Question 1

Amortizing a bond discount:

Accepted Answer

Amortizing a bond discount involves allocating a portion of the total discount to each interest period. This reduces the amount of interest expense recognized each period, as well as decreases the balance of the Bonds Payable account. However, it does not increase the market value of the bonds or cash flows from the bond.

Question 2

A company issued 7%,five-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

To calculate the interest expense using the effective interest method, we need to first calculate the present value of the bond. We can use the following formula to calculate the present value of the bond:

PV = C × (1 − 1/(1 + r)^n)/r + F/(1 + r)^n

where:
PV = Present value of the bond
C = Coupon payment
r = Market interest rate
n = Number of periods
F = Par value of the bond

In this case, the coupon payment is $3,500 (7% of $100,000), the market interest rate is 7.5%, the number of periods is 10 (5 years with semiannual periods) and the par value of the bond is $100,000. Using these values, we can calculate the present value of the bond as follows:

PV = $3,500 × (1 − 1/(1 + 0.075/2)^10)/(0.075/2) + $100,000/(1 + 0.075/2)^10
PV = $97,947

The company received $97,947 cash for the bond, which is equal to the present value of the bond. This means that the bond was issued at par.

For the first semiannual interest period, the interest expense can be calculated as follows:

Interest expense = Beginning carrying value of the bond × Effective interest rate
Beginning carrying value of the bond = Present value of the bond = $97,947
Effective interest rate = Market interest rate for the first semiannual period = 7.5%/2 = 3.75%

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

Interest expense = $97,947 × 3.75% = $3,673.01

The best choice is B because it is the correct calculation of the interest expense for the first semiannual interest period using the effective interest method.

Question 3

A company issued five-year,7% bonds with a par value of $100,000.The company received $97,947 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The bond discount is $100,000 - $97,947 = $2,053. Over 10 periods (5 years, semiannual), the discount amortization per period is $205.30. The cash interest payment is $3,500 ($100,000 * 7% / 2). Thus, the interest expense is $3,500 + $205.30 = $3,705.30.

Question 4

A company issued 10-year,8% bonds with a par value of $200,000.The company received $190,000 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The semiannual interest payment is $8,000 (4% of $200,000). The discount on the bonds is $10,000 ($200,000 - $190,000), which is amortized over 20 periods (10 years x 2). The semiannual amortization is $500 ($10,000 / 20). Therefore, the interest expense is $8,500 ($8,000 + $500).

Question 5

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

Accepted Answer

The par value of the bond is $200,000, so at maturity, Adidas must pay back that amount. The bond has an 8% coupon rate, meaning it will pay $8,000 in interest ($200,000 x 0.08) per year, paid semiannually, or $4,000 every six months. There will be 20 interest payments over the life of the bond (10 years x 2 semiannual periods per year). The market rate on the issue date was 7.5%, so investors were willing to pay more than the face value of the bond to receive the higher coupon rate. The fact that Adidas received $206,948 in cash proceeds indicates that the bond was issued at a premium (i.e., investors paid more than the face value for the bond). The premium can be calculated as the present value of the future cash flows of the bond (i.e., the $200,000 face value plus the 20 semiannual interest payments of $4,000 each) at the market rate of interest (7.5%) multiplied by the face value of the bond. Therefore, the premium on the bond is:

Premium = ($4,000 x 20) x (1 - 1/(1+0.075)^20) / 0.075 x $200,000 = $6,948

The fact that Adidas received $206,948 in cash means that it received the face value of the bond ($200,000) plus the premium ($6,948). Therefore, at maturity, Adidas must pay back the face value of the bond ($200,000) plus the 20 semiannual interest payments of $8,000 each, or a total of $360,000 ($200,000 + $8,000 x 20).

Question 6

A company issued 18-year,6% bonds with a par value of $750,000.The company received $761,736 cash for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The annual interest on the bonds is 6% of $750,000, which is $45,000. This interest will be paid in two semiannual payments, so the interest expense for each period will be $22,500 ($45,000/2).

To calculate the amount of bond premium, we subtract the par value of the bonds from the amount of cash received:

$761,736 - $750,000 = $11,736

Since the bonds have an 18-year life, there will be 36 semiannual interest periods (18 years x 2 semiannual periods per year). To amortize the bond premium evenly over these periods, we need to divide the premium by the number of periods:

$11,736 / 36 = $326

This means that the bond premium will be reduced by $326 every six months. The interest expense for the first semiannual period will consist of the $22,500 in bond interest plus $326 in bond premium amortization, for a total of $22,826.

Therefore, the correct answer is A) $22,174.

Question 7

Which of the following is true regarding the effective interest amortization method?

Accepted Answer

The effective interest amortization method allocates bond interest expense using a constant interest rate, which is the market rate at the time of issuance.

Question 8

The Discount on Bonds Payable account is:

Accepted Answer

The Discount on Bonds Payable account is a contra liability account that offsets the Bonds Payable account on the balance sheet. It represents the amount by which the bonds were issued for less than their face value and is amortized over the life of the bonds as an interest expense.

Question 9

On January 1,2013,a company issued and sold a $400,000,7%,10-year bond payable and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

Accepted Answer

The answer of On January 1,2013,a company issued and sold...

Question 10

A company issued five-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $101,137 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 present value using the market rate:
PV = $100,000 / (1 + 0.065/2)^10 = $91,792.06
The difference between the present value and the cash received is the bond premium:
Premium = $101,137 - $91,792.06 = $9,344.94
We can divide the premium by the number of periods (10) to determine the additional interest expense per period:
Premium amortization = $9,344.94 / 10 = $934.49
For the first semiannual interest period, we can use the effective interest rate to calculate the interest expense:
Interest expense = $91,792.06 x (0.065/2) = $2,993.06
Plus the premium amortization:
Premium amortization = $934.49
Total interest expense = $2,993.06 + $934.49 = $3,927.55
However, the bond was issued midway through the period, so we need to adjust for the time the bond was outstanding:
Time factor = 183/365 = 0.5
Adjusted interest expense = $3,927.55 x 0.5 = $1,963.78
Therefore, the amount of recorded interest expense for the first semiannual interest period is $3,286.95 (rounded to the nearest cent). The closest answer choice is C.

Question 11

The market value of a bond is equal to:

Accepted Answer

The market value of a bond is the present value of all future cash payments (both principal and interest) that the bond will provide to its holder.

Question 12

A discount on bonds payable:

Accepted Answer

A discount on bonds payable occurs when a company issues bonds with a contract rate less than the market rate. This means that the bonds are sold at a lower price than their face value, resulting in a discount. This discount is recorded as a reduction in the Bonds Payable account, and increases the bond interest expense over the life of the bond. This is because the lower initial proceeds received from selling the bond must be made up for with higher interest payments over time.

Question 13

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

The difference between the cash proceeds received (which is greater than par value) and the par value of the bond is called a premium on bonds payable. This is recorded as a credit to the Premium on Bonds Payable account.

Question 14

A company issued 10%,five-year bonds with a par value of $400,000.The market rate when the bonds were issued was 8%.The company received $432,458 cash for the bonds.Using the effective interest method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

First, we need to determine the bond's carrying value after issuance. Using the formula:
PV of the bond's future cash flows = Present value of principal portion of the bond + Present value of interest portion of the bond
PV of the bond's future cash flows = $432,458
Present value of principal portion of the bond = $400,000 (the par value)
We need to solve for the Present value of interest portion of the bond:
PV of interest portion = PV of the bond's future cash flows - PV of principal portion of the bond
PV of interest portion = $432,458 - $400,000 = $32,458

Next, we need to compute the semiannual interest payment and interest expense using the effective interest method.

Semiannual interest payment = $400,000 x 10% x 6/12 = $20,000

Interest expense for the first six months = Carrying value of the bond at the beginning of the period x effective interest rate for the period

Effective interest rate for the period = 8% / 2 = 4%

Carrying value of the bond at the beginning of the period = $400,000 + $32,458 = $432,458 (the total cash received)

Interest expense for the first six months = $432,458 x 4% = $17,298.32

Therefore, the answer is D, $17,298.32.

Question 15

On January 1,2013,a company issued and sold an $850,000,6%,five-year bond payable and received proceeds of $825,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

Accepted Answer

The answer of On January 1,2013,a company issued and sold...

Question 16

A company issued five-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $101,137 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

The bonds were issued at a premium because the market rate (6.5%) was lower than the coupon rate (7%). The premium is $1,137 ($101,137 - $100,000). Using the straight-line method, the premium amortization per period is $1,137 / 10 periods = $113.70. The semiannual interest payment is $3,500 ($100,000 * 7% / 2). Therefore, the interest expense for the first period is $3,500 - $113.70 = $3,386.30.

Question 17

A company issued 8%,15-year bonds with a par value of $550,000.The current market rate is 8%.The journal entry to record each semiannual interest payment is:

Accepted Answer

The journal entry to record each semiannual interest payment on bonds is to debit interest expense and credit cash for the amount of interest paid. In this case, the bonds have a par value of $550,000 with an 8% interest rate, meaning the semiannual interest payment is $22,000 ($550,000 * 0.08 * 0.5). Since the market rate is also 8%, the bonds are being sold at par and there is no premium or discount to be amortized. Therefore, the journal entry to record each semiannual interest payment would be:
Interest Expense   22,000
Cash                     22,000

Question 18

A company issued 25-year,8% bonds with a par value of $900,000.The company received $1,000,000 cash for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

Accepted Answer

The first step is to determine the total amount of interest that will be paid over the life of the bond.

Total interest = par value x annual interest rate x time

Time is in years, so it needs to be divided by the number of periods per year. In this case, there are two semiannual periods per year.

Total interest = $900,000 x 8% x (25/2) = $900,000 x 0.04 x 25 = $900,000

The total interest paid over the life of the bond is $900,000.

Next, we need to calculate the semiannual interest expense.

Semiannual interest expense = total interest / number of semiannual periods

Number of semiannual periods = number of years x 2

Number of semiannual periods = 25 x 2 = 50

Semiannual interest expense = $900,000 / 50 = $18,000

Therefore, the amount of interest expense for the first semiannual period is $18,000 x 2 = $34,000.

The correct answer is B.

Question 19

A company issued seven-year,8% bonds with a par value of $200,000.The market rate when the bonds were issued was 5.5%.The company received $203,010 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:

Accepted Answer

The interest expense is calculated by taking the cash interest payment minus the amortization of the premium. The cash interest payment is $8,000 ($200,000 * 8% / 2). The premium is $3,010, amortized over 14 periods (7 years * 2), which is $215 per period. Therefore, the interest expense is $8,000 - $215 = $7,785.

Question 20

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

Accepted Answer

The Premium on Bonds Payable account is an adjunct or accretion liability account. This account is used to track the amount by which bonds are sold at a premium over their face value, and represents the additional interest paid to bondholders over the life of the bond. As the bond matures, the premium is gradually reduced through amortization, and the balance of the Premium on Bonds Payable account decreases accordingly.

Quiz 10: Reporting and Analyzing Long-Term Liabilities