Question 1

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 answer of A company has bonds outstanding with a...

Question 2

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 method of retiring bonds. It is simply paying the interest due until the bond matures. All the other options (A, B, C, and E) are means of retiring bonds.

Question 3

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 straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

First, we need to calculate the total interest expense for the bonds over the 5-year period using the straight-line method:

Annual interest expense = (par value of bonds) x (market rate) = $100,000 x 6.5% = $6,500

Total interest expense over 5 years = 2 x (annual interest expense) x (number of years) = 2 x $6,500 x 5 = $65,000

Next, we need to calculate the amount of interest expense for each semiannual period:

Interest expense per semiannual period = (total interest expense) / (number of semiannual periods) = $65,000 / 10 = $6,500

However, we need to adjust this amount for the fact that the bonds were issued at a premium (i.e. for more than their par value). The premium amount is computed as:

Premium = (amount received from sale of bonds) - (par value of bonds) = $102,105 - $100,000 = $2,105

The premium must be amortized (reduced) over the life of the bonds, which means that each semiannual interest period will have a slightly lower interest expense than $6,500. The amount of premium to be amortized each period is:

Premium amortization per semiannual period = (premium) / (number of semiannual periods) = $2,105 / 10 = $210.50

Therefore, the recorded interest expense for the first semiannual period is:

Interest expense = (annual interest expense) - (premium amortization) = $6,500 - $210.50 = $6,289.50

However, since we are only concerned with the first semiannual period, we need to divide this amount in half:

Recorded interest expense for first semiannual period = $6,289.50 / 2 = $3,144.75

Therefore, the closest answer is D) $3,289.50.

Question 4

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a:

Accepted Answer

When a bond is issued at a price higher than its par value, it is called a premium. The difference between the cash proceeds received and the par value is recorded as a credit to Premium on Bonds Payable. In this case, the company received cash proceeds of $206,948 on a bond issue with a par value of $200,000, indicating that the bond was issued at a premium. So, the correct answer is B - credit to Premium on Bonds Payable.

Question 5

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

Accepted Answer

The answer of Adonis Corporation issued 10-year, 8% bonds with...

Question 6

A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,946.80 cash for the bonds. Using the effective interest method, the amount of interest expense for the second semiannual interest period is:

Accepted Answer

The answer of A company issued 7%, 5-year bonds with...

Question 7

A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s)is:

Accepted Answer

The first interest payment is made on July 1, which means the bondholders have held the bonds for half a year. The coupon rate is 8%, so the semi-annual interest payment is (8% / 2) x $40,000 = $1,600. 
Since the market rate is lower than the coupon rate, the bond is issued at par value. Therefore, the bondholders do not receive any premium or discount. 
Thus, the cash paid on July 1 to the bondholder(s) is $1,600. 
Therefore, the correct answer is D.

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

Step 1: Calculate the bond's interest expense using the effective interest rate method.
Interest expense = (Carrying value of bonds at the start of period) x (Effective interest rate for the period)
Effective semi-annual interest rate = (1 + Market interest rate/n)^n - 1
= (1 + 6.5%/2)^2 - 1 = 6.63%
Carrying value of bonds at the start of first semi-annual period = $102,105 (it remains the same throughout the bond's life since the bonds were issued at par)
Interest expense = $102,105 x 6.63% = $6,773.90
Step 2: Allocate the interest expense between the interest expense and bond premium amortization.
Interest expense = Interest paid - bond premium amortization
Interest paid = Par value x Coupon rate x Time period
= $100,000 x 7% x 6/12 = $3,500
Bond premium amortization = $6,773.90 - $3,500 = $3,273.90
Therefore, the recorded interest expense for the first semiannual interest period is $3,318.41 ($6,773.90 - $3,273.90). The correct answer is C.

Question 9

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:

Accepted Answer

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

Question 10

If an issuer sells bonds at a premium:

Accepted Answer

When an issuer sells bonds at a premium, the carrying value of the bond starts at the issue price and decreases over the bond's term until it reaches the par value at maturity. Therefore, the correct choice is D.

Question 11

The effective interest amortization method:

Accepted Answer

The effective interest amortization method allocates bond interest expense over the bond's life using a constant interest rate. This interest rate is determined by taking the present value of all future cash flows of the bond and setting it equal to the actual sales price of the bond. The resulting interest rate is then applied to each interest period to allocate interest expense. This method is required by Generally Accepted Accounting Principles (GAAP) and is used to provide a more accurate representation of interest expense over time than the straight-line method.

Question 12

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 answer of A company has bonds outstanding with a...

Question 13

The Premium on Bonds Payable account is a(n):

Accepted Answer

The Premium on Bonds Payable account is an Adjunct liability account because it represents the excess paid by investors over the face value of the bonds, which is recorded as a liability on the balance sheet.

Question 14

A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

Accepted Answer

Under the effective interest method, the interest expense for the period is calculated as the carrying amount of the bond multiplied by the effective interest rate for the period. The effective interest rate is the market rate at the time of issue (7.5%) adjusted for the difference between the issue price and the par value of the bond. 
Carrying amount at the beginning of the period = $97,947
Interest expense for the period = $97,947 x (7.5% / 2) = $3,673.01 (rounded to the nearest cent)

Question 15

A company issues 9%, 5-year bonds with a par value of $100,000 on January 1 at a price of $106,160, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

Accepted Answer

The semiannual coupon rate can be calculated as follows:
Market rate = 8%
Coupon rate = 9%/2 = 4.5%
Semiannual payment = Coupon rate x Par Value = 4.5% x $100,000 = $4,500.

Question 16

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

Accepted Answer

Callable bonds give the issuer the option to retire them before they mature.

Question 17

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 present value of a single sum factor for 3 years at 6% is 0.8396. The payment each July 31 will be:

Accepted Answer

The payment each July 31 can be calculated using the following formula:

Payment = Loan amount / Present value of annuity factor

Where, Loan amount = $30,000 and Present value of annuity factor = 2.6730

Therefore, payment = $30,000 / 2.6730 = $11,223.34 (rounded to the nearest cent)

Option D is the closest to the calculated payment.

Question 18

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

The bond was issued with a premium of $20,000 and 40% of it has been amortized, which means the amortized amount is $8,000 ($20,000 x 40%). Therefore, the book value of the bond is $1,008,000 ($1,000,000 + $20,000 - $8,000).

When the corporation purchases the entire issue on the open market at 99, they pay $990,000 ($1,000,000 x 0.99). Since the book value of the bond is $1,008,000, the corporation recognizes a gain of $18,000 ($1,008,000 - $990,000).

Therefore, the correct answer is (B) $22,000 gain. (Note: The question stated the gain or loss, so the answer should be a positive or negative number, not just the word "gain" or "loss.")

Question 19

The market value (price)of a bond is equal to:

Accepted Answer

The market value of a bond is the present value of all future cash payments (including interest and principal), discounted at the appropriate interest rate. Therefore, choice C accurately describes the calculation for determining the market value of a bond.

Question 20

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:

Accepted Answer

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

Quiz 14: Long-Term Liabilities