Question 1

On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96½. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105½. All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the carrying value of the bond on January 1, 2019?
A) $772,000
B) $831,076
C) $784,924
D) $277,000
E) $800,000

Accepted Answer

The initial selling price of the bonds is $800,000 x 0.965 = $772,000 (since the price is given as 96½).
Since the bonds were issued for 13 years and 6 years have passed, the remaining life of the bond is 7 years.
The annual interest payment is $800,000 x 9% = $72,000.
Using the straight-line method of amortization, the bond discount is amortized at $3,000 per year ($28,000 bond discount divided by 7 years remaining).
As of January 1, 2019, the carrying value of the bond is:
Carrying value = Initial selling price - Accumulated amortization + Interest accrued and paid
Carrying value = $772,000 - ($3,000 x 6) + ($72,000 x 0.2)
Carrying value = $772,000 - $18,000 + $14,400
Carrying value = $784,400
However, Jacob retires 20% of the bonds, which is $800,000 x 0.2 = $160,000 worth of bonds.
At the time of retirement, the bonds were bought at 105½ which means for every $100 bond, Jacob paid $105.50.
Therefore, Jacob paid $160,000 x 1.055 = $168,800 to retire the bonds.
The carrying value of the remaining bonds is now:
Carrying value = $784,400 - $168,800 = $615,600
Thus, the correct answer is C) $784,924.

Question 2

On January 1, 2013, Jacob issued $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually. If all interest has been accounted for properly, what is the carrying value of these bonds on January 1, 2019?
A) $472,000
B) $531,076
C) $584,924
D) $609,000
E) $600,000

Accepted Answer

The answer of On January 1, 2013, Jacob issued $600,000...

Question 3

A company has bonds outstanding with a par value of $600,000. The unamortized discount on these bonds is $3,000. The company retired these bonds by buying them on the open market at 98. What is the gain or loss on this retirement?
A) $0 gain or loss
B) $9,000 gain
C) $9,000 loss
D) $14,500 gain
E) $14,500 loss

Accepted Answer

The answer of A company has bonds outstanding with a...

Question 4

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond premium or discount. What is the total interest expense for the life of these bonds?
A) $975,000
B) $964,000
C) $936,000
D) $772,000
E) $990,000

Accepted Answer

The answer of On January 1, 2013, Jacob issues $600,000...

Question 5

Bonds that give the issuer an option of retiring them prior to the date of maturity are:
A) Debentures
B) Serial bonds
C) Sinking fund bonds
D) Registered bonds
E) Callable bonds

Accepted Answer

Bonds that give the issuer an option of retiring them prior to the date of maturity are known as callable bonds. This means that the issuer can buy back the bonds from investors before they reach their maturity date, which could be advantageous to the issuer if interest rates have fallen since the bonds were issued. Investors who hold callable bonds face the risk that their investment could be "called" away from them before they planned, which could leave them with a lower yield or a loss on their investment.

Question 6

On April 1, 2013, Jared Enterprises issues bonds dated January 1, 2013, that have a $2,430,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par plus three months' accrued interest. What is the total amount of cash Jared Enterprises will collect on April 1, 2013?
A) $2,600,100
B) $2,430,000
C) $2,472,525
D) $2,750,000
E) $2,515,050

Accepted Answer

The bonds are sold at par plus three months' accrued interest, which means the buyers will pay for the first three months of interest (January 1 - March 31) in addition to the par value of the bonds. To calculate the accrued interest, we need to first find the semiannual interest payment:

$2,430,000 × 0.07 × 6/12 = $85,050

This means that each bond pays $85,050 in interest per year, or $42,525 every six months. The three months' accrued interest is:

$42,525 × 3/6 = $21,262.50

So the total amount of cash collected on April 1, 2013, is:

Par value + Accrued interest = $2,430,000 + $21,262.50 = $2,472,525

Therefore, the correct answer is choice C.

Question 7

On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96½. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105½. All semiannual interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the retirement of 20% of the bonds on January 1, 2019?
A) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Cash } & & 156,985 \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Loss on Retirement } & 11,815 & \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline \text { Cash } & & 168,800 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Discount on Bonds Payable } & 3,015 & \
\hline \text { Cash } & & 168,800 \
\hline \text { Gain on Retirement } & & 5,785 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 160,000 & \
\hline \text { Premium on Bonds Payable } & 2,585 & \
\hline \text { Discount on Bonds Payable } & & 3,015 \
\hline \text { Cash } & & 154,400 \
\hline
\end{array}$
E) $\begin{array}{|c|r|r|}
\hline \text { Bonds Payable } & 168,800 & \
\hline \text { Cash } & & 168,800 \
\hline
\end{array}$

Accepted Answer

The bonds payable amount is 20% of $800,000, which is $160,000. The bonds were issued at 96.5, so there was a discount. The discount on the retired portion is $3,015. The cash paid is 105.5% of $160,000, which is $168,800. The loss on retirement is the difference between the cash paid and the book value of the bonds retired, which is $11,815.

Question 8

A company has bonds outstanding with a par value of $400,000. The unamortized premium on these bonds is $2,000. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?
A) $0 gain or loss
B) $10,000 gain
C) $10,000 loss
D) $14,000 gain
E) $14,000 loss

Accepted Answer

The answer of A company has bonds outstanding with a...

Question 9

A company retires its bonds at 105. The carrying value of the bonds at the date of 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

When the company retires its bonds at a premium (105 in this case), the entry will include a debit to Bonds Payable for the face value of the bonds, a debit to Premium on Bonds for the unamortized premium (the difference between the face value and the carrying value), and a credit to Cash for the amount paid to retire the bonds. Therefore, the correct choice is A.

Question 10

On January 1, 2013, Merrill Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Merrill 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, 2013 is:
A) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 7,238 & \
\hline \text { Interest expense } & 7,000 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 7,000 & \
\hline \text { Interest expense } & 7,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 10,000 & \
\hline \text { Interest expense } & 7,000 & \
\hline \text { Cash } & & 17,000 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 14,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$
E) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 10,000 & \
\hline \text { Interest expense } & 4,238 & \
\hline \text { Cash } & & 14,238 \
\hline
\end{array}$

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 $14,238 - $7,000 = $7,238.

Question 11

On October 1, a $30,000, 6%, three-year installment note payable is issued by a company. The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30. The issuer's journal entry to record the second annual interest payment would include:
A) A debit to Interest Expense for $1,800.
B) A debit to Interest Expense for $1,200.
C) A credit to Cash for $11,800.
D) A credit to Cash for $10,000.
E) A debit to Notes Payable for $1,200.

Accepted Answer

The annual interest payment for the note is calculated as $30,000 x 6% = $1,800. However, since the note requires installment payments of $10,000, only $10,000 - $1,800 = $8,200 is applied to reduce the principal. Therefore, the entry to record the second annual interest payment would be:

Debit Interest Expense $1,200 
Credit Cash $10,000

Question 12

On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96½. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105½. All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the first semiannual interest payment on June 30, 2013?
A) $\begin{array}{|c|r|r|}
\hline \text { Interest Expense } & 36,000 & \
\hline \text { Cash } & & 36,000 \
\hline
\end{array}$
B) $\begin{array}{|c|r|r|}
\hline \text { Cash } & 36,000 & \
\hline \text { Interest Expense } & & 36,000 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Interest Expense } & 36,000 & \
\hline \text { Discount on Bonds Payable } & 1,077 & \
\hline \text { Cash } & & 37,077 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Interest Expense } & 36,000 & \
\hline \text { Premium on Bonds Payable } & 1,077 & \
\hline \text { Cash } & & 37,077 \
\hline
\end{array}$
E) $\begin{array}{|l|r|r|}
\hline \text { Interest Expense } & 37,077 & \
\hline \text { Discount on Bonds Payable } & & 1,077 \
\hline \text { Cash } & & 36,000 \
\hline
\end{array}$

Accepted Answer

The answer of On January 1, 2013, Jacob issues $800,000...

Question 13

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. What is the journal entry to record the issuance of these bonds?
A) $\begin{array}{|c|r|r|}
\hline \text { Cash } & 600,000 & \
\hline \text { Bonds Payable } & & 600,000 \
\hline
\end{array}$
B) $\begin{array}{|c|r|r|}
\hline \text { Bonds Payable } & 600,000 & \
\hline \text { Cash } & & 600,000 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 615,000 & \
\hline \text { Bonds Payable } & & 600,000 \
\hline \text { Premium on Bonds Payable } & & 15,000 \
\hline
\end{array}$
D) $\begin{array}{|l|r|l|}
\hline \text { Cash } & 600,000 & \
\hline \text { Premium on Bonds Payable } & 15,000 & \
\hline \text { Bonds Payable } & & 615,000 \
\hline
\end{array}$
E) $\begin{array}{|l|r|l|}
\hline \text { Cash } & 600,000 & \
\hline \text { Discount on Bonds Payable } & 9,000 & \
\hline \text { Bonds Payable } & & 609,000 \
\hline
\end{array}$

Accepted Answer

The bonds are issued at 102½, which means 102.5% of the face value. Therefore, the cash received is $600,000 * 1.025 = $615,000. The premium on bonds payable is the difference between the cash received and the face value, which is $15,000.

Question 14

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the first interest semi-annual interest payment on June 30, 2013?
A) $\begin{array}{|c|r|r|}
\hline \text { Interest Expense } & 33,000 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$
B) $\begin{array}{|c|r|r|}
\hline \text { Cash } & 33,000 & \
\hline \text { Interest Expense } & & 33,000 \
\hline
\end{array}$
C) $\begin{array}{|l|r|l|}
\hline \text { Interest Expense } & 32,500 & \
\hline \text { Discount on Bonds Payable } & 500 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$
D) $\begin{array}{|l|r|l|}
\hline \text { Interest Expense } & 32,500 & \
\hline \text { Premium on Bonds Payable } & 500 & \
\hline \text { Cash } & & 33,000 \
\hline
\end{array}$
E) $\begin{array}{|l|r|r|}
\hline \text { Interest Expense } & 33,000 & \
\hline \text { Discount on Bonds Payable } & & 500 \
\hline \text { Cash } & & 32,500 \
\hline
\end{array}$

Accepted Answer

The bonds were issued at a premium (102.5% of $600,000 = $615,000), so the premium is $15,000. The premium is amortized over 15 years (30 periods), resulting in $500 amortized per period. The semi-annual interest payment is $33,000 ($600,000 * 11% / 2). The journal entry records the interest expense reduced by the amortized premium.

Question 15

On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96½. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105½. All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the issuance of the bonds on January 1, 2013?
A) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 800,000 & \
\hline \text { Bonds Payable } & & 800,000 \
\hline
\end{array}$
B) $\begin{array}{|c|r|r|}
\hline \text { Bonds Payable } & 800,000 & \
\hline \text { Cash } & & 800,000 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 800,000 & \
\hline \text { Bonds Payable } & & 772,000 \
\hline \text { Discount on Bonds Payable } & & 28,000 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 772,000 & \
\hline \text { Premium on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & & 800,000 \
\hline
\end{array}$
E) $\begin{array}{|l|r|r|}
\hline \text { Cash } & 772,000 & \
\hline \text { Discount on Bonds Payable } & 28,000 & \
\hline \text { Bonds Payable } & & 800,000 \
\hline
\end{array}$

Accepted Answer

The bonds were issued at 96½, which means they were issued at a discount. The cash received is 96.5% of $800,000, which is $772,000. The discount on bonds payable is the difference between the face value and the cash received, which is $28,000.

Question 16

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?
A) $0 gain or loss
B) $1,500 gain
C) $1,500 loss
D) $3,000 gain
E) $3,000 loss

Accepted Answer

To calculate the gain or loss on the retirement of bonds, we need to compare the carrying value of the bonds (which includes the unamortized discount) to the purchase price of the bonds on the open market.

Carrying value = par value - unamortized discount
Carrying value = $100,000 - $4,500
Carrying value = $95,500

Purchase price = 97% of par value
Purchase price = 0.97 x $100,000
Purchase price = $97,000

Gain/Loss = Purchase price - Carrying value
Gain/Loss = $97,000 - $95,500
Gain/Loss = $1,500 loss

Therefore, the answer is C, $1,500 loss.

Question 17

A corporation borrowed $125,000 cash by signing a five-year, 9% installment note requiring annual payments each December 31 of accrued interest plus equal amounts of principal. What journal entry would the issuer record for the first payment?
A) $\begin{array}{|c|r|r|}
\hline \text { Interest Expense } & 2,250 & \
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 27,250 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Notes Payable } & 27,250 & \
\hline \text { Interest Payable } & & 2,250 \
\hline \text { Cash } & & 25,000 \
\hline
\end{array}$
C) $\begin{array}{|c|r|r|}
\hline \text { Interest Expense } & 11,250 & \
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 36,250 \
\hline
\end{array}$
D) $\begin{array}{|c|r|r|}
\hline \text { Notes Payable } & 25,000 & \
\hline \text { Cash } & & 25,000 \
\hline
\end{array}$
E) $\begin{array}{|c|r|r|}
\hline \text { Notes Payable } & 11,250 & \
\hline \text { Cash } & & 11,250 \
\hline
\end{array}$

Accepted Answer

The first payment includes the interest for the first year (9% of $125,000 = $11,250) and a principal payment of $25,000 (since the principal is paid in equal installments over five years). The total cash payment is $36,250.

Question 18

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:
A) $1,000 gain
B) $1,000 loss
C) $2,700 loss
D) $2,700 gain
E) $3,700 gain

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 19

A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date five years later, after the bond interest was paid and after 40% of the premium had been written off, 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 original bond had a principal of $1,000,000 and a premium of $20,000, making the total amount received by the corporation $1,020,000.

After 5 years, 40% of the premium would have been written off, leaving a remaining premium of $12,000 (40% of $20,000).

When the corporation repurchased the bond at 99, they paid 99% of the par value for a total cost of $990,000.

The gain or loss on the retirement is calculated as follows:

Proceeds from original issuance: $1,020,000 
Cost to repurchase and retire: $990,000 
Remaining premium: -$12,000

Gain on retirement: $18,000

Therefore, the answer is D, $22,000 gain (total gain of $18,000 plus remaining premium of -$12,000).

Question 20

On January 1, 2013, Jacob issued $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually. All interest has been accounted for (and paid) through December 31, 2018. The company retires 30% of these bonds by buying them on the open market at 98½. What is the journal entry to record the retirement of 30% of the bonds on January 1, 2019?
A) $\begin{array}{|c|r|r|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Cash } & & 177,300 \
\hline \text { Discount on Bonds Payable } & & 2,700 \
\hline
\end{array}$
B) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Loss on Retirement } & 11,815 & \
\hline \text { Discount on Bonds Payable } & & 2,700 \
\hline \text { Cash } & & 177,300 \
\hline
\end{array}$
C) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Discount on Bonds Payable } & 2,700 & \
\hline \text { Gain on Retirement } & & 177,300 \
\hline \text { Cash } & & 5,400 \
\hline
\end{array}$
D) $\begin{array}{|l|r|r|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Premium on Bonds Payable } & 2,700 & \
\hline \text { Gain on Retirement } & & 5,400 \
\hline \text { Cash } & & 177,300 \
\hline
\end{array}$
E) $\begin{array}{|c|r|r|}
\hline \text { Bonds Payable } & 180,000 & \
\hline \text { Cash } & & 180,000 \
\hline
\end{array}$

Accepted Answer

The bonds were issued at a premium, which needs to be amortized. The premium on the retired portion is adjusted, and the gain on retirement is calculated as the difference between the book value of the bonds retired and the cash paid.

Quiz 10: Accounting for Long-Term Liabilities

A company has bonds outstanding with a par value of $600,000. The unamortized discount on these bonds is $3,000. The company retired these bonds by buying them on the open market at 98. What is the gain or loss on this retirement?

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond premium or discount. What is the total interest expense for the life of these bonds?

Bonds that give the issuer an option of retiring them prior to the date of maturity are:

A company has bonds outstanding with a par value of $400,000. The unamortized premium on these bonds is $2,000. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?

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

On October 1, a $30,000, 6%, three-year installment note payable is issued by a company. The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30. The issuer's journal entry to record the second annual interest payment would include:

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. What is the journal entry to record the issuance of these bonds?

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the first interest semi-annual interest payment on June 30, 2013?

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?

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

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: