Question 1

Given a contract interest rate of 7.75%,and a market interest rate of 8.5%,the bonds will be issued at:

Accepted Answer

The contract interest rate is lower than the market interest rate, which means the bonds are less attractive to investors. Therefore, the bonds will be issued at a discount to compensate for the lower interest rate.

Question 2

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

Accepted Answer

Discount on Bonds Payable is a contra account to Bonds Payable because it has a normal credit balance and is subtracted from Bonds Payable on the balance sheet.

Question 3

A $1,000 bond quoted at 97.75 is selling for:

Accepted Answer

To determine the selling price, we need to calculate 97.75% of $1,000, which gives us $977.50. Therefore, the correct answer is C.

Question 4

A bond originally issued at a discount cannot be subsequently resold at a premium.

Accepted Answer

A bond originally issued at a discount can be resold at a premium depending on changes in market interest rates and other factors.

Question 5

When a bond is issued at a discount,the discount has the effect of raising the interest expense on the bonds to the market rate of interest.

Accepted Answer

When a bond is issued at a discount, the bond's interest rate is lower than the market rate of interest. This means that the interest expense recorded in the company's financial statements will be lower than it would be if the bond had been issued at par (face value). To adjust for this, the discount is amortized (decreased) over the life of the bond, which increases the interest expense each period and brings it up to the market rate of interest. Therefore, issuing a bond at a discount raises the interest expense on the bonds to the market rate of interest.

Question 6

Given a contract interest rate of 8.5%,and a market interest rate of 7.75%,the bonds will be issued at:

Accepted Answer

When the contract interest rate (the rate stated on the bond) is higher than the market interest rate, bonds are issued at a premium because they offer a more attractive return compared to the current market conditions.

Question 7

The entry to record the semiannual interest payment on bonds that were issued at par value includes a:

Accepted Answer

To record a semiannual interest payment on bonds that were issued at par value, we need to debit the Interest Expense account and credit the Bond Interest Payable account. This is because the bondholders are entitled to receive interest payments at a specified rate, even if the bonds were issued at par value. Therefore, there is no need to adjust the bonds payable or the discount on bonds payable accounts at this time.

Question 8

Lunar Corporation issues 50,$1,000 maturity value,10% bonds at 95.The journal entry includes a:

Accepted Answer

The company receives cash of $47,500 ($1,000 per bond x 50 bonds x 95%), so it should be debited to Cash account. The bonds are issued at a discount of 5% (100% - 95%), so their face value of $50,000 is less than the proceeds received. Therefore, the Bonds Payable account should be credited for $47,500 ($50,000 x 95%). There is no need to record a separate account for Premium on Bonds Payable, as there is no premium in this case.

Question 9

The interest rate that investors demand for loaning money is the:

Accepted Answer

The effective interest rate is the actual rate that investors demand for loaning money, taking into account the effects of compounding.

Question 10

Interest expense on the income statement will exceed the annual interest payment to bondholders if bonds are issued at a premium.

Accepted Answer

Interest expense on the income statement reflects the effective interest rate, which takes into account any premiums or discounts paid for the bonds. Therefore, if bonds are issued at a premium, the interest expense on the income statement will be lower than the actual annual interest payment to bondholders.

Question 11

The entry to record the issuance of bonds at par value includes a:

Accepted Answer

When bonds are issued at par value, the entry includes a debit to Cash for the par value of the bonds, reflecting the cash received from the bond issuance.

Question 12

On January 2,Solar Corporation issues $500,000 face value,6% bonds for $495,000.It may be derived that the effective rate of interest was:

Accepted Answer

The effective rate of interest was more than 6% because the bonds were issued at a discount (sold for less than their face value), indicating that the market demanded a higher yield than the stated interest rate of 6%.

Question 13

Laser Corporation issues 50,$1,000 maturity value,10% bonds at 102.5.The journal entry includes a:

Accepted Answer

The bonds are issued at 102.5, which means they are issued at a premium (2.5% above the face value). The premium is calculated as 2.5% of $50,000, which is $1,250. Therefore, the journal entry includes a credit to Premium on Bonds Payable for $1,250.

Question 14

The premium on bonds payable:

Accepted Answer

A premium on bonds payable occurs when bonds are issued for more than their face value. This premium effectively reduces the total interest expense over the life of the bonds because the issuer receives more cash upfront but still repays only the face value at maturity. The premium is amortized over the life of the bond, which decreases the annual interest expense recorded.

Question 15

A $1,000 bond quoted at 102.5 is selling for:

Accepted Answer

When a bond is quoted at 102.5, it means the bond is selling at 102.5% of its face value.

Face value of bond = $1,000 
102.5% of face value = 102.5/100 x $1,000 = $1,025

Therefore, the bond is selling for $1,025.00 (Choice A).

Question 16

Jones Corporation issues $400,000,10%,five-year bonds at face value.The total interest expense over the life of the bonds is:

Accepted Answer

The total interest expense over the life of the bonds can be calculated as:

Total interest expense = face value of bonds x annual interest rate x time

= $400,000 x 10% x 5 years

= $200,000

Therefore, the correct answer is choice C.

Question 17

Discount on bonds payable is a(n):

Accepted Answer

Discount on bonds payable is a contra account to Bonds Payable, representing the difference between the face value of the bond and the amount actually received from the sale. It reduces the carrying value of the bond liability on the balance sheet.

Question 18

The book value of bonds is equal to bonds payable:

Accepted Answer

The book value of bonds is calculated as the bonds payable added to the unamortized premium. This is because the unamortized premium is a credit balance that increases the value of the bonds payable, thus resulting in a higher book value.

Question 19

The premium on bonds payable represents an increase in interest expense over the life of the bonds.

Accepted Answer

The premium on bonds payable actually decreases interest expense over the life of the bonds, as it is amortized and reduces the effective interest rate.

Question 20

Gamble Corporation issues $100,000 of 9%,10-year bonds dated March 1 at par on May 31.The entry to record the issue includes a:

Accepted Answer

The answer of Gamble Corporation issues $100,000 of 9%,10-year bonds...

Quiz 4: Long-Term Liabilities