Question 1

On January 1, 2013, JetNew Corp. issued $300,000 of 8%, 5-year bonds, with annual interest payments on January 1. The bonds were issued when the market rate was higher than 8% and thus JetNew received $265,000 for this bond. Prepare the journal entry to record the issuance of this bond on January 1, 2013. Show how this bond would appear on the balance sheet.

Accepted Answer

The answer of On January 1, 2013, JetNew Corp. issued...

Question 2

A dollar received today is worth more than a dollar to be received 5 years from now.

Accepted Answer

This is because of the time value of money, which states that the value of money decreases over time due to factors such as inflation and interest rates. Therefore, receiving money earlier allows for more potential for growth or investment, making it more valuable than receiving the same amount of money later on.

Question 3

Market conditions may force a company to issue its bonds at less than the face value of the bonds. The Discount on Bonds Payable account is used in this situation. This account:

Accepted Answer

The Discount on Bonds Payable account is a contra liability account, meaning it reduces the value of the liability represented by the bonds payable. When bonds are issued at a discount, the company receives less cash upfront than the face value of the bonds, so the discount represents the additional interest expense the company will incur over the life of the bonds. This account is used to accurately reflect the true cost of the bonds and the actual liability the company owes to bondholders.

Question 4

The carrying amount of bonds is equal to:

Accepted Answer

The carrying amount of bonds can either be the face value of the bonds plus the premium on bonds payable or the face value of the bonds less the discount on bonds payable. This is because bonds can be issued at a premium (above face value) or at a discount (below face value), and the premium/discount is amortized over the life of the bonds, affecting the carrying amount. Therefore, the correct answer is D.

Question 5

The carrying amount of bonds issued at a discount is calculated by:

Accepted Answer

The carrying amount of bonds issued at a discount is calculated by subtracting the Discount on Bonds Payable from the Bonds Payable. This method of accounting for the discount ensures that the Bonds Payable are recorded at their net present value or carrying amount on the issuance date.

Question 6

On January 1, 2013, JetNew Corp. issued $550,000 of 6%, 5-year bonds, with annual interest payments on December 31. The bonds were issued at face value. Note JetNew uses the effective-interest method of amortization.
a. Prepare the necessary journal entries to record the issuance of the bonds and the first interest payment.
b. Determine the carrying value of the bonds on December 31, 2013.

Accepted Answer

The answer of On January 1, 2013, JetNew Corp. issued...

Question 7

Debentures carry a lower interest rate than secured bonds because of the risk associated with them.

Accepted Answer

Debentures typically carry a higher interest rate than secured bonds because they are unsecured, meaning they do not have specific assets pledged as collateral, which represents a higher risk to investors.

Question 8

On January 1, 2013, JetNew Corp. issued $300,000 of 8%, 5-year bonds, with annual interest payments on January 1. The bonds were issued at face value. Note JetNew uses the effective-interest method of amortization.
  b. Prepare the journal entry to record the bond's maturity.

Accepted Answer

The answer of On January 1, 2013, JetNew Corp. issued...

Question 9

The phrase term bonds applies when all the bonds in a particular issue mature in installments over a period of time.

Accepted Answer

The answer of The phrase term bonds applies when all...

Question 10

The market or effective rate of interest is used to calculate the actual amount of interest bondholders will receive from a company issuing bonds.

Accepted Answer

The answer of The market or effective rate of interest...

Question 11

A bond issued at a price above its maturity or par value is sold at a premium.

Accepted Answer

When a bond is sold at a price above its maturity or par value, it is considered to be sold at a premium.

Question 12

A bond issued at a discount typically has a market price that decreases toward maturity value.

Accepted Answer

The answer of A bond issued at a discount typically...

Question 13

Under the effective-interest method of amortizing bond premiums, the interest expense recorded for each semi-annual interest payment:

Accepted Answer

The answer of Under the effective-interest method of amortizing bond...

Question 14

New Shu Corporation issued $100,000 worth of bonds on January 1, 2014. These bonds had a 5 year term with a stated rate of 9%. At the time of sale the market rate was 10% so New Shu received $96,149 for this sale. Record the issuance of this bond.

Accepted Answer

The answer of New Shu Corporation issued $100,000 worth of...

Question 15

The account Discount on Bonds Payable is a contra account to the account Bonds Payable.

Accepted Answer

This is because Discount on Bonds Payable has a debit balance and reduces the balance of Bonds Payable, which has a credit balance. Therefore, it is considered a contra account.

Question 16

Another name for the effective interest rate is the market interest rate.

Accepted Answer

The answer of Another name for the effective interest rate...

Question 17

A bond issued at a premium typically has a market price that decreases toward maturity value.

Accepted Answer

The answer of A bond issued at a premium typically...

Question 18

Describe the two interest rates included in setting the price of a bond.

Accepted Answer

The answer of Describe the two interest rates included in...

Question 19

On a bond's maturity date, its carrying value will equal the:

Accepted Answer

On a bond's maturity date, the carrying value will equal its maturity value, which is the face value of the bond. Interest payments, which are made periodically, would have already been included in calculating the carrying value of the bond up until its maturity date. The present value of the bond on its issuance date is not relevant on the maturity date.

Question 20

The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds Payable from Bonds Payable.

Accepted Answer

This statement is true. The carrying amount of bonds issued at a discount is calculated by subtracting the discount from the face value of the bonds payable. This results in a lower carrying amount than the face value of the bonds.

Quiz 9: Liabilities

A dollar received today is worth more than a dollar to be received 5 years from now.

Market conditions may force a company to issue its bonds at less than the face value of the bonds. The Discount on Bonds Payable account is used in this situation. This account:

The carrying amount of bonds is equal to:

The carrying amount of bonds issued at a discount is calculated by:

Debentures carry a lower interest rate than secured bonds because of the risk associated with them.

On January 1, 2013, JetNew Corp. issued $300,000 of 8%, 5-year bonds, with annual interest payments on January 1. The bonds were issued at face value. Note JetNew uses the effective-interest method of amortization. b. Prepare the journal entry to record the bond's maturity.

The phrase term bonds applies when all the bonds in a particular issue mature in installments over a period of time.

The market or effective rate of interest is used to calculate the actual amount of interest bondholders will receive from a company issuing bonds.

A bond issued at a price above its maturity or par value is sold at a premium.

A bond issued at a discount typically has a market price that decreases toward maturity value.

Under the effective-interest method of amortizing bond premiums, the interest expense recorded for each semi-annual interest payment:

New Shu Corporation issued $100,000 worth of bonds on January 1, 2014. These bonds had a 5 year term with a stated rate of 9%. At the time of sale the market rate was 10% so New Shu received $96,149 for this sale. Record the issuance of this bond.

The account Discount on Bonds Payable is a contra account to the account Bonds Payable.

Another name for the effective interest rate is the market interest rate.

A bond issued at a premium typically has a market price that decreases toward maturity value.

Describe the two interest rates included in setting the price of a bond.

On a bond's maturity date, its carrying value will equal the:

The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds Payable from Bonds Payable.