Question 1

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:

Accepted Answer

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

Question 2

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:

Accepted Answer

- The corporation received a premium of $20,000 when it issued the bonds, which means it sold them for $1,020,000 ($1,000,000 + $20,000).
- Over the 5-year period, the corporation would have amortized 40% of the premium, which is $8,000 ($20,000 x 40%).
- After paying the interest, the corporation decided to retire the bonds, meaning it had to purchase them back from the open market. It bought them back at 99, which means it paid $990,000 ($1,000,000 x 0.99).
- To determine the gain or loss on this retirement, we need to compare the amount the corporation received when it issued the bonds ($1,020,000) to the amount it paid to retire them ($990,000). There is a gain of $30,000 ($1,020,000 - $990,000).
- However, we need to subtract the remaining unamortized premium from the gain, which is $12,000 ($20,000 - $8,000).
- Therefore, the net gain on the retirement is $18,000 ($30,000 - $12,000), which means the answer is D, $22,000 gain.

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 $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

Step 1: Calculate the annual interest payment
= Par value x Coupon rate
= $100,000 x 7%
= $7,000

Step 2: Calculate the semiannual interest payment
= $7,000 / 2
= $3,500

Step 3: Calculate the present value of the bond
PV = $102,105 (cash received)

Step 4: Calculate the premium or discount on the bond (compared to par value)
= PV - Par value
= $102,105 - $100,000
= $2,105 (premium)

Step 5: Calculate the effective interest rate
Using the formula: Effective interest rate = (1 + i)^n - 1, where i is the periodic interest rate (6.5%/2) and n is the number of periods (10)
Effective interest rate = (1 + 0.0325)^10 - 1
= 0.3492 or 34.92%

Step 6: Calculate the interest expense for the first semiannual period
= Book value of the bond at the beginning of the period x Effective interest rate
Book value at the beginning = Par value + Premium
= $100,000 + $2,105
= $102,105

Interest expense = $102,105 x 34.92% / 2
= $1,781.82

Step 7: Round the interest expense to the nearest cent
= $1,781.82
= $1,781.83 (rounded up)

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

Question 4

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:

Accepted Answer

The correct journal entry for the issuance of bonds sold at a premium (when the selling price is higher than the par value) is to debit Cash for the amount received ($312,177), credit Bonds Payable for the par value of the bonds ($300,000), and credit Premium on Bonds Payable for the difference between the cash received and the par value ($12,177). This reflects the company receiving more cash than the bonds' face value, indicating a premium situation.

Question 5

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 journal entry to record the first annual payment?

Accepted Answer

The first annual payment includes both interest expense and principal repayment. The interest expense for the first year is calculated as 8% of $250,000, which is $20,000. The remainder of the payment ($37,258 - $20,000 = $17,258) reduces the principal amount of the note payable. Therefore, the journal entry includes debiting Interest Expense for the interest portion and Notes Payable for the principal portion, with a credit to Cash for the total payment amount.

Question 6

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 book value of the bonds is $95,500 ($100,000 par value - $4,500 unamortized discount). The company bought the bonds on the open market at 97, which means they paid $97 for each $100 of face value, or $97,000 for the entire issue. Since the book value is higher than the purchase price, there is a loss on retirement. The amount of the loss is the difference between the book value and the purchase price, or $95,500 - $97,000 = $1,500 loss. Therefore, the correct answer is C.

Question 7

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 principal will be included in the first annual payment?

Accepted Answer

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

Question 8

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

Accepted Answer

Paying all future interest and cancelling the debt is not a typical means of retiring bonds, as it would require the company to have enough cash on hand to pay off the entire remaining principal amount of the bond as well as all future interest payments. This is unlikely to be feasible for most companies, particularly for larger bond issues. The other options (using a call option, allowing holders to convert to stock, purchasing on the open market, or paying off at maturity) are all more common methods of retiring bonds.

Question 9

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

Accepted Answer

Callable bonds give the issuer the option of retiring them before they mature. This allows the issuer to take advantage of lower interest rates in the market and issue new bonds at a lower cost.

Question 10

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:

Accepted Answer

The answer of A company retires its bonds at 105.The...

Question 11

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 call price to the carrying amount of the bonds. The 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 the par value, which is $99,000. Therefore, the gain is the carrying amount minus the retirement price: $102,700 - $99,000 = $3,700.

Question 12

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?

Accepted Answer

The interest expense for the first year is calculated by multiplying the initial loan amount by the interest rate: $250,000 * 8% = $20,000.

Question 13

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 14

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 total amount of recorded interest expense for the bond is calculated using the straight-line method as follows:

Annual interest payment = par value of the bond x coupon rate = $100,000 x 7% = $7,000

Semiannual interest payment = annual interest payment / 2 = $7,000 / 2 = $3,500

Total recorded interest expense for the bond = (par value of the bond x market rate) x (number of years/2) = ($100,000 x 6.5%) x (5/2) = $16,250

Recorded interest expense for the first semiannual interest period = total recorded interest expense / number of semiannual interest periods = $16,250 / 10 = $1,625

Therefore, the amount of recorded interest expense for the first semiannual interest period using the straight-line method is $1,625 x 2 = $3,289.50. The best choice is A.

Question 15

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 payment on the note on December 31,Year 2 is:

Accepted Answer

The correct answer involves calculating the interest expense for the year, which is based on the outstanding balance of the note payable. Since the note is an installment note, part of each payment goes towards paying off the principal (the amount borrowed), and part goes towards interest. Initially, the interest for the first year would be based on the full $100,000, but in subsequent years, the interest expense decreases as the principal is paid down. The payment of $14,238 is split between reducing the principal (notes payable) and covering the interest expense. The exact amounts for interest and principal repayment in Year 2 can be calculated based on an amortization schedule for the loan, which would show decreasing interest expense and increasing principal repayment over the 10 years. Option C correctly reflects a typical scenario where part of the payment goes towards interest ($6,493) and the larger portion towards reducing the principal ($7,745).

Question 16

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?

Accepted Answer

The first payment includes both principal and interest. The principal amount of the payment can be calculated by dividing the total amount borrowed ($125,000) by the number of annual payments (5), which results in $25,000. To determine the interest portion of the payment, the formula [Outstanding Balance x Interest Rate] must be used. The outstanding balance after the first year can be calculated by subtracting the first payment of $32,136 from the original borrowed amount of $125,000, which is $92,864. Then, the interest portion of the payment will be $11,250 ($92,864 x 9%), and the remaining balance will be the principal portion of $20,886 ($32,136 - $11,250). Therefore, the journal entry would be:

Debit Interest Expense $11,250
Debit Notes Payable $20,886
Credit Cash $32,136

Question 17

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?

Accepted Answer

The correct journal entry for the issuance of the note involves debiting Cash for the amount borrowed ($250,000) and crediting Notes Payable for the same amount ($250,000). This entry reflects the receipt of cash and the obligation to repay the principal amount of the note. Interest expense and payments are accounted for in future periods when they are incurred or paid, not at the issuance of the note.

Question 18

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 present value of a single sum factor for 3 years at 6% is 0.8396.The payment each July 31 will be:

Accepted Answer

To find the payment, we need to use the present value of an annuity formula which requires us to know the present value of the note.

PV of note = $30,000 x 0.8396 = $25,188

Now, we can use the present value of an annuity formula:

PMT = PV / PV of annuity factor
PMT = $25,188 / 2.6730
PMT = $9,423.84

However, the question asks for equal payments of principal plus accrued interest, so we need to add the interest component to the payment.

Interest in Year 1 = $30,000 x 6% = $1,800
Principal = PMT - Interest in Year 1 = $9,423.84 - $1,800 = $7,623.84

Therefore, the payment each July 31 will be:

PMT = Principal + Interest in Year 1 = $7,623.84 + $1,800 = $9,423.84

This payment will be made for 3 years, so the total payments over the life of the note will be:

Total Payments = PMT x # of years = $9,423.84 x 3 = $28,271.52

This is greater than the face value of the note, so we know we've done our calculations correctly.

Question 19

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:

Accepted Answer

The correct journal entry involves debiting Interest Expense for the interest portion of the payment ($7,000, which is 7% of $100,000) and debiting Notes Payable for the principal portion of the payment ($7,238, which is the total payment of $14,238 minus the interest expense of $7,000). The total payment is then credited to Cash ($14,238).

Question 20

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...

Quiz 10: Reporting and Analyzing Long-Term Liabilities