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:

Accepted Answer

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Question 2

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 3

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?

Accepted Answer

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

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:

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

Question 5

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

Accepted Answer

The statement "Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS" is incorrect. Both U.S. GAAP and IFRS allow companies to use the fair value option to account for certain types of liabilities, including bonds and notes.

Question 6

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:

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Question 7

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:

Accepted Answer

The first interest payment using straight-line amortization is calculated as (Par Value - Selling Price) / (Number of interest periods * Par Value), which in this case is ($400,000 - $383,793) / (10 * $400,000) = $1,620.70. This amount is added to the interest payment of ($400,000 * 7% / 2) = $14,000, resulting in a total interest expense of $15,620.70. The discount on bonds payable account is also reduced by the amount of discount amortization. Therefore, the journal entry is: Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.

Question 8

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 9

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 answer of On July 1, Shady Creek Resort borrowed...

Question 10

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

Accepted Answer

Callable bonds give the issuer the right to retire the bonds before they mature, usually at a premium price to the initial issuance price.

Question 11

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:

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The answer of On August 1, a $30,000, 6%, 3-year...

Question 12

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 would be $95,500 ($100,000 par value - $4,500 unamortized discount). If the company bought them for 97, they paid $97,000 for the bonds. Therefore, the company incurred a loss of $1,500 ($95,500 - $97,000).

Question 13

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:

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

Question 14

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:

Accepted Answer

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

Question 15

What is a bond? Identify and discuss the different characteristics and features bonds may possess.

Accepted Answer

The answer of What is a bond? Identify and discuss...

Question 16

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 recognized method of retiring bonds. The other options are common methods of retiring bonds.

Question 17

Describe installment notes and the nature of the typical payment pattern.

Accepted Answer

The answer of Describe installment notes and the nature of...

Question 18

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 19

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 of $32,136 includes both principal and interest components. The interest portion can be calculated as 9% of the outstanding balance of the loan, which is ($125,000 - $32,136) = $92,864. Therefore, the interest expense for the first year would be $92,864 x 9% = $8,357.76. The remainder of the payment ($32,136 - $8,357.76) = $23,778.24 is applied to reduce the principal of the loan, leaving a balance of $101,121.76 ($125,000 - $23,778.24) at the end of the first year. The journal entry to record the first payment would be:
Debit Interest Expense $8,357.76
Debit Notes Payable $23,778.24
Credit Cash $32,136

Question 20

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