Question 1

When a bond is issued at a premium, the interest expense calculation using the effective-interest amortization method uses the carrying amount of the bonds and the market rate of interest.

Accepted Answer

When a bond is issued at a premium, the effective-interest amortization method calculates the interest expense based on the carrying amount of the bonds, which is higher than the face value due to the premium, and the market rate of interest.

Question 2

On January 1, 2019, Eastern Services issued $140,000 of four-year, 9% bonds when the market rate was 8%. The bonds were issued at $144,713. Eastern uses the effective-interest method to amortize the bond premium. Semiannual interest payments are made on June 30 and December 31 of each year. Prepare the amortization table for the first four interest payments. (Round your answers to the nearest dollar number.)
 $$\begin{array} { | l | l | l | l | l | } 
\hline \text { Date } & \begin{array} { c } 
\text { Cash } \
\text { Paid }
\end{array} & \begin{array} { c } 
\text { Interest } \
\text { Expense }
\end{array} & \begin{array} { c } 
\text { Premium } \
\text { Amortized }
\end{array} & \begin{array} { c } 
\text { Carrying } \
\text { Amount }
\end{array} \
\hline 1 / 1 / 19 & & & & \
\hline 6 / 30 / 19 & & & & \
\hline 12 / 31 / 19 & & & & \
\hline 6 / 30 / 20 & & & & \
\hline 12 / 31 / 20 & & & & \
\hline
\end{array}$$

Accepted Answer

The answer of On January 1, 2019, Eastern Services issued...

Question 3

Using the effective-interest amortization method, the calculation for the amount of premium amortization is the difference between the cash paid for interest and the calculated interest expense based on the effective interest rate.

Accepted Answer

This statement is true. The effective-interest amortization method involves calculating the interest expense based on the effective interest rate and then amortizing any premium or discount over the life of the debt. The amount of premium amortization is the difference between the cash paid for interest and the calculated interest expense based on the effective interest rate.

Question 4

On January 1, 2019, Castle Services issued $169,000 of six-year, 12% bonds when the market interest rate was 11%. The bonds were issued for $172,000. Castle uses the effective-interest method to amortize the bond premium. Semiannual interest payments are made on June 30 and December 31 of each year. Which of the following is the correct journal entry to record the first interest payment? (Round your answers to the nearest dollar number.)

Accepted Answer

The correct journal entry involves recognizing interest expense using the effective-interest method, which calculates interest expense based on the carrying amount of the bond and the market interest rate at issuance. The bond was issued at a premium (issued for $172,000 when the face value was $169,000), so the interest expense is the carrying amount of the bond times the market interest rate, and the premium on bonds payable is amortized over the life of the bond. The cash paid for interest is based on the stated interest rate of the bond (12% annually, or 6% semiannually on the face value). The calculation for the interest expense would involve the carrying amount of the bond times the market rate (11% annually, or 5.5% semiannually), and the difference between the cash paid and the interest expense is the amount of premium amortized.

Question 5

Using the effective-interest amortization method, the amount of premium amortization remains the same over the life of the bond.

Accepted Answer

Under the effective-interest amortization method, the amount of premium amortization changes over the life of the bond as the carrying value of the bond changes.

Question 6

On January 1, 2019, Parker Advertising Company issued $50,000 of six-year, 3% bonds when the market interest rate was 4%. The bonds were issued for $47,356. Parker uses the effective-interest method of amortization for bond discount. Semiannual interest payments are made on June 30 and December 31 of each year. Prepare the amortization table for the first four interest payments. (Round your answers to the nearest dollar number.)
 $$\begin{array} { | l | l | l | l | l | } 
\hline \text { Date } & \text { Cash Paid } & \begin{array} { c } 
\text { Interest } \
\text { Expense }
\end{array} & \begin{array} { c } 
\text { Discount } \
\text { Amortized }
\end{array} & \begin{array} { c } 
\text { Carrying } \
\text { Amount }
\end{array} \
\hline 1 / 1 / 19 & & & & \
\hline 6 / 30 / 19 & & & & \
\hline 12 / 31 / 19 & & & & \
\hline 6 / 30 / 20 & & & & \
\hline 12 / 31 / 20 & & & & \
\hline
\end{array}$$

Accepted Answer

The answer of On January 1, 2019, Parker Advertising Company...

Question 7

On January 1, 2018, Ling Services issued $168,000 of six-year, 12% bonds when the market interest rate was 11%. The issue price of the bonds was $177,110. Ling uses the effective-interest method to amortize the bond premium. Semiannual interest payments are made on June 30 and December 31 of each year. How much interest expense will be recorded when the first interest payment is made? (Round the final answer to the nearest dollar.)

Accepted Answer

First, we need to calculate the semiannual interest payment:
$168,000 x 12% x 6/12 = $10,080

Next, we need to calculate the amortization of the bond premium for the first interest period:
Carrying Value = Issue Price - Premium Amortization
CV(end of period 1) = $177,110 - (($177,110 - $168,000) x 11%/2) = $174,369.50

Finally, we can calculate the interest expense for the first interest payment:
Interest Expense = CV(beginning of period) x Market Interest Rate / 2
IE(period 1) = $168,000 x 11% / 2 = $9,240

Therefore, the answer is B, $9,741.

Quiz 12: Long-Term Liabilities

When a bond is issued at a premium, the interest expense calculation using the effective-interest amortization method uses the carrying amount of the bonds and the market rate of interest.

Using the effective-interest amortization method, the calculation for the amount of premium amortization is the difference between the cash paid for interest and the calculated interest expense based on the effective interest rate.

Using the effective-interest amortization method, the amount of premium amortization remains the same over the life of the bond.