Question 1

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 more cash than the par value of the bond, which indicates that the bond was issued at a premium. The difference between the par value and the proceeds received is recorded as a credit to Premium on Bonds Payable.

Question 2

The market value (price)of a bond is equal to:

Accepted Answer

The market value of a bond is equal to the present value of all future cash payments provided by a bond, which includes both the interest payments and the principal repayment. This is because investors are willing to pay the price of the bond based on the expected future cash flows it will provide, and the present value calculation takes into account the time value of money.

Question 3

A company issues 9% bonds with a par value of $100,000 at par on April 1.The bonds pay interest semi-annually on January 1 and July 1.The cash paid on July 1 to the bond holder(s)is:

Accepted Answer

The answer of A company issues 9% bonds with a...

Question 4

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000.If the company calls these bonds at a price of $201,000,the gain or loss on retirement is:

Accepted Answer

The answer of Chang Industries has bonds outstanding with a...

Question 5

Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.If the company calls these bonds at a price of $95,000,the gain or loss on retirement is:

Accepted Answer

The answer of Clabber Company has bonds outstanding with a...

Question 6

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 company is able to sell the bonds at a lower interest rate than what the market demands, which results in a lower cash inflow for the company. The difference between the bond's face value and the cash inflow is recorded as a discount on the bonds payable account. This discount reduces the carrying value of the bond and increases the total bond interest expense over the life of the bond.

Question 7

A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?

Accepted Answer

The carrying value of the bonds before retirement is $100,000 - $4,500 = $95,500. 
The company paid $97 for each bond, which means they paid a total of $97 x the number of bonds retired. 
If the price paid is higher than the carrying value, there is a loss. 
The loss in this case is ($97 x number of bonds retired) - $95,500. 
Since the question does not provide the number of bonds retired, we cannot calculate the exact amount of the loss. 
However, we can tell that the loss is greater than $1,500 (option B) because $1,500 is less than the unamortized discount on the bonds, which means it is less than the actual loss incurred by the company. Therefore, the correct answer is C) $1,500 loss.

Question 8

A company has bonds outstanding with a par value of $100,000.The unamortized premium on these bonds is $2,700.If the company retired these bonds at a call price of 99,the gain or loss on this retirement is:

Accepted Answer

The gain on retirement is calculated by comparing the net carrying amount of the bonds to the call price. The net carrying amount is the par value plus the unamortized premium, which is $100,000 + $2,700 = $102,700. The call price of 99 means the bonds are retired at 99% of their par value, which is $100,000 * 99% = $99,000. The gain is the difference between the net carrying amount and the retirement price, which is $102,700 - $99,000 = $3,700.

Question 9

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 $102,105 cash for the bonds.Using the effective interest method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

First, we need to calculate the bond's interest payments per period. 
The coupon rate is 7%, so the annual interest payment is $100,000 x 7% = $7,000. 
Dividing that by 2 (since the bond pays semiannually), we get $3,500 as the interest payment per period.

Next, we need to determine the bond's effective interest rate. Since the market rate is 6.5% and the coupon rate is 7%, this bond was issued at a premium (meaning its price was higher than its par value). To calculate the effective interest rate, we can use the following formula:

Effective interest rate = (annual interest payments / market value of the bond) x 100%

For this bond, the annual interest payments are $7,000, and the market value (or issue price) is $102,105. Plugging these values into the formula, we get:

Effective interest rate = ($7,000 / $102,105) x 100% = 6.86%

Now we can use the effective interest method to calculate the interest expense for the first semiannual period. 
First, we'll calculate the bond's interest income using the effective interest rate:

Interest income = carrying value of the bond x effective interest rate x time

Since this is the first semiannual period, the time value will be 0.5 years. To calculate the carrying value of the bond, we start with the initial value of $102,105 and subtract the amount of premium amortization for the period:

Carrying value = initial value - premium amortization

Premium amortization = (effective interest rate - coupon rate) x carrying value

For the first semiannual period:

Premium amortization = (6.86% - 7%) x $102,105 = -$98.86

(Note that since the effective interest rate is slightly lower than the coupon rate, this means that the premium amortization is negative - i.e. the carrying value actually increases slightly over the period.)

So the carrying value for the first semiannual period is:

Carrying value = $102,105 - (-$98.86) = $102,203.86

Plugging these values into the interest income formula, we get:

Interest income = $102,203.86 x 6.86% x 0.5 = $3,318.41

Finally, we can calculate the recorded interest expense by subtracting the interest income from the actual interest payment:

Recorded interest expense = interest payment - interest income

Recorded interest expense = $3,500 - $3,318.41 = $181.59

Therefore, the amount of recorded interest expense for the first semiannual interest period is $3,318.41 (choice C).

Question 10

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 $102,105 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 correct answer is A because the amount of recorded interest expense for the first semiannual interest period is $3,289.50. This is calculated by taking the face amount of the bonds ($100,000) and multiplying it by the annual interest rate (7%) and then dividing by 2 (since the interest is paid semiannually). This gives us $3,500. We then subtract the amount of premium amortization for the period, which is $210.50. This gives us a total interest expense of $3,289.50.

Question 11

Bonds that give the issuer an option of retiring them before they mature are:

Accepted Answer

Callable bonds give the issuer the option to retire them before their maturity date.

Question 12

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

First, we need to calculate the bond's effective interest rate using the market rate and the bond's discount. The bond's discount is $2,053 ($100,000 - $97,947), and the bond's carrying value is $97,947. The effective interest rate is then:

Effective interest rate = (interest payment / carrying value) x 2

The interest payment is ($100,000 x 7%) / 2 = $3,500. Plug in the values:

Effective interest rate = ($3,500 / $97,947) x 2 = 7.168%

To calculate the interest expense for the first semiannual interest period, we need to multiply the carrying value at the beginning of the period by the effective interest rate. The carrying value at the beginning of the first semiannual period is the bond's face value of $100,000 minus the bond discount of $2,053, or $97,947.

Interest expense = $97,947 x 7.168% = $3,673.01

So, the answer is B.

Question 13

A company issues 9% bonds with a par value of $100,000 at par on April 1,which is 4 months after the most recent interest date.The cash received for accrued interest on April 1 by the bond issuer is:

Accepted Answer

The bond has a 9% annual interest rate, which means the monthly interest rate is 0.75% (9% / 12 months). Accrued interest from the most recent interest date (January 1st) to April 1st (when the bonds were issued) is 3 months x $750 = $2,250 (assuming a 30-day month). The bond issuer will receive this amount plus the cash raised from issuing the bonds ($100,000) on April 1st. Therefore, they will receive a total of $102,250. But since the question is asking only for the cash received for accrued interest, we subtract the $100,000 raised from issuing the bonds to get the answer of $2,250. However, this answer is not given as an option. The closest option is D, which is twice the correct answer. This suggests that there may be a mistake in the question or answer choices. Nevertheless, the correct answer for the cash received for accrued interest is $2,250.

Question 14

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

Accepted Answer

The Premium on Bonds Payable account is an adjunct or accretion liability account that represents the excess amount paid by investors over the face value of bonds. It is recorded on the balance sheet as a liability and is amortized over the life of the bonds.

Question 15

A company issued 10-year,7% bonds with a par value of $100,000.The company received $96,526 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The total interest paid over the 10-year period would be $70,000 (7% of $100,000) and since the amount received for the bonds is $96,526, the difference of $26,526 represents the discount on the bonds. To calculate the straight-line method of amortization, we divide the discount by the number of interest periods (20 for a 10-year bond with semiannual payments) to get $1,326.30. This is also the amount of the first interest payment because the bond sells at a discount, hence the first semiannual interest expense is $1,326.30 + $2,347.40 = $3,673.70 (option C).

Question 16

On January 1,a company issued and sold a $400,000,7%,10-year bond payable,and received proceeds of $396,000.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 answer of On January 1,a company issued and sold...

Question 17

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

Accepted Answer

Adonis Corporation must pay the par value of $200,000 at maturity and make 20 semiannual interest payments of $8,000 each (4% of $200,000).

Question 18

If an issuer sells bonds at a date other than an interest payment date:

Accepted Answer

If the issuer sells bonds at a date other than an interest payment date, the buyers will normally pay the issuer the purchase price plus any interest accrued since the prior interest payment date. This is known as accrued interest and is added to the purchase price of the bonds. Therefore, the bonds do not sell at a premium or a discount, and the issuing company will not report a gain or a loss on the sale.

Question 19

The effective interest amortization method:

Accepted Answer

The effective interest amortization method allocates bond interest expense over the bond's life using a constant interest rate. This rate may differ from the coupon rate on the bond, but it remains constant throughout the life of the bond. This method is allowed by the FASB and is widely used in practice.

Question 20

A company may retire bonds by all but which of the following means?

Accepted Answer

Purchasing bonds on the open market, exercising a call option, and paying them off at maturity are all means through which a company can retire bonds. Converting bonds to stock is not retiring them, but rather exchanging them for a different asset. However, paying all future interest and cancelling the debt, known as defeasance, is another way a company can retire bonds.

Quiz 14: Long-Term Liabilities