Question 1

On November 1, 2017, Austin Services issued $304,000 of five-year bonds with a stated rate of 11%. The bonds were issued at par, and Austin makes semiannual payments on April 30 and October 31. On December 31, 2017, Austin made an adjusting entry to accrue interest at year-end. No further entries were made until April 30, 2018, when the first payment was made. What amount of interest expense was recorded for the period of January 1 to April 30, 2018? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

Accepted Answer

A)Interest Expense = $304,000 × 11% × 4/12 = $11,147

Question 2

On July 1, 2016, Sharon Equipment Dealer issued $520,000 of 7% bonds payable that mature in five years. These bonds were issued at face value and pay interest each June 30 and December 31. Each semiannual interest payment will be higher than the amount of cash paid to the bondholders.

Accepted Answer

Since the bonds were issued at face value, the semiannual interest payments will be equal to the annual interest rate (7%) times the face value ($520,000), divided by two (since there are two interest payments per year). Therefore, the amount of cash paid to the bondholders will be the same each semiannual period.

Question 3

When bonds are issued at face value, ________.

Accepted Answer

When bonds are issued at face value, the amount of cash received is equal to the face value of the bonds. For each interest payment, the amount of Interest Expense equals the amount of cash paid, as there is no bond discount or premium to amortize. Additionally, the journal entry to record the issuance of the bonds includes a debit to the Cash account and a credit to the Bonds Payable account, rather than a debit to the Bonds Payable account as stated in option D.

Question 4

Campbell, Inc. has net income of $500,000 and 200,000 shares of common stock. The company is considering a project that requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised can be used to increase income before interest and taxes by $300,000 each year. The company estimates income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in higher earnings per share. (Round your answers to two decimal points.)

Accepted Answer

The answer of Campbell, Inc. has net income of $500,000...

Question 5

On January 1, 2017, Davie Services issued $20,000 of 8% bonds that mature in five years. The bonds were issued at par. Prepare the journal entry to issue bonds.

Accepted Answer

The answer of On January 1, 2017, Davie Services issued...

Question 6

Which of the following is true of the Discount on Bonds Payable account?

Accepted Answer

The Discount on Bonds Payable account is a contra account to Bonds Payable and represents the difference between the face value of the bond and the amount the company received when it sold the bond at a lower interest rate. Therefore, it is subtracted from the Bonds Payable balance and shown with long-term liabilities on the balance sheet.

Question 7

Debt is a less expensive source of capital than stock.

Accepted Answer

Debt is typically less expensive than issuing stock because lenders view it as a lower risk. Lenders only expect to receive interest payments on their loan, while stockholders expect a return on their investment through dividends and the appreciation of the stock's value.

Question 8

The balance in the Bonds Payable account is a credit of $72,000. The balance in the Discount on Bonds Payable is a debit of $3,600. The balance sheet will report the bond balance as $75,600.

Accepted Answer

The answer of The balance in the Bonds Payable account...

Question 9

Unlike cash dividends, which are optional payments to stockholders, the interest payment on bonds is required.

Accepted Answer

The payment of interest on bonds is a contractual obligation and is required, while the payment of cash dividends to stockholders is not mandatory and is at the discretion of the company's board of directors.

Question 10

The balance in the Bonds Payable account is a credit of $74,000. The balance in the Discount on Bonds Payable account is a debit of $2,450. The bond's carrying amount is $71,550.

Accepted Answer

This is correct because the carrying amount of the bond ($71,550) is calculated by subtracting the discount on bonds payable ($2,450) from the credit balance in the bonds payable account ($74,000).

Question 11

On July 1, 2106, Jordan Equipment Dealer issued $510,000 of 6% bonds payable that mature in eight years. These bonds were issued at face value and pay interest each June 30 and December 31. Each semiannual interest payment is $15,300.

Accepted Answer

The information provided in the question states that the bonds were issued at face value, which means the initial proceeds received by the company is equal to the face value of the bonds. The face value of the bonds is $510,000. The bonds pay interest each June 30 and December 31, which means there are two interest payments every year, each of which is $15,300. The bonds mature in eight years, which means the bondholders will receive the face value of the bonds ($510,000) at the end of the eighth year. Therefore, all the given information is consistent, and the statement is true.

Question 12

Bonds affect the percentage of ownership of a corporation.

Accepted Answer

Bonds represent debt that a corporation owes, not ownership. Ownership is determined by shares of stock.

Question 13

Why would a corporation issue bonds payable instead of issuing stock?

Accepted Answer

Debt in the form of bonds payable may be a less expensive source of capital than issuing stock. This is because bondholders do not have voting rights or ownership in the company, and interest payments on bonds may be tax deductible for the company.

Question 14

The balance in the Bonds Payable account is a credit of $75,000. The balance in the Discount on Bonds Payable account is a debit of $2,900. What is the bond's carrying amount?

Accepted Answer

The bond's carrying amount is calculated by adding the balance of Bonds Payable and Discount on Bonds Payable accounts. 
Carrying Amount = Bonds Payable - Discount on Bonds Payable
Carrying Amount = $75,000 - $2,900
Carrying Amount = $72,100

Question 15

On January 1, 2017, Door #2 Services issued $20,000 of 8% bonds that mature in five years. They were issued at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year. Provide the journal entry for the payment made on June 30, 2017.

Accepted Answer

The answer of On January 1, 2017, Door #2 Services...

Question 16

Discount on Bonds Payable is additional Interest Expense of the company that issues the bond.

Accepted Answer

When a company issues bonds at a discount (below face value), the difference between the face value and the selling price is recorded as a discount on bonds payable. This discount increases the effective interest rate on the bond, resulting in additional interest expense for the company over the life of the bond. Therefore, discount on bonds payable is considered an additional interest expense for the company.

Question 17

Earning more income on borrowed money than the related interest expense is called ________.

Accepted Answer

This is known as leveraging or using leverage. It can lead to increased profits, but also increases risk.

Question 18

On June 1, 2017, Smith & Beecham Services issued $32,000 of 8% bonds that mature in five years. They were issued at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31, 2017, what is the total amount paid to bondholders?

Accepted Answer

A)
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Question 19

On November 1, 2017, Archangel Services issued $302,000 of eight-year bonds with a stated rate of 10% at par. Interest payments occur each April 30 and October 31. On December 31, 2017, Archangel made an adjusting entry to accrue interest at year-end. What is the amount of Interest Expense that will be recorded on December 31, 2017? (Do not round any intermediate calculations, and round your final answer to the nearest dollar.)

Accepted Answer

B)Interest Expense = $302,000 × 10% × 2/12 = $5,033

Question 20

Financial leverage occurs when a company earns less income on borrowed money than the related interest expense.

Accepted Answer

Financial leverage occurs when a company earns more income on borrowed money than the related interest expense, allowing it to amplify its returns on equity.

Quiz 14: Long-Term Liabilities