Question 1

On January 1, 2018, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 102. Interest is payable annually on January 1. The journal entry to record this transaction on January 1, 2015 is

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The answer of On January 1, 2018, Carter Corporation issued...

Question 2

Each of the following accounts is reported as long-term liabilities except

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Interest Payable is reported as a current liability, not a long-term liability. The other options, Bonds Payable, Discount on Bonds Payable, and Premium on Bonds Payable, are all long-term liabilities.

Question 3

The total cost of borrowing is increased only if the

Accepted Answer

When bonds are issued at a discount, it means that the contractual interest rate is higher than the current market interest rate. This results in a lower amount of cash received upfront by the issuer. However, over time, the issuer will have to pay back the face value of the bond, which is higher than the amount received upfront. This results in a higher total cost of borrowing.

Question 4

Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2018, at 103. The journal entry to record the issuance will show a

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The answer of Ward Corporation issues 5,000, 10-year, 8%, $1,000...

Question 5

The selling price of a $10,000, 5-year bond, will be less than $10,000 if the

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When the contractual interest rate is less than the market interest rate, the bond's coupon payments are less attractive to investors than other available investment options. As a result, the bond's selling price will be less than its par value of $10,000. This is because investors will demand a discount in order to achieve an equivalent return to other investments offering higher interest rates.

Question 6

If bonds are issued at a discount, it means that the

Accepted Answer

Bonds issued at a discount means that they are sold for less than their face value. This happens when the market interest rate is higher than the contractual interest rate, which makes the bond less attractive to investors. The financial strength of the issuer is not necessarily related to whether bonds are issued at a discount. Additionally, while the bondholder will receive less than the face value, the contractual interest rate still applies to the face value, so they will receive the same amount of interest as specified in the contract.

Question 7

Beonce Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2016. The bonds had a face value of $200,000, pay interest annually on January 1, and have a call price of 101. Beonce uses the straight-line method of amortization.
Beonce Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Beonce report on its 2018 income statement?

Accepted Answer

First, we need to calculate the carrying value of the bond on January 1, 2018. Since the bonds were issued at a discount (the market rate was higher than the coupon rate), the carrying value would have been increasing each year as a portion of the discount is being amortized. The annual amortization is calculated as follows:

Discount = Face value - Proceeds = $200,000 - $188,000 = $12,000
Amortization per year = Discount / Number of years = $12,000 / 10 = $1,200

So, the carrying value on January 1, 2018 would be:

Face value - Total amortization = $200,000 - ($1,200 x 2) = $197,600

Now, we need to compare the carrying value with the call price. The call price is 101, which means Beonce would have to pay 101% of the face value to redeem the bonds. That is:

Call price = 101% x Face value = 101% x $200,000 = $202,000

Since the carrying value is lower than the call price, Beonce will have to pay a premium to redeem the bonds. The amount of premium is the difference between the call price and the carrying value, which is:

Premium = Call price - Carrying value = $202,000 - $197,600 = $4,400

Therefore, Beonce would report a loss of $4,400 on its 2018 income statement.

Question 8

The market interest rate is often called the

Accepted Answer

The market interest rate, also known as the effective rate, is the rate of interest investors demand for loaning funds. It differs from the stated, coupon, or contractual rate, which are terms more closely associated with the fixed interest rate specified in financial or bond agreements.

Question 9

Four thousand bonds with a face value of $1,000 each, are sold at 105. The entry to record the issuance is

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The answer of Four thousand bonds with a face value...

Question 10

In the balance sheet the account Premium on Bonds Payable is

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The answer of In the balance sheet the account Premium...

Question 11

Lake Company received proceeds of $188,000 on 10-year, 6% bonds issued on January 1, 2018. The bonds had a face value of $200,000, pay interest annually on January 1, and have a call price of 101. Lake uses the straight-line method of amortization.
What is the amount of interest Lake must pay the bondholders on January 1, 2019?

Accepted Answer

- Annual interest payment = Face value x Interest rate = $200,000 x 6% = $12,000
- Lake Company received proceeds of $188,000, which is less than the face value of the bond. This means that the bonds were issued at a discount.
- Discount = Face value - Proceeds = $200,000 - $188,000 = $12,000
- The discount will be amortized over the life of the bond using the straight-line method, which means that the discount will be allocated equally to each interest payment.
- Amortization of discount per year = Discount / Number of years = $12,000 / 10 = $1,200
- Interest expense for the first year = Annual interest payment + Amortization of discount = $12,000 + $1,200 = $13,200
- Therefore, Lake must pay $13,200 in interest to the bondholders on January 1, 2019. The answer is B.

Question 12

Lark Corporation retires its $800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a

Accepted Answer

The carrying value of the bonds at the redemption date is $829,960, which is greater than the face value of $800,000. This means that the bonds were issued at a discount, and the difference between the face value and carrying value is a premium on bonds payable.

When the bonds are retired at a premium, the premium must be amortized to the bond interest expense over the life of the bonds. However, when the bonds are retired before maturity, any unamortized premium should be debited to Premium on Bonds Payable.

Therefore, the entry to record the redemption will include a debit of $829,960 to Bonds Payable, a debit of $2,040 to Premium on Bonds Payable, and a credit of $832,000 to Cash.

Question 13

Hernandez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2018, at 98. The journal entry to record the issuance will show a

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The answer of Hernandez Corporation issues 2,000, 10-year, 8%, $1,000...

Question 14

Bargain Company has $1,500,000 of bonds outstanding. The unamortized premium is $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?

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The answer of Bargain Company has $1,500,000 of bonds outstanding....

Question 15

The carrying value of bonds will equal the market price

Accepted Answer

The carrying value of bonds is the initial amount borrowed and recorded on the company's books at the date of issuance. It does not change with the market price of the bonds over time. Therefore, the carrying value of bonds will not equal the market price at the close of every trading day, at the end of the fiscal period, or every six months on the date interest is paid.

Question 16

If the market interest rate is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount

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The answer of If the market interest rate is 10%,...

Question 17

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the

Accepted Answer

When the market interest rate decreases, then bond prices will go up. This is because the bonds become more attractive to investors due to the higher yield they offer compared to newer bonds issued at lower interest rates. Conversely, if the market interest rate increases, bond prices will decrease because they are less attractive to investors as newer bonds are offering higher yields. Choice A is incorrect because the contractual interest rate is fixed and cannot change. Choice B is incorrect because an increase in the contractual interest rate would make the bond more attractive to investors and increase its price. Choice D is also incorrect as an increase in contractual interest rate would not impact the market interest rate.

Question 18

The sale of bonds above face value

Accepted Answer

When bonds are sold above their face value, the issuer receives more money upfront than the amount that will be repaid at maturity. This premium reduces the total cost of borrowing because the issuer pays interest on the face value of the bonds, not on the higher amount received. Thus, over the life of the bonds, the total cost of borrowing (interest expense plus repayment of principal) is less than the total interest payments made to bondholders.

Question 19

Bond interest paid is

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The answer of Bond interest paid is
...

Question 20

The current carrying value of Kane's $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?

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The answer of The current carrying value of Kane's $800,000...

Quiz 10: Liabilities