Question 1

A corporation issued 8% bonds with a par value of $1,000,000,receiving a $20,000 premium.On the interest date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation purchased the entire issue on the open market at 99 and retired it.The gain or loss on this retirement is:
A)$0.
B)$10,000 gain.
C)$10,000 loss.
D)$22,000 gain.
E)$22,000 loss.

Accepted Answer

The answer of A corporation issued 8% bonds with a...

Question 2

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of principle will be included in the first annual payment?
A)$20,000
B)$37,258
C)$25,000
D)$232,742
E)$17,258

Accepted Answer

The first annual payment includes both interest and principal. The interest for the first year is $250,000 * 8% = $20,000. The total payment is $37,258, so the principal portion is $37,258 - $20,000 = $17,258.

Question 3

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.The journal entry to record the first interest payment using the effective interest method of amortization is:
A)Debit Interest Expense $12,487.08;debit Premium on Bonds Payable $1,012.92;credit Cash $13,500.00.
B)Debit Interest Payable $13,500;credit Cash $13,500.00.
C)Debit Bond Interest Expense $12,487.08;debit Discount on Bonds Payable $1,012.92;credit Cash $13,500.00.
D)Debit Bond Interest Expense $14,717.70;credit Premium on Bonds Payable $1,217.70;credit Cash $13,500.00.
E)Debit Bond Interest Expense $12,282.30;debit Premium on Bonds Payable $1,217.70;credit Cash $13,500.00.

Accepted Answer

The interest expense is calculated using the market rate of 8% on the carrying amount of $312,177, resulting in $12,487.08. The cash interest payment is $13,500 (9% of $300,000 divided by 2). The difference of $1,012.92 is the amortization of the premium.

Question 4

A company retires its bonds at 105.The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745.The issuer's journal entry to record the retirement will include a:
A)Debit to Premium on Bonds.
B)Credit to Premium on Bonds.
C)Debit to Discount on Bonds.
D)Credit to Gain on Bond Retirement.
E)Credit to Bonds PayablE.

Accepted Answer

The carrying value of the bonds at the retirement date is higher than the face value, which means that the company had a premium on the bonds. To retire the bonds at 105, the company needs to pay an amount higher than the carrying value, which means that the premium needs to be debited. Therefore, the correct journal entry would be:

Debit Bonds Payable for $100,000
Debit Premium on Bonds for $3,745
Credit Cash for $105,000

Question 5

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the issuance of the bond is:
A)Debit Cash $400,000;debit Discount on Bonds Payable $16,207;credit Bonds Payable $416,207.
B)Debit Cash $383,793;debit Discount on Bonds Payable $16,207;credit Bonds Payable $400,000.
C)Debit Bonds Payable $400,000;debit Bond Interest Expense $16,207;credit Cash $416,207.
D)Debit Cash $383,793;debit Premium on Bonds Payable $16,207;credit Bonds Payable $400,000.
E)Debit Cash $383,793;credit Bonds Payable $383,793.

Accepted Answer

The company received $383,793 cash, which is less than the par value of the bond, indicating that the bond was sold at a discount. The discount on the bond is the difference between the par value ($400,000) and the selling price ($383,793), which is $16,207. Therefore, the journal entry to record the bond issuance would be to debit Cash for $383,793, debit Discount on Bonds Payable for $16,207, and credit Bonds Payable for $400,000.

Question 6

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the first interest payment using the effective interest method of amortization is:
A)Debit Interest Expense $12,648.28;debit Premium on Bonds Payable $1,351.72;credit Cash $14,000.00.
B)Debit Interest Payable $14,000.00;credit Cash $14,000.00.
C)Debit Interest Expense $12,648.28;debit Discount on Bonds Payable $1,351.72;credit Cash $14,000.00.
D)Debit Interest Expense $15,351.72;credit Discount on Bonds Payable $1,351.72;credit Cash $14,000.00.
E)Debit Interest Expense $15,351.72;credit Premium on Bonds Payable $1,351.72;credit Cash $14,000.00.

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 7

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:
A)Accounting for bonds and notes under U.S.GAAP and IFRS is similar.
B)Both U.S.GAAP and IFRS require companies to distinguish between operating leases and capital leases.
C)The criteria for identifying a lease as a capital lease are more general under IFRS.
D)Both U.S.GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
E)Use of the fair value option to account for bonds and notes is not acceptable under U.S.GAAP or IFRS.

Accepted Answer

Under both U.S. GAAP and IFRS, companies have the option to use fair value accounting for financial instruments, including bonds and notes.

Question 8

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.The journal entry to record the issuance of the bond is:
A)Debit Cash $312,177;credit Discount on Bonds Payable $12,177;credit Bonds Payable $300,000.
B)Debit Cash $300,000;debit Premium on Bonds Payable $12,177;credit Bonds Payable $312,177.
C)Debit Bonds Payable $300,000;debit Bond Interest Expense $12,177;credit Cash $312,177.
D)Debit Cash $312,177;credit Premium on Bonds Payable $12,177;credit Bonds Payable $300,000.
E)Debit Cash $312,177;credit Bonds Payable $312,177.

Accepted Answer

The bonds are issued at a premium because the market rate is lower than the contract rate. The cash received is $312,177, which is more than the par value of $300,000, resulting in a premium of $12,177. Therefore, the correct entry is to debit Cash for $312,177, credit Bonds Payable for $300,000, and credit Premium on Bonds Payable for $12,177.

Question 9

Sharmer Company issues 5%,5 year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
A)$957,355
B)$1,000,000
C)$1,250,000
D)$786,745
E)$1,213,255

Accepted Answer

The bond's issue price is calculated by finding the present value of the principal and the present value of the interest payments. The present value of the principal is $1,000,000 * 0.7441 = $744,100. The semiannual interest payment is $1,000,000 * 5% / 2 = $25,000. The present value of the annuity of interest payments is $25,000 * 8.5302 = $213,255. The bond's issue price is $744,100 + $213,255 = $957,355.

Question 10

On January 1,$300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock.The entry to record the conversion of the bonds includes all of the following entries except:
A)Debit to Bonds Payable $310,000.
B)Debit to Premium on Bonds Payable $10,000.
C)Credit to Common Stock $250,000.
D)Credit to Paid-In Capital in Excess of Par Value,Common Stock $60,000.
E)Debit to Bonds Payable $300,000.

Accepted Answer

The entry to record the conversion of bonds to common stock includes debiting Bonds Payable for the face value of the bonds being converted ($300,000), debiting Premium on Bonds Payable for any unamortized premium ($10,000), crediting Common Stock for the par value of the shares issued (50,000 x $5 = $250,000), and crediting Paid-In Capital in Excess of Par Value, Common Stock for the excess of the fair value of the shares issued over the par value (50,000 x [$310,000 - $10,000]/50,000 - $250,000 = $60,000). Therefore, option A is not included in the entry to record the conversion.

Question 11

Wasp Corporation has a loan agreement that provides it with cash today,and the company must pay $25,000 one year from today,$15,000 two years from today,and $5,000 three years from today.Wasp agrees to pay 10% interest.The following are factors from a present value table:  What is the amount of cash that Wasp receives today?

Accepted Answer

The answer of Wasp Corporation has a loan agreement that...

Question 12

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,Year 1 is:
A)Debit Interest Expense $7,000;debit Notes Payable $7,238;credit Cash $14,238.
B)Debit Notes Payable $7,000;debit Interest Expense $7,238;credit Cash $14,238.
C)Debit Notes Payable $10,000;debit Interest Expense $7,000;credit Cash $17,000.
D)Debit Notes Payable $14,238;credit Cash $14,238.
E)Debit Notes Payable $10,000;debit Interest Expense $4,238;credit Cash $14,238.

Accepted Answer

The interest expense for the first year is $7,000 (7% of $100,000). The remaining portion of the payment reduces the principal, which is $7,238 ($14,238 total payment - $7,000 interest).

Question 13

A corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?
A)Debit Interest Expense $7,136;debit Notes Payable $25,000;credit Cash $32,136.
B)Debit Notes Payable $32,136;debit Interest Payable $11,250;credit Cash $43,386.
C)Debit Interest Expense $11,250;debit Notes Payable $20,886;credit Cash $32,136.
D)Debit Notes Payable $32,136;credit Cash $32,136.
E)Debit Notes Payable $11,250;credit Cash $11,250.

Accepted Answer

Each payment of $32,136 includes both interest expense and principal repayment. The interest expense is calculated as the carrying value of the note at the beginning of the period multiplied by the interest rate, 9%.

Carrying value at the beginning of the first period is the original principal amount $125,000 minus the first principal payment of $32,136, which equals $92,864.

Interest expense for the first period is $92,864 x 9% = $8,357.

Therefore, the journal entry for the first payment would be: 
Debit Interest Expense: $8,357 
Debit Notes Payable: $23,779 ($32,136 - $8,357) 
Credit Cash: $32,136

Question 14

On August 1,a $30,000,6%,3-year installment note payable is issued by a company.The note requires equal payments of principal plus accrued interest be paid each year on July 31.The present value of an annuity factor for 3 years at 6% is 2.6730.The payment each July 31 will be:
A)$10,000.00.
B)$11,223.34.
C)$10,800.00.
D)$10,400.00.
E)$1,223.34.

Accepted Answer

The payment each July 31 will be $11,223.34. This is calculated by dividing the present value of the note ($30,000) by the present value of an annuity factor for 3 years at 6% (2.6730).

Question 15

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of interest expense will be included in the first annual payment?
A)$20,000
B)$37,258
C)$25,000
D)$17,258
E)$232,742

Accepted Answer

The answer of On July 1,Shady Creek Resort borrowed $250,000...

Question 16

On January 1,a company issues 8%.5 year,$300,000 bonds that pay interest semiannually.On the issue date,the annual market rate of interest is 6%.The following information is taken from present value tables:  What is the issue (selling)price of the bond?
A)$420,000
B)$402,362
C)$300,010
D)$308,107
E)$325,592

Accepted Answer

The answer of On January 1,a company issues 8%.5 year,$300,000...

Question 17

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.The journal entry to record the first interest payment using straight-line amortization is:
A)Debit Interest Payable $13,500;credit Cash $13,500.00.
B)Debit Bond Interest Expense $12,282.30;debit Discount on Bonds Payable $1,217.70;credit Cash $13,500.00.
C)Debit Bond Interest Expense $14,717.70;credit Premium on Bonds Payable $1,217.70;credit Cash $13,500.00.
D)Debit Bond Interest Expense $14,717.70;credit Discount on Bonds Payable $1,217.70;credit Cash $13,500.00.
E)Debit Bond Interest Expense $12,282.30;debit Premium on Bonds Payable $1,217.70;credit Cash $13,500.00.

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 18

Marwick Corporation issues 8%,5 year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
A)$1,000,000
B)$789,244
C)$1,341,208
D)$1,085,308
E)$658,792

Accepted Answer

Step 1: Calculate the semiannual interest rate.
Semiannual interest rate = 6% / 2 = 3%

Step 2: Calculate the number of periods.
Number of periods = 5 years x 2 = 10

Step 3: Calculate the present value of the principal.
PV of principal = $1,000,000 x 0.7441 = $744,100

Step 4: Calculate the present value of the interest payments.
PV of annuity = ($1,000,000 x 0.03) x 8.5302 = $255,208.60

Step 5: Calculate the issue price.
Issue price = PV of principal + PV of annuity = $744,100 + $255,208.60 = $999,308.60, which is closest to $1,085,308.

Therefore, the best answer is D, $1,085,308.

Question 19

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the first interest payment using straight-line amortization is:
A)Debit Interest Payable $14,000.00;credit Cash $14,000.00.
B)Debit Interest Expense $14,000.00;credit Cash $14,000.00.
C)Debit Interest Expense $15,620.70;credit Discount on Bonds Payable $1,620.70;credit Cash $14,000.00.
D)Debit Interest Expense $12,379.30;debit Discount on Bonds Payable $1,620.70;credit Cash $14,000.00.
E)Debit Interest Expense $15,620.70;credit Premium on Bonds Payable $1,620.70;credit Cash $14,000.00.

Accepted Answer

Straight-line amortization is used to allocate the discount on bonds payable or premium on bonds payable over the life of the bonds to determine the amount of interest expense and interest payable for each period. In this case, the discount on bonds payable is $16,207 ($400,000 - $383,793), which will be amortized over 10 semi-annual periods ($16,207 ÷ 10 = $1,620.70). The interest expense for each period will be $20,000 ($400,000 x 0.07 x 6/12). Therefore, the journal entry to record the first interest payment using straight-line amortization would be:

Debit Interest Expense $15,620.70
Credit Discount on Bonds Payable $1,620.70
Credit Cash $14,000.00

Question 20

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the appropriate journal entry to record the issuance of the note?
A)Debit Cash $250,000;debit Interest Expense $37,258;credit Notes Payable $287,258.
B)Debit Notes Payable $250,000;credit Cash $250,000.
C)Debit Cash $37,258;credit Notes Payable $37,258.
D)Debit Cash $250,000;credit Notes Payable $250,000.
E)Debit Cash $287,258;credit Interest Payable $37,258;credit Notes Payable $250,000.

Accepted Answer

The issuance of the note involves receiving cash and creating a liability. Therefore, the correct entry is to debit Cash for $250,000 and credit Notes Payable for $250,000.

Quiz 14: Long-Term Liabilities

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of principle will be included in the first annual payment?

A company retires its bonds at 105.The face value is $100,000 and the carrying value of the bonds at the retirement date is $103,745.The issuer's journal entry to record the retirement will include a:

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:

On January 1,$300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock.The entry to record the conversion of the bonds includes all of the following entries except:

A corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?

On August 1,a $30,000,6%,3-year installment note payable is issued by a company.The note requires equal payments of principal plus accrued interest be paid each year on July 31.The present value of an annuity factor for 3 years at 6% is 2.6730.The payment each July 31 will be:

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of interest expense will be included in the first annual payment?

On January 1,a company issues 8%.5 year,$300,000 bonds that pay interest semiannually.On the issue date,the annual market rate of interest is 6%.The following information is taken from present value tables: What is the issue (selling) price of the bond?

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the appropriate journal entry to record the issuance of the note?