Question 1

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 answer of Weller Co.issued $600,000 of 30-year,8 percent bonds...

Question 2

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 the bond is 10%, which means that the company is required to pay $100,000 in interest every year ($1,000,000 x 10%). However, the bonds were issued to yield a market interest rate of 9%, which means that the effective interest rate on the bonds is 9%. Therefore, the periodic interest payments to be used in calculating the present value of the bond issue would be $50,000 ($1,000,000 x 9% / 2). This is because the company is required to make semi-annual interest payments, and the effective interest rate takes into account the time value of money over the life of the bonds.

Question 3

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

Accepted Answer

The future value of the face (maturity) amount is not needed in calculating the value of a bond. The other options are necessary in determining the value of the bond.

Question 4

On January 2,20x5,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 2,20x5,the

Accepted Answer

When calculating the present value of a bond, the market interest rate (or yield) should be used to calculate the present value of both the face amount and the periodic interest payments. This is because the bond must yield the same rate of return as other similar investments in the market. Therefore, in this case, the 9 percent market interest rate should be used to calculate the present value of both the face amount and the annual interest payments.

Question 5

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 6

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 7

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 8

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 includes the stated interest plus the discount on issuance. The stated interest is $200,000 * 6% * 20 = $240,000. The discount on issuance is $200,000 * (100% - 98%) = $4,000. Therefore, the total interest cost is $240,000 + $4,000 = $244,000.

Question 9

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 bonds were issued at 98, meaning Pelican Company received $196,000 ($200,000 x 0.98) when they were issued. The semiannual interest payment is calculated as ($200,000 x 0.06)/2 = $6,000 per payment. Over the 20-year life of the bonds, there will be 40 semiannual interest payments.

Using the straight-line method, we allocate the bond discount of $4,000 ($200,000 - $196,000) over the 40 semiannual interest payments. This means that the bond discount decreases by $100 ($4,000/40) each semiannual interest payment.

After seven years, there will have been 14 semiannual interest payments. This means that the bond discount will have decreased by $1,400 ($100 x 14) over this time. Therefore, the carrying value of the bonds will be:

Carrying value = Face value of bonds - Accumulated amortization
Carrying value = $200,000 - $1,400
Carrying value = $198,600

Therefore, the best choice is B: $197,400.

Question 10

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

The semi-annual interest payment is calculated by multiplying the face value of the bond by the face interest rate and then dividing by two: 
$1,600,000 x 6% / 2 = $48,000

To calculate the effective interest rate, we need to solve for the periodic interest rate (r) using the present value formula: 
$1,381,920 = $48,000 / (1+r)^1 + $48,000 / (1+r)^2 + ... + $48,000 / (1+r)^20 
Solving for r, we get r = 4%

Using the effective interest method of amortization, we allocate the total interest expense between the interest payment and the amortization of the bond discount. 
For the first interest payment: 
Interest expense = $1,381,920 x 4% = $55,276.80 
Amortization of bond discount = $55,276.80 - $48,000 = $7,276.80 
Carrying value of the bond payable = $1,381,920 + $7,276.80 = $1,389,196.80

For the second interest payment: 
Interest expense = $1,389,196.80 x 4% = $55,567.87 
Amortization of bond discount = $55,567.87 - $48,000 = $7,567.87 
Carrying value of the bond payable = $1,389,196.80 + $7,567.87 = $1,396,764

Therefore, the correct answer is C.

Question 11

On January 2,20x5,Preston 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 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 the bond is 8%, which means that the annual interest payment would be $300,000 x 8% = $24,000. However, the bonds were issued to yield a market interest rate of 9%, which is higher than the face interest rate. This means that the bonds must be sold at a discount in order to make up for the difference in interest payments. The present value of the bond issue is calculated using the market interest rate of 9%, which means that the semi-annual interest payments would be $300,000 x 9% / 2 = $13,500. Thus, the periodic interest payments to be used in calculating the present value of the bond issue are $13,500. Therefore, the correct choice is B.

Question 12

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

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Question 13

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.

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

Accepted Answer

The total interest cost of bonds issued at a discount is equal to the sum of all interest payments made over the life of the bonds plus the amount of the issuance discount. This is because the discount increases the cost of borrowing beyond the stated interest payments.

Question 15

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 16

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

Accepted Answer

The answer of The total interest cost on forty-six (46),ten-year,6...

Question 17

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

Accepted Answer

All of these choices are correct regarding present value calculations associated with bonds. The amount of interest a bond pays is fixed over its life, but the present value of that interest changes as the market interest rate changes. The market interest rate is used to determine the bond's present value, and as a result, the amount investors are willing to pay for a bond varies based on changes in the market interest rate.

Question 18

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

Accepted Answer

In order to calculate the value of a bond, you need to know the face interest rate (also called the coupon rate), the market interest rate, and the present value of the face (maturity) amount. The future value of periodic interest payments is not needed in the calculation.

Question 19

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 bonds have a 20-year maturity, resulting in 40 periods (20 years * 2 periods per year). Therefore, the correct factor for calculating the present value of the bond issue is 4.5%, 40 periods.

Question 20

On January 2,20x5,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 semiannually on January 2 and July 1.In calculating the present value of the bond issue on January 2,20x5,

Accepted Answer

The answer of On January 2,20x5,Barham Corporation issued ten-year bonds...

Quiz 14: Long Term Liabilities

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?

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

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

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?

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?

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

A bond premium has the effect of

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

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?

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

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

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