Question 1

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010.Interest is paid on June 30 and December 31.The proceeds from the bonds are $19,604,145.Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2010 statement of financial position?

Accepted Answer

The carrying value is calculated by adding the interest expense (calculated using the yield rate) to the initial carrying value and then subtracting the actual interest paid. This process is repeated for each interest period.

Question 2

On January 2, 2010, a calendar-year corporation sold 8% bonds with a face value of $600,000.These bonds mature in five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $553,600 to yield 10%.Using the effective-interest method of computing interest, how much should be charged to interest expense in 2010?

Accepted Answer

The interest expense is calculated using the effective interest rate of 10% on the carrying amount of the bonds. For the first period, the interest expense is $553,600 * 5% = $27,680. For the second period, the carrying amount is adjusted by adding the amortized discount, and the interest expense is recalculated. The total interest expense for 2010 is $27,680 + $27,864 = $55,544.

Question 3

At the beginning of 2010, Winston Corporation issued 10% bonds with a face value of $600,000.These bonds mature in five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $555,840 to yield 12%.Winston uses a calendar-year reporting period.Using the effective-interest method of amortization, what amount of interest expense should be reported for 2010? (Round your answer to the nearest dollar.)

Accepted Answer

The interest expense for 2010 is calculated using the effective interest rate of 12% on the carrying amount of the bonds. For the first period, the interest expense is $555,840 * 6% = $33,350. For the second period, the carrying amount is adjusted by the amortization of the discount, and the interest expense is recalculated. The total interest expense for 2010 is approximately $66,901.

Question 4

The following information applies to both questions
On October 1, 2010 Bartley Corporation issued 5%, 10-year bonds with a face value of $500,000 at 108 (a 4% yield).Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an effective-interest basis.
-The entry to record the issuance of the bonds would include a

Accepted Answer

The bonds were issued at a premium, so the carrying value of the bonds is greater than the face value. The premium is amortized over the life of the bonds, so the interest expense will be less than the cash paid for interest. The entry to record the issuance of the bonds would include a credit of $540,000 to Bonds Payable.

Question 5

Use the following information for questions.issued eight-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31.The bonds were sold to yield 8%.Table values are: 
-Everhart Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010.The bonds pays interest semiannually on June 30 and December 31.The bonds are issued to yield 5%.What are the proceeds from the bond issue?

Accepted Answer

The answer of Use the following information for questions.issued eight-year...

Question 6

A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010.Interest is paid on June 30 and December 31.The proceeds from the bonds are $4,901,036.Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2010 statement of financial position?

Accepted Answer

The correct answer is A because the carrying value of the bonds on the December 31, 2010 statement of financial position will be $4,903,160. This is because the bonds were issued at a discount, and the effective-interest amortization method allocates the discount over the life of the bonds. As a result, the carrying value of the bonds will increase over time as the discount is amortized.

Question 7

At the beginning of 2010, Wallace Corporation issued 10% bonds with a face value of $900,000.These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $833,760 to yield 12%.Wallace uses a calendar-year reporting period.Using the effective-interest method of amortization, what amount of interest expense should be reported for 2010? (Round your answer to the nearest dollar.)

Accepted Answer

To calculate the interest expense for 2010, we need to follow these steps:
1. Calculate the total interest payment for the year:

Face value of bonds x coupon rate = $900,000 x 10% = $90,000 
2 semiannual interest payments = $90,000/2 = $45,000

2. Calculate the bond discount:

Bond issue price - face value = $833,760 - $900,000 = -$66,240

3. Calculate the effective interest rate:

Interest expense / carrying value of bond liability = x 
$45,000 / carrying value = x

Carrying value = issue price - discount: 
Carrying value = $833,760 - (-$66,240) = $900,000

Therefore, 
x = $45,000 / $900,000 = 5%

Effective Interest Rate = 2 x 5% = 10%

4. Calculate the interest expense:

Interest expense = Effective interest rate x carrying value of bond liability 
Interest expense = 10% x $900,000 = $90,000

So, for the first interest payment on June 30, 2010, interest expense would be:

Carrying value of bond liability x semiannual effective interest rate 
$900,000 x 5% = $45,000

For the second interest payment on December 31, 2010, interest expense would be:

( Carrying value of bond liability - 1st payment of principal) x semiannual effective interest rate 
($900,000 - $45,000) x 5% = $42,750

Total interest expense for 2010 would be: $45,000 + $42,750 = $87,750

Therefore, the closest answer is B) $100,353.

Question 8

Bangalor Company issues Rs10,000,000, 8%, 10-year bonds at 96.5 on July 1, 2011.Interest is paid on July 1 and January 1.The journal entry to record the issuance will include

Accepted Answer

The bonds are issued at a discount, so the cash received is less than the face value of the bonds. The difference between the cash received and the face value of the bonds is recorded as a discount on bonds payable.

Question 9

Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2011.Interest is paid on July 1 and January 1.The proceeds from the bonds are €9,802,073.What amount of interest expense will be reported on the 2012 income statement?

Accepted Answer

The answer of Franzia Company issues €10,000,000, 7.8%, 20-year bonds...

Question 10

On January 1, 2011, Chang Company sold HK$10,000,000 of its 10%, bonds for HK$8,852,960, a yield of 12%.Interest is payable semiannually on January 1 and July1.The June 30, 2011 entry to record the first interest payment will include

Accepted Answer

The first interest payment will be for half a year, from January 1 to June 30. The bond has a face value of HK$10,000,000 and an annual interest rate of 10%. Therefore, the semi-annual interest payment is HK$500,000 (10% x HK$10,000,000 x 1/2). The bond was sold at a discount, meaning the company received less than the face value, so the effective interest rate is higher than 10%. In this case, the yield was 12%, which means that the effective interest rate is also 12%. To calculate the interest expense, we need to multiply the carrying value of the bond (the amount of the bond after the discount is applied) by the effective interest rate.

Carrying value of the bond: HK$8,852,960 
Effective interest rate: 12% 
Interest expense for the first semi-annual payment: HK$531,178

Therefore, the June 30, 2011 entry to record the first interest payment will include a debit to Bonds Payable for HK$531,178.

Question 11

A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010.Interest is paid on June 30 and December 31.The proceeds from the bonds are $4,901,036.Using effective-interest amortization, how much interest expense will be recognized in 2010?

Accepted Answer

Using effective-interest amortization, the interest expense recognized in 2010 can be calculated as follows:
Step 1: Calculate the annual interest payment:
Annual interest payment = Face value of bonds × Coupon rate
= $5,000,000 × 7.8% = $390,000
Step 2: Calculate the semiannual interest payment:
Semiannual interest payment = Annual interest payment ÷ 2
= $390,000 ÷ 2 = $195,000
Step 3: Calculate the interest expense for the first 6 months (January 1, 2010, to June 30, 2010):
Interest expense = Carrying value of bonds on January 1, 2010 × Effective interest rate for the period
Carrying value of bonds on January 1, 2010 = Proceeds from bonds = $4,901,036
Effective interest rate for the period = Semiannual yield to maturity = 4%
Interest expense for the first 6 months = $4,901,036 × 4% = $196,041
Step 4: Calculate the interest expense for the last 6 months (July 1, 2010, to December 31, 2010):
Interest expense = Carrying value of bonds on July 1, 2010 × Effective interest rate for the period
Carrying value of bonds on July 1, 2010 = Carrying value of bonds on January 1, 2010 + Interest expense for the first 6 months - Semiannual interest payment
= $4,901,036 + $196,041 - $195,000 = $4,902,077
Effective interest rate for the period = Semiannual yield to maturity = 4%
Interest expense for the last 6 months = $4,902,077 × 4% = $196,083
Step 5: Add the interest expense for the first 6 months and the interest expense for the last 6 months to get the total interest expense for 2010:
Total interest expense for 2010 = Interest expense for the first 6 months + Interest expense for the last 6 months
= $196,041 + $196,083 = $392,124

Question 12

Use the following information for questions.issued eight-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31.The bonds were sold to yield 8%.Table values are: 
-Farmer Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest.The bonds are dated January 1, 2010, and pay interest on June 30 and December 31.What is the total cash received on the issue date?

Accepted Answer

The bonds are issued at 97, which means 97% of the face value, so $10,000,000 * 0.97 = $9,700,000. Additionally, accrued interest from January 1 to March 1 (2 months) is $10,000,000 * 9% * (2/12) = $150,000. Total cash received is $9,700,000 + $150,000 = $9,850,000.

Question 13

Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2011.Interest is paid on July 1 and January 1.The proceeds from the bonds are $9,604,145.The balance reported in the bonds payable account on the December 31, 2011 statement of financial position?

Accepted Answer

- The bonds were issued for €10,000,000 but the proceeds were only $9,604,145, meaning that the company incurred some expenses related to the issuance of the bonds (such as underwriting fees, legal fees, etc.). 
- The bonds pay interest on July 1 and January 1, which means that by December 31, 2011, the company had already accrued 2/3 of the annual interest expense (since 6 months out of 12 had already passed). 
- To calculate the balance in the bonds payable account on December 31, 2011, we need to calculate how much of the bond principal had been repaid (if any) and how much interest had been accrued. 
- The annual interest expense is €10,000,000 x 7.8% = €780,000. Two-thirds of this is €520,000 (since 6 months out of 12 had passed). 
- The interest expense accrues at a rate of 8%, so the interest accrued on the bond principal from July 1, 2011 to December 31, 2011 is: €10,000,000 x 7.8% x 6/12 x 8/100 = €312,000. 
- The total increase in the bonds payable account from the time of issuance to December 31, 2011 is the sum of the bond principal, the accrued interest, and any expenses incurred: €10,000,000 - €9,604,145 + €520,000 + €312,000 = €227,855. 
- The balance in the bonds payable account on December 31, 2011 is therefore €9,604,145 + €227,855 = €9,832,000. 
- The closest answer to this amount is B)€9,804,156.

Question 14

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010.Interest is paid on June 30 and December 31.The proceeds from the bonds are $19,604,145.Using effective-interest amortization, how much interest expense will be recognized in 2010?

Accepted Answer

Step 1: Calculate the total interest expense for the year
Interest = $20,000,000 × 7.8% = $1,560,000

Step 2: Calculate the interest payment for June 30, 2010
Interest payment = $20,000,000 × 7.8% × 6/12 = $780,000

Step 3: Calculate the interest expense from January 1 to June 30, 2010
Interest expense = $19,604,145 × 8% × 6/12 = $784,578

Step 4: Calculate the interest expense from July 1 to December 31, 2010
Interest expense = ($19,604,145 – $780,000) × 8% × 6/12 = $783,920

Step 5: Calculate the total interest expense recognized in 2010
Total interest expense = $1,560,000 + $784,578 + $783,920 = $3,128,498
Therefore, the answer is (C) $1,568,498.

Question 15

The following information applies to both questions 
On October 1, 2010 Macklin Corporation issued 5%, 10-year bonds with a face value of $1,000,000 at 108 (a 4% yield).Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an effective-interest basis.
-The entry to record the issuance of the bonds would include a credit of

Accepted Answer

The face value of the bonds is $1,000,000, but they were issued at 108% of face value, which means the company received $1,080,000 ($1,000,000 x 108%). The credit to Bonds Payable should therefore be for the amount received, which is $1,080,000.

Question 16

On January 1, Martinez Inc.issued $3,000,000, 11% bonds for $3,195,000.The market rate of interest for these bonds is 10%.Interest is payable annually on December 31.Martinez uses the effective-interest method of amortizing bond premium.At the end of the first year, Martinez should report bonds payable of:

Accepted Answer

The effective-interest method of amortizing bond premium involves calculating interest expense as the market rate multiplied by the carrying amount of the bond at the beginning of the period. The difference between this interest expense and the actual interest paid is then added to the carrying amount of the bond.

In this case, the bond premium is $195,000 ($3,195,000 - $3,000,000). The annual interest expense can be calculated as $330,450 ($3,000,000 * 11% * 1 year). The actual interest paid is $300,000 ($3,000,000 * 10% * 1 year).

Therefore, the difference between the interest expense and actual interest paid is $30,450 ($330,450 - $300,000). This amount is added to the carrying amount of the bond, which was $3,195,000 at issuance.

The new carrying amount of the bond at the end of the first year is $3,225,450 ($3,195,000 + $30,450). Therefore, Martinez should report bonds payable of $3,184,500 ($3,225,450 rounded to the nearest thousand) at the end of the first year. The correct answer is B.

Question 17

The following information applies to both questions
On October 1, 2010 Bartley Corporation issued 5%, 10-year bonds with a face value of $500,000 at 108 (a 4% yield).Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an effective-interest basis.
-Bond interest expense reported on the December 31, 2010 income statement of Bartley Corporation would be

Accepted Answer

The answer of The following information applies to both questions
On...

Question 18

On January 1, 2010, Huber Co.sold 12% bonds with a face value of $600,000.The bonds mature in five years, and interest is paid semiannually on June 30 and December 31.The bonds were sold for $646,200 to yield 10%.Using the effective-interest method of amortization, interest expense for 2010 is

Accepted Answer

The interest expense is calculated using the effective interest rate of 10% on the carrying amount of the bonds. For the first period, the interest expense is $646,200 * 5% = $32,310. For the second period, the carrying amount is adjusted by the amortization of the premium, and the interest expense is recalculated. The total interest expense for 2010 is $64,436.

Question 19

On January 1, Patterson Inc.issued $5,000,000, 9% bonds for $4,695,000.The market rate of interest for these bonds is 10%.Interest is payable annually on December 31.Patterson uses the effective-interest method of amortizing bond discount.At the end of the first year, Patterson should report bonds payable of

Accepted Answer

Using the effective-interest method, the bond discount is amortized over the life of the bond. 
For the first year, the effective interest expense is calculated as follows: 
Carrying value of bond = $4,695,000 (original issue price) + $0 (amortization of discount in the first year) = $4,695,000 
Effective interest = 10% (market rate) x $4,695,000 (carrying value) = $469,500 
Interest payment = $5,000,000 (face value) x 9% (stated rate) = $450,000

Therefore, the amortization of the bond discount for the first year is $469,500 - $450,000 = $19,500. 
The carrying value of the bond after the first year is $4,695,000 + $19,500 = $4,714,500. 
Thus, the correct answer is B, bonds payable should be reported as $4,714,500 at the end of the first year.

Question 20

The following information applies to both questions 
On October 1, 2010 Macklin Corporation issued 5%, 10-year bonds with a face value of $1,000,000 at 108 (a 4% yield).Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an effective-interest basis.
-Bond interest expense reported on the December 31, 2010 income statement of Macklin Corporation would be

Accepted Answer

The bond was issued at a premium, so the interest expense is calculated using the effective interest rate (4%) on the carrying amount of the bond. The carrying amount is $1,080,000 (108% of $1,000,000). The interest expense for the three months from October 1 to December 31 is $1,080,000 * 4% * (3/12) = $10,800.

Quiz 14: Non-Current Liabilities