Question 1

All of the following statements regarding accounting treatments for liabilities under U.S.GAAP and IFRS are true except:

Accepted Answer

The statement "Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS" is incorrect. Both U.S. GAAP and IFRS allow companies to use the fair value option to account for certain types of financial instruments such as bonds and notes.

Question 2

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 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

Cash payment = $300,000 * .09 * ½ = $13,500
Interest Expense = $312,177 * .08 * ½ = $12,487.08
Premium Amortization = $13,500 - $12,487.08 = $1,012.92

Question 4

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:
$\begin{array} { r l c c } 
&&\text { Present Value of an}\
 \mathrm {n } = & \mathrm { i } = & \text { Annuity } & \text { Present value of } \$ 1 \
5 & 8 \% & 3.9927 & 0.6806 \
10 & 4 \% & 8.1109 & 0.6756 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5302 & 0.7441
\end{array}$

Accepted Answer

The bond's issue price can be calculated by adding the present value of the annuity (interest payments) and the present value of the principal (par value at maturity). Given the annual market rate of 6% and semiannual payments, we use the 5 years and 6% row for calculations. The bond pays semiannual interest of $40,000 (0.08 * $1,000,000 / 2). The present value of the annuity (interest payments) is $40,000 * 4.2124 = $168,496. The present value of the principal ($1,000,000) is $1,000,000 * 0.7473 = $747,300. Adding these together gives $168,496 + $747,300 = $915,796. However, this calculation does not match any of the provided options, indicating a mistake in the calculation process. Correctly, the present value of the annuity is $40,000 * 8.1109 (since we have 10 periods, not 5, due to semiannual payments) = $324,436, and the present value of the principal is $1,000,000 * 0.6756 = $675,600. Adding these gives the correct issue price: $324,436 + $675,600 = $1,000,036, which closely matches option D when considering rounding and the correct factors for 10 periods at 4% (semiannual equivalent of the annual 6% rate). The correct calculation approach involves recognizing the semiannual nature of the payments and using the 10-period factors, but the final explanation mistakenly used incorrect factors and calculations. The correct issue price calculation should involve using the appropriate present value factors for a semiannual period, leading to a conclusion that matches one of the provided options accurately.

Question 5

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

Interest expense = $125,000 * 9% = $11,250
Principal reduction = $32,136 - $11,250 = $20,886

Question 6

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

Cash payment of interest = $600,000 * .07 * ½ = $21,000
Discount Amortization = $600,000 - $564,000 = $36,000/6 = $6,000
Interest Expense = $21,000 + $6,000 = $27,000

Question 7

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

Cash payment = $300,000 * .09 * ½ = $13,500
Premium Amortization = $312,177 - $300,000 = $12,177/10 = $1,217.70
Interest Expense = $300,000 * .09 * ½ = $13,500 - $1,217.70 = $12,282.30

Question 8

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

Cash payment of interest = $400,000 * .07 * ½ = $14,000
Discount Amortization = $400,000 - $383,793 = $16,207/10 = $1,620.70
Interest Expense = $14,000 + $1,620.70 = $15,620.70

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 first payment on the note on December 31,Year 1 is:

Accepted Answer

Interest expense = $100,000 * 7% = $7,000
Principal payment = $14,238 - $7,000 = $7,238

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

Interest Expense = $383,793 * .08 * ½ = $15,351.72
Cash payment of interest = $400,000 * .07 * ½ = $14,000
Discount Amortization = $15,351.72 - $14,000 = $1,351.72
The effective interest method determines interest expense by multiplying the carrying value of the bond by the market rate of interest.

Question 11

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

$30,000/2.6730 = $11,223.34

Question 12

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

Discount = $400,000 - $383,793 = $16,207
The issued bond is always recorded at par (face) value in the Bonds Payable account, with the difference between par value and issue price recorded as a discount or premium, depending on whether the issue price is greater than par (premium) or less than par (discount).

Question 13

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

$250,000 principle * 8% = $20,000 interest
$37,258 payment - 20,000 interest = $17,258 principal payment

Question 14

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

$250,000 principle * 8% = $20,000 interest
$37,258 payment - $20,000 interest = $17,258 principal payment

Question 15

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

$250,000 principal * 8% = $20,000 interest

Question 16

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:
$$\begin{array} { c c c c } 
&&{ \text { Present Value of arn } } \
\mathrm { n} = & \mathrm { i } = & \text { Annuity } & \text { Present value of } \$ 1 \
3 & 4.0 \% & 2.7751 & 0.8890 \
6 & 2.0 \% & 5.6014 & 0.8880 \
3 & 5.0 \% & 2.7232 & 0.8638 \
6 & 2.5 \% & 5.5081 & 0.8623
\end{array}$$

Accepted Answer

The issue price of the bonds is calculated by finding the present value of the bond's future cash flows, which include the semiannual interest payments and the principal amount to be repaid at maturity. The market rate of interest (5%) is used for discounting because it represents the return required by investors. Since interest is paid semiannually, the market rate per period is 2.5% (5% annual rate divided by 2), and the number of periods is 6 (3 years times 2 periods per year).1. Calculate the present value of the semiannual interest payments: The semiannual interest payment is $200,000 * 4% / 2 = $4,000. Using the present value of an annuity factor for n=6 and i=2.5%, the present value of the interest payments is $4,000 * 5.5081 = $22,032.40.2. Calculate the present value of the principal amount: The principal amount ($200,000) is paid at the end of the bond's term. Using the present value of $1 factor for n=6 and i=2.5%, the present value of the principal is $200,000 * 0.8623 = $172,460.3. Add the present values to find the issue price of the bonds: $22,032.40 + $172,460 = $194,492.40.

Question 17

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

Year 1 - Interest expense = $100,000 * 7% = $7,000
Principal payment = $14,238 - $7,000 = $7,238
Year 2 - Interest expense = ($100,000 - $7,238) * 7% = $6,493
Principal payment = $14,238 - $6,493 = $7,745

Question 18

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

Premium = $312,177 - $300,000 = $12,177
The issued bond is always recorded at par (face) value in the Bonds Payable account, with the difference between par value and issue price recorded as a discount or premium, depending on whether the issue price is greater than par (premium) or less than par (discount).

Question 19

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:
$$\begin{array} { r l c c } 
&&\text { Present Value of an } \
 \mathrm {n} =& \mathrm { i } = & \text { Annuity } & \text { Present value of } \$ 1 \
5 & 5 \% & 4.3295 & 0.7835 \
10 & 3 \% & 8.7521 & 0.7812 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5302 & 0.7441
\end{array}$$

Accepted Answer

The bond's issue price is calculated by finding the present value of the bond's future cash flows, which include the semiannual interest payments and the principal repayment at maturity. Given the bond's annual coupon rate is 5% (semiannual rate of 2.5%), par value of $1,000,000, and a market interest rate of 6% (semiannual rate of 3%), we use the present value of an annuity factor for the semiannual interest payments (10 periods, 3% rate) and the present value of $1 for the principal repayment (10 periods, 3% rate). The correct factors from the table are 4.2124 for the annuity (interest payments) and 0.7473 for the present value of $1 (principal repayment). The calculation is as follows:Interest payment per period = 0.025 * $1,000,000 = $25,000.Present value of interest payments = $25,000 * 4.2124 = $105,310.Present value of principal = $1,000,000 * 0.7473 = $747,300.Total present value (issue price) = $105,310 + $747,300 = $852,610.However, the calculation above does not match any of the provided choices, indicating a mistake in the calculation process based on the given options. The correct approach using the given factors should involve using the present value of an annuity factor for the interest payments and the present value of $1 for the principal, both at the 6% semiannual rate for 5 years (10 periods), which are 4.2124 and 0.7473, respectively. The correct calculation is:Interest payment per period = 0.025 * $1,000,000 = $25,000.Present value of interest payments = $25,000 * 4.2124 = $105,310.Present value of principal = $1,000,000 * 0.7473 = $747,300.Total present value (issue price) = $105,310 + $747,300 = $852,610.Given the discrepancy and the focus on the correct methodology rather than the miscalculation, the correct answer should reflect the process of calculating the bond's issue price using the appropriate present value factors for a bond issued at a discount (since the market rate is higher than the coupon rate). The correct answer choice should be based on the methodology of calculating the present value of the bond's cash flows using the given factors for a 6% market rate, which is not directly provided in the calculation above. Therefore, without a direct match, we refer to the methodology that would typically be used to calculate the bond's issue price under the given conditions.

Question 20

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

11ea84bb_e9f7_23e3_bd15_bfc46913784c_TB6946_00 The effective interest method determines interest expense by multiplying the carrying value of the bond by the market rate of interest.

Quiz 10: Accounting for Long-Term Liabilities