Question 1

If bonds with a face value of $200,000 are converted into common stock when the carrying value of the bonds is $155,000, the entry to record the conversion would include a debit to:

Accepted Answer

When bonds are converted into common stock, the carrying value of the bonds is transferred to the common stock account. In this case, the carrying value of the bonds is $155,000, which is less than the face value of $200,000. Therefore, the entry to record the conversion would include a debit to Bonds Payable for the face value of $200,000. There is no need for a debit to Discount on Bonds Payable or Cash in this scenario.

Question 2

On January 1, 2012, Peterson Corporation issued $100,000, 9%, 5-year bonds with semiannual interest payments on June 30 and December 31. The bonds were issued at $93,529 yielding an effective-interest rate of 10%. Peterson uses the effective-interest method of amortization. Prepare the journal entries that Peterson would make on January 1, June 30 and December 31, 2012. Round all amounts to the nearest dollar.

Accepted Answer

The answer of On January 1, 2012, Peterson Corporation issued...

Question 3

Fairways West, Inc. has $500,000 of bonds payable outstanding. The bonds have an unamortized discount of $30,000. Management of Fairways West, Inc. would like to pay off the bonds. The bonds have a call price of 102 and Fairways West calls the bonds. Determine the gain or loss on the retirement of the bonds and prepare the journal entry required for the calling of the bonds.

Accepted Answer

The answer of Fairways West, Inc. has $500,000 of bonds...

Question 4

Gardner Corporation has $2,400,000 of bonds outstanding with an unamortized discount of $120,000 immediately following the last interest payment. At that time, the bonds were converted into 250,000 shares of $10 par value common stock. As a result of this conversion:

Accepted Answer

The unamortized discount of $120,000 is a contra-liability account that reduces the carrying value of the bonds. When the bonds are converted, the unamortized discount is eliminated, resulting in a decrease in liabilities of $2,280,000 ($2,400,000 - $120,000). The issuance of 250,000 shares of common stock increases stockholders' equity by $2,500,000 ($10 par value x 250,000 shares).

Question 5

Conversion of bonds payable into common stock will include a:

Accepted Answer

When bonds payable are converted into common stock, the bonds payable account is debited to remove the liability, and the common stock account is credited to reflect the issuance of new shares.

Question 6

XYZ Corporation has $30,000 of bonds outstanding with a carrying value of $38,400. The bonds are converted into 15,000 shares of $1 par value common stock. The common stock had a market value of $5 per share on the date of conversion. The entry to record the conversion would include a debit to bonds payable of:

Accepted Answer

The bonds payable account should be credited with the carrying value of the bonds, which is $38,400. To balance the entry, the common stock account should be credited with the market value of the shares issued, which is $75,000 (($1 par value x 15,000 shares) x $5 market value per share). Therefore, the bonds payable account should be debited for the same amount, which is $30,000 ($38,400 - $8,400 discount amortized to date).

Question 7

Earnings per share is the amount of a company's net income divided by the par value of its stock.

Accepted Answer

Earnings per share (EPS) is the amount of a company's net income divided by the number of outstanding shares of its stock, not the par value of the stock.

Question 8

Darla's Cookie Emporium borrowed money by issuing $200,000 of bonds at 96 on January 1. The bonds pay interest on January 1 and July 1. The stated rate of interest is 5% and the bonds mature in 10 years. Any discount or premium is amortized using the straight-line method. Journalize the entries to record the:
1. issuance of the bonds
2. interest paid on the bonds every six months.
3. payment of the bond at maturity.

Accepted Answer

The answer of Darla's Cookie Emporium borrowed money by issuing...

Question 9

Bandana Corp. has convertible bonds with a par value of $200,000 and an unamortized discount of $7,000. The bonds can be converted into 2,000 shares of Bandana's common stock that has a $50 par value. Prepare the journal entry to record the conversion.

Accepted Answer

The answer of Bandana Corp. has convertible bonds with a...

Question 10

On January 1, 2012, Tata Corporation issued $4,000,000, 9%, 5-year bonds at 96. The bonds pay semiannual interest on January 1 and July 1. Tata uses the straight-line method of amortization and has a calendar year end. Prepare all the journal entries that Tata Corporation would make related to this bond issue through January 1, 2013.

Accepted Answer

The answer of On January 1, 2012, Tata Corporation issued...

Question 11

On April 1, 2012, Edward Company issues $2,500,000 of 6%, 5-year bonds, with interest payments made each October 1 and April 1. The bonds are issued at 98. Edward Company amortizes any premium or discount using the straight-line method.
1. Prepare the journal entry on April 1 to issue the bonds.
2. Prepare the journal entry on October 1 to record the payment of interest and the amortization of any discount or premium.
3. Prepare the journal entry on December 31 to record accrued interest and the amortization of any discount or premium.

Accepted Answer

The answer of On April 1, 2012, Edward Company issues...

Question 12

On January 1, 2012, Kensington Valley Company issued bonds with a face value of $800,000. The bonds have a stated interest of 7% payable on January 1 and July 1.
Required:
1. Prepare the journal entry for the issuance of the bonds if issued at 97.
2. Prepare the journal entry for the issuance of the bonds if issued at 102.

Accepted Answer

The answer of On January 1, 2012, Kensington Valley Company...

Question 13

Immediately after the last interest payment, Henderson Company converted $3,000,000 of its bonds into 300,000 shares of $10 par value common stock. The unamortized premium on the bonds at the date of the conversion was $870,000. As a result of this conversion:

Accepted Answer

When bonds are converted into stock, liabilities decrease by the amount of the face value of the bonds, which in this case is $3,000,000. Stockholders' equity increases also by $3,000,000. The unamortized premium on the bonds has no impact on the conversion, so it is not included in the accounting entry. Therefore, only the face value of the bonds is used in the entry, resulting in a decrease in liabilities for $3,000,000 and an increase in stockholders' equity for $3,000,000.

Question 14

On January 1, 2012, Henderson Company issued 8%, 20-year bonds with a face amount of $3,000,000 at 101. Interest is payable semiannually on June 30 and December 31. Prepare the journal entries to record the issuance of the bonds and the first semiannual interest payment. Henderson uses the straight-line method to amortize bond premium or discount.

Accepted Answer

The answer of On January 1, 2012, Henderson Company issued...

Question 15

On January 1, 2012, Fisher Corporation issued 9%, 10-year bonds with a face value of $900,000 at 96. Interest is payable semiannually on January 1 and July 1. The effective-interest rate when the bonds were issued was 10%. Prepare the journal entries to record the issuance of the bonds and the first semiannual interest payment. Fisher Corporation uses the effective-interest method of amortization.

Accepted Answer

The answer of On January 1, 2012, Fisher Corporation issued...

Question 16

On July 1, 2012, Bobby's Building Corp. issued $1,000,000 of 10% bonds dated July 1, 2012 for $937,229. The bonds were sold to yield 11% and pay interest semiannually on June 31 and December 31. Bobby's Building Corp. uses the effective interest method of amortization.
Required (Round all amounts to the nearest dollar):
1. Prepare the journal entry to record the issuance of the bonds on July 1, 2012.
2. Complete the amortization table below for the first two interest periods.
  3. Prepare the journal entry to record the interest payment on December 31, 2012.
4. Suppose Bobby's Building Corp. has a fiscal year end of February 28. Prepare any adjusting entry needed on February 28, 2012.

Accepted Answer

The answer of On July 1, 2012, Bobby's Building Corp....

Question 17

The times-interest-earned ratio is calculated by dividing operating income by operating expenses.

Accepted Answer

The times-interest-earned ratio is calculated by dividing operating income by interest expense.

Question 18

Wolverines, Inc. issued $1,000,000 of 7.5%, 10-year bonds dated June 1, 2012, with semiannual interest payments on June 1 and December 1. The bonds were issued on June 1, 2012, at 103 3/4. Wolverines' year end is December 31.
1. If the company uses the straight-line method of amortization, what is the amount of interest expense for the year ended December 31, 2012?
2. What is the carrying value of the bonds on December 31, 2012?

Accepted Answer

The answer of Wolverines, Inc. issued $1,000,000 of 7.5%, 10-year...

Question 19

Earnings per share is a standard measure of operating performance that applies to companies of different sizes and from different industries.

Accepted Answer

Earnings per share is a commonly used financial metric that can be applied to companies of different sizes and industries. It is calculated by dividing a company's net income by its total number of outstanding shares, providing investors and analysts with a standardized measure of profitability.

Question 20

On January 1, Potter Company issued $600,000, 6%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Journalize the entries to record:
1. the issuance of the bonds.
2. payment of interest on July 1.
3. accrual of interest on December 31.

Accepted Answer

The answer of On January 1, Potter Company issued $600,000,...

Quiz 9: Liabilities