7

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Accepted Answer

This is correct. Payments on installment notes typically include both accrued interest and some portion of the principal borrowed, allowing the borrower to gradually pay off the loan over time.

Question 8

The carrying (book) value of a bond payable is the par value of the bonds plus the discount.

Accepted Answer

The carrying value of a bond payable is the par value of the bonds plus any unamortized premium or less any unamortized discount.

Question 9

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.
Total interest expense recognized is ($500,000 x 10% x 8 years) + discount ($13,000) = $413,000.

Accepted Answer

The calculation for total interest expense recognized is incorrect. The correct calculation is ($500,000 x 10% x 8 years) - discount ($13,000) = $387,000.

Question 10

When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

Accepted Answer

When convertible bonds are converted to a company's stock, the carrying value of the bonds (which is the sum of the face value of the bond plus any unamortized premium or minus any unamortized discount and deferred issuance costs) is transferred to equity accounts, and no gain or loss is recorded. This is because the stock received upon conversion has a fair value equivalent to the carrying value of the debt being retired.

Question 11

When the contract rate is above the market rate, a bond sells at a discount.

Accepted Answer

When the contract rate is above the market rate, a bond sells at a premium, not a discount.

Question 12

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $812.50.
($500,000 - $487,000)/16 = $812.50

Accepted Answer

The calculation shown is correct, and the amount of discount amortized each period is indeed $812.50. Therefore, the statement is true.

Question 13

Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

Accepted Answer

Exercising a call option or purchasing bonds on the open market are two common ways of retiring bonds before maturity.

Question 14

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

Accepted Answer

The answer of The equal total payments pattern for installment...

Question 15

Premium on Bonds Payable is an adjunct or accretion liability account.

Accepted Answer

Premium on Bonds Payable is an adjunct or accretion liability account because it represents the excess of the issue price of a bond over its par value. This premium is amortized over the life of the bond and is recorded as a reduction of interest expense.

Question 16

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance and the premium reduces the interest expense of the bond over its life.

Accepted Answer

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance, and this premium can reduce the interest expense of the bond over its life. This is because the actual cash interest payments will be lower than the contractual interest payments, as the premium can be used to offset a portion of the interest expenses.

Question 17

When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a discount.

Accepted Answer

When the contract rate on a bond issue is less than the market rate, the bonds will be less attractive to investors and will generally sell at a lower price, which causes a discount.

Question 18

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

Accepted Answer

The answer of The issue price of bonds is found...

Question 19

Long-term bonds have relatively higher interest rates because they carry higher risk due to the longer time period.

Accepted Answer

This statement is true. Long-term bonds carry higher risk as they are exposed to fluctuations in interest rates and inflation over a longer time period, which can impact their value and earnings potential. This higher risk is compensated for by offering relatively higher interest rates compared to shorter-term bonds.

Question 20

The effective interest method yields increasing amounts of bond interest expense and decreasing amounts of premium amortization over the bond's life for bonds issued at a premium.

Accepted Answer

The effective interest method yields a constant rate of interest expense over the life of the bond. While the amount of interest expense remains constant, the amount of premium amortization increases over time, reducing the carrying amount of the bond to its face value at maturity.

Quiz 14: Long-Term Liabilities