Question 1

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.
-The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 2

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the first payment on the note on December 31,Year 1 is:

Accepted Answer

The correct entry involves debiting Interest Expense for the interest portion of the payment ($7,000, which is 7% of $100,000) and debiting Notes Payable for the principal portion of the payment ($7,238, which is the total payment of $14,238 minus the interest portion of $7,000), then crediting Cash for the total payment amount of $14,238.

Question 3

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.
-The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

Under the effective interest method of amortization, the interest expense for each period is calculated as the carrying value of the bonds multiplied by the effective interest rate. In this case, the effective interest rate is given as 8%, which is lower than the contract rate of 9%. This means that the bonds were sold at a premium, so the premium on bonds payable must be amortized over the life of the bonds.

The semiannual interest payment can be calculated as follows:
Par value x Contract rate x Time = $300,000 x 9% x 6/12 = $13,500

The effective interest rate can be calculated as follows:
PV of interest payments / PV of bond = $13,500 / $312,177 = 4.324%

To calculate the amortization of the premium on bonds payable for the first interest payment, we need to subtract the interest expense from the interest payment:
Premium on Bonds Payable - Bond Interest Expense = Premium Amortization
$12,712.92 - $12,487.08 = $225.84

Therefore, the journal entry to record the first interest payment using the effective interest method of amortization is:
Debit Bond Interest Expense $12,487.08
Debit Premium on Bonds Payable $225.84
Credit Cash $13,500.00

Question 4

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 of $11,223.34.The entry to record the first payment on July 31 would include:

Accepted Answer

The interest expense for the first year is calculated as $30,000 * 6% = $1,800. The entry would include a debit to Interest Expense for this amount.

Question 5

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the second interest payment using the effective interest method of amortization is:

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 6

On January 1,a company issues bonds dated January 1 with a par value of $300,000.The bonds mature in 5 years.The contract rate is 9%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $312,177.
-The journal entry to record the issuance of the bond is:

Accepted Answer

The correct journal entry for the issuance of bonds sold at a premium (when the selling price is higher than the par value) is to debit Cash for the amount received ($312,177), credit Bonds Payable for the par value of the bonds ($300,000), and credit Premium on Bonds Payable for the difference between the cash received and the par value ($12,177). This reflects that the bonds were sold for more than their face value.

Question 7

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of interest expense will be included in the first annual payment?

Accepted Answer

The interest expense for the first year is calculated as 8% of the initial loan amount of $250,000, which equals $20,000.

Question 8

On January 1,a company issues bonds dated January 1 with a par value of $200,000.The bonds mature in 3 years.The contract rate is 4%,and interest is paid semiannually on June 30 and December 31.The market rate is 5%.Using the present value factors below,the issue (selling)price of the bonds is:

Accepted Answer

Step 1: Calculate the semiannual interest payment
Par Value x Contract rate = $200,000 x 4% = $8,000
Semiannual interest payment = $8,000/2 = $4,000

Step 2: Calculate the present value of principal
PV of $1 at 5% for 6 periods = 0.74726
PV of principal = $200,000 x 0.74726 = $149,452

Step 3: Calculate the present value of interest payments
PV of annuity of $1 at 5% for 6 periods = 5.21667
PV of interest payments = $4,000 x 5.21667 = $20,866.68

Step 4: Calculate the total present value
Total present value = PV of principal + PV of interest payments = $149,452 + $20,866.68 = $170,318.68

Step 5: Calculate the issue price
Issue price = total present value / PV factor of $1 at issue date for 6 periods at 5% = $170,318.68 / 0.87589 = $194,492.

Therefore, the best choice is (B) $194,492.

Question 9

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the payment on the note on December 31,Year 2 is:

Accepted Answer

The correct answer involves calculating the interest expense for the year, which is based on the outstanding balance of the note payable. Since the payments are equal each year, part of the payment goes towards interest and the remainder reduces the principal. The interest for Year 2 would be calculated on the reduced principal after the first year's payment. Without the exact outstanding balance, we can't directly calculate the interest for Year 2, but the correct approach is to allocate part of the payment to interest expense (based on the current interest rate and outstanding principal) and the rest to reducing the notes payable. Option C correctly reflects this approach by showing a split between interest expense and reduction in notes payable, aligning with how installment payments are typically accounted for.

Question 10

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.
-The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 11

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the journal entry to record the first annual payment?

Accepted Answer

The first annual payment includes both interest expense and principal repayment. The interest for the first year is 8% of $250,000, which is $20,000. The remainder of the payment ($37,258 - $20,000 = $17,258) reduces the principal amount of the note payable. Therefore, the journal entry includes debiting Interest Expense for the interest portion and Notes Payable for the principal portion, with a credit to Cash for the total payment amount.

Question 12

Marwick Corporation issues 8%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the following Present Value factors:

Accepted Answer

Using the present value table given:
PV factor for 5 years at 6% = 0.74726
PV factor for 4.5 years at 4% = 0.78099
Total PV factor = 1.52825

Bond issue price = PV factor x Par value
= 1.52825 x $1,000,000
= $1,085,308

Therefore, the answer is D, $1,085,308.

Question 13

On January 1,a company issues bonds dated January 1 with a par value of $600,000.The bonds mature in 3 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The bonds are sold for $564,000.The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

The answer of On January 1,a company issues bonds dated...

Question 14

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.
-The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

Under straight-line amortization method, the same amount of discount is allocated to each interest payment over the life of the bond.

Step 1: Calculate the annual interest payment using the contract rate:
$400,000 x 7% = $28,000

Step 2: Calculate the semiannual interest payment:
$28,000/2 = $14,000

Step 3: Calculate the discount amortization for the first interest payment:
Discount amortization = Discount/Number of interest payments
Discount = Par value - Sale price = $400,000 - $383,793 = $16,207
Number of interest payments = 10 (5 years x 2 semiannual periods)

Discount amortization = $16,207/10 = $1,620.70

Step 4: Record the journal entry for the first interest payment:
Debit Interest Expense $15,620.70 (=$14,000 + $1,620.70)
Credit Discount on Bonds Payable $1,620.70
Credit Cash $14,000.00

Question 15

A corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?

Accepted Answer

The first payment is for the interest accrued on the outstanding principal balance of the note for the first year, which is 9% of $125,000 = $11,250. Therefore, the journal entry should include a debit to Interest Expense for $11,250. The remaining amount of the payment, $32,136 - $11,250 = $20,886, should be applied to reduce the principal balance of the note. Therefore, there should be a debit to Notes Payable for $20,886 and a credit to Cash for the full payment amount of $32,136. Thus, the correct journal entry is:

Debit Interest Expense      $11,250
Debit Notes Payable        $20,886
Credit Cash                 $32,136

Question 16

On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.
-The journal entry to record the issuance of the bond is:

Accepted Answer

The journal entry to record the issuance of bonds includes debiting Cash for the amount received ($383,793), debiting Discount on Bonds Payable for the difference between the par value and the selling price ($16,207), and crediting Bonds Payable for the par value ($400,000). This entry reflects the fact that the market rate of interest is higher than the contract rate, resulting in a discount on the bonds.

Question 17

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the appropriate journal entry to record the issuance of the note?

Accepted Answer

The correct journal entry to record the issuance of the note is to debit Cash for the amount borrowed ($250,000) and credit Notes Payable for the same amount ($250,000). This entry reflects the receipt of cash and the obligation to repay the principal amount of the note. The installment payments and interest are not part of the initial journal entry for the issuance of the note.

Question 18

Sharmer Company issues 5%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the following factors:

Accepted Answer

To calculate the issue price of the bond, we need to use the present value of an annuity formula. The semiannual interest payment would be $25,000 ($1,000,000 x 5% x 6/12), and there would be 10 semiannual payments over 5 years. The market rate is 6%, which means the semiannual rate would be 3%. Plugging in these values into the formula, we get:

PV = ($25,000 x (1 - 1/(1 + 0.03)^10)) / 0.03 + ($1,000,000 / (1 + 0.03)^10)
PV = $957,355

Therefore, the bond's issue price is $957,355, which is option A.

Question 19

All of the following statements regarding convertible bonds are true except:

Accepted Answer

Holders of convertible bonds cannot choose how many shares of stock to receive at conversion. The number of shares is predetermined by the conversion ratio, which is specified in the bond's indenture.

Question 20

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of principal will be included in the first annual payment?

Accepted Answer

The first annual payment includes interest and principal. The interest for the first year is 8% of $250,000, which is $20,000. Subtracting this interest from the total annual payment ($37,258 - $20,000) gives the principal portion of $17,258.

Quiz 10: Accounting for Long-Term Liabilities

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 of $11,223.34.The entry to record the first payment on July 31 would include:

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of interest expense will be included in the first annual payment?

On January 1,a company issues bonds dated January 1 with a par value of $200,000.The bonds mature in 3 years.The contract rate is 4%,and interest is paid semiannually on June 30 and December 31.The market rate is 5%.Using the present value factors below,the issue (selling) price of the bonds is:

On January 1,Year 1,Stratton Company borrowed $100,000 on a 10-year,7% installment note payable.The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years.The required general journal entry to record the payment on the note on December 31,Year 2 is:

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the journal entry to record the first annual payment?

Marwick Corporation issues 8%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling) price,assuming the following Present Value factors:

A corporation borrowed $125,000 cash by signing a 5-year,9% installment note requiring equal annual payments each December 31 of $32,136.What journal entry would the issuer record for the first payment?

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What is the appropriate journal entry to record the issuance of the note?

Sharmer Company issues 5%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling) price,assuming the following factors:

All of the following statements regarding convertible bonds are true except:

On July 1,Shady Creek Resort borrowed $250,000 cash by signing a 10-year,8% installment note requiring equal payments each June 30 of $37,258.What amount of principal will be included in the first annual payment?