Question 1

On January 1, 2016, Precision Corporation issued a 3-year, 7%, $2,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 10%. If Precision uses the effective interest method, what is the book value of the bond payable on January 1, 2016?

Accepted Answer

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Question 2

On January 1, 2016, Lundell Corporation issued a 5-year, 4%, $2,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The bonds were issued at 105 3/4. How much cash did Lundell receive from issuing the bonds on January 1, 2016?

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Question 3

On January 1, 2016, Pacific Corporation issued a 3-year, 8%, $5,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 10%. The bond was issued at $4,750. Calculate the total interest expense over the 3-year life of the bond independent of the particular accounting method used to recognize interest expense each year.

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Question 4

Barkley Brothers Inc. shows the following information on its balance sheet for December 31, 2017.
$$\begin{array} { | l | r | r | } 
\hline \text { Bonds payable } & \$ 100,000 & \
\hline \text { Less Unamortized discount } & 5,350 & \$ 94,650 \
\hline
\end{array}$$
The bonds have a stated annual interest rate of 5 percent and will mature on December 31, 2019. The market value of the bonds as of December 31, 2017, is $98,167. Assume that Barkley retired the bonds by purchasing them on the open market. The journal entry to record this purchase would include:

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Question 5

On January 1, a 5-year, $5,000 non-interest-bearing note payable was issued when the market rate of interest was 9%. What are the proceeds from this issue? Round your final answer to the nearest dollar.

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Question 6

On January 1, 2017, Lukens Corporation issued 5-year bonds with a $50,000 face amount and a 6% annual coupon rate paid annually on January 1. The bonds were issued at $44,166 when the market rate of interest was 9%.
A. Prepare the journal entry to record the issuance of the bonds on January 1, 2017. Round to the nearest dollar.
B. Were the bonds issued at a premium or discount? How do you know?

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Question 7

Bowlin Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Bowlin's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The interest expense for the six months ending December 31, 2017 is:

Accepted Answer

Bonds were issued at a discount ($1,000,000 - $937,790 = $62,210) because the market rate of interest was higher than the coupon rate (10% > 9%). Under the effective interest method, the total interest expense over the life of the bond is allocated to each period based on the carrying value of the bond at the beginning of the period and the effective interest rate (market rate at the time of issuance).

Effective interest rate = 10%
Carrying value at issuance = $937,790

Interest expense for the first six months will be:
= Carrying value x Effective interest rate x Time
= $937,790 x 10% x 6/12
= $46,889.50

Therefore, the answer is option C.

Question 8

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2017, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2022 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The June 30, 2017 entry will include:

Accepted Answer

The effective interest method requires that the bond discount or premium be amortized using the effective interest rate, which is the market interest rate at the time of issuance. The effective interest rate is calculated by dividing the total interest expense over the life of the bond by the bond's carrying value. In this case, the bond was sold at a premium, so the effective interest rate will be less than the stated interest rate of 12%.

To calculate the effective interest rate:
PV = $107,732
FV = $100,000
n = 5 (years)
PMT = $12,000 (annual interest payment)
Solve for i = 5.92%

The first interest payment will be made on June 30, 2017, which is half a year from the date of issuance. The total interest expense for this period will be $12,000 x 6/12 = $6,000. The bond's carrying value at the end of the period will be:
Carrying value = PV of the bond + interest expense - cash payment
Carrying value = $107,732 + $6,000 - $0 = $113,732

To amortize the premium on the bond, the following entry will be recorded on June 30, 2017:
Debit Interest Expense $5,386.60
Credit Premium on Bonds Payable $5,386.60

This journal entry records half of the total interest expense for the period ($6,000/2) and amortizes the bond premium by the same amount. The carrying value of the bond after the journal entry will be $108,345.40 ($113,732 - $5,386.60).

Question 9

On January 1, a 3-year, $10,000 non-interest-bearing note payable was issued for $7,938 when the market rate of interest was 8%. Interest expense is recognized using the effective interest method. Calculate the book value of the note a year after its issuance. Round your final answer to the nearest dollar.

Accepted Answer

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Question 10

Bowlin Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Bowlin's fiscal year ends on December 31and the company uses the effective interest method of amortization. The book value of the bonds on December 31, 2017 is:

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Question 11

On January 1, a 5-year, $4,000 non-interest-bearing note payable was issued for $2,600 when the market rate of interest was 9%. What is the total interest expense that will be recognized over the life of the note? Round your final answer to the nearest dollar.

Accepted Answer

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Question 12

Samuels Corporation issued a $40,000, 3-year, non-interest-bearing note payable on January 1, 2016. Reflecting a market rate of interest of 10%, Garrison received $30,053. Calculate interest expense (to the nearest dollar) for 2016 and 2017.

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Question 13

On January 1, 2017, Hooper Corporation issued 3-year bonds with a $40,000 face amount and a 6% annual coupon rate paid annually on December 31. The bonds were issued at $36,021 when the market rate of interest was 10%. Complete the amortization table for the bonds using the effective interest method. Round all amounts to the nearest dollar.
 $$\begin{array} { | c | l | l | l | l | } 
\hline \text { Date } & \text { Cash } & \text { Interest Expense } & \text { Amortization } & \text { Carrying Value } \
\hline 1 / 1 / 17 & & & & \
\hline 12 / 31 / 17 & & & & \
\hline 12 / 31 / 1 \mathrm { a } & & & & \
\hline 12 / 31 / 19 & & & & \
\hline
\end{array}$$

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The answer of On January 1, 2017, Hooper Corporation issued...

Question 14

On January 1, 2016, Sheena Corporation issued a 3-year, 7%, $4,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The bonds were issued at 104¼. Calculate the issue price.

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Question 15

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2017, when the market interest rate was 10 percent and received $107,732 for them. The bonds mature on January 1, 2022 and pay interest on June 30 and December 31. Duncan uses the effective interest method of amortization. The interest expense for 2017 is:

Accepted Answer

Step 1: Calculate the bond premium: $107,732 (bonds sold) - $100,000 (face value) = $7,732 premium
Step 2: Calculate the total interest to be paid each year: $100,000 x 0.12 = $12,000
Step 3: Calculate the effective interest rate using the bond premium: 
Effective Interest Rate = Total Interest / Bond Book Value
Book Value = Face Value + Premium 
Book Value as of January 1, 2017 = $100,000 + $7,732 = $107,732
Effective Interest Rate = $12,000 / $107,732 = 11.14%
Step 4: Calculate interest expense for 2017:
Interest Expense = Effective Interest Rate x Book Value as of January 1, 2017 x Time
Time = 6/12 (since the bonds were only outstanding for half a year in 2017)
Interest Expense = 11.14% x $107,732 x 6/12 = $5,371.50
Answer: C ($5,371.50 rounded up to $5,743)

Question 16

On January 1, 2016, Enron Corporation issued a 4-year, 7%, $9,000 bond payable. Beginning in 2017, interest is payable annually every January 1. The market rate of interest at issuance is 9%. How much are the interest payments by Enron? Why is the amount of interest expense different than the cash payments?

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Question 17

On January 1, 2016, Mango Corporation issued a 3-year, 4%, $3,000 bond payable. Beginning in 2017, interest is payable every year on January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 6%. What are the proceeds received by Mercer from the issue of this bond on January 1, 2016?

Accepted Answer

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Question 18

Burns Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Burn's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The journal entry on December 31, 2017 will include:

Accepted Answer

The interest expense is calculated using the effective interest rate method. The interest expense for the period is $937,790 (carrying amount) * 10% (market rate) / 2 = $46,889.50. The cash interest paid is $1,000,000 * 9% / 2 = $45,000. The difference of $1,889.50 is credited to Discount on Bonds Payable.

Question 19

On January 1, a 3-year, $1,090 non-interest-bearing note payable was issued for $942 when the market rate of interest was 5%. How much interest expense will Hamlen recognize in each of the first two years using the effective interest method? Round to the nearest dollar.

Accepted Answer

The answer of On January 1, a 3-year, $1,090 non-interest-bearing...

Question 20

On January 1, 2016, Edison Corporation issued a 4-year, 8%, $5,000 bond payable. Beginning in 2017, interest is payable every January 1 over the life of the bond. The market rate of interest on January 1, 2016 is 10%.
A. Calculate the contracted cash interest payments by Edison as specified by this bond.
B. Will the total interest expense over the life of the bond be less than or greater than the total cash payments for interest? Explain.

Accepted Answer

The answer of On January 1, 2016, Edison Corporation issued...

Quiz 11: Long-Term Liabilities: Notes, Bonds, and Leases