Question 1

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. Under the effective-interest amortization method, the premium (or discount) amortization is calculated as the difference between the cash paid for interest and the calculated interest expense based on the effective interest rate. This method is used to allocate the cost (or proceeds) of a bond over its term in a way that reflects the time-value of money and the actual cash flows.

Question 2

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 is used to calculate interest expense. This method uses the carrying amount of the bonds (which includes any unamortized premium) and the market rate of interest to determine the interest expense for each period. Therefore, the statement is true.

Question 3

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 varies over the life of the bond as it is based on the carrying value of the bond at each period's end. As the carrying value of the bond decreases over time, the amount of premium amortization decreases as well. Therefore, the statement is false.

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.)
A) $$\begin{array} { | c | l | l | } 
\hline \text { Interest Expense } & 2295 & \
\hline \text { Cash } & & 2295 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | l | } 
\hline \text { Interest Expense } & 2295 & \
\hline \text { Discount on Bonds Payable } & 345 & \
\hline \text { Cash } & & 10,140 \
\hline
\end{array}$$
C) $$\begin{array} { | l | l | l | } 
\hline \text { Interest Expense } & 9460 & \
\hline \text { Premium on Bonds Payable } & 680 & \
\hline \text { Cash } & & 10,140 \
\hline
\end{array}$$
D) $$\begin{array} { | l | l | l | } 
\hline \text { Cash } & 10,140 & \
\hline \text { Premium on Bonds Payable } & & 345 \
\hline \text { Interest Expense } & & 9295 \
\hline
\end{array}$$

Accepted Answer

The correct journal entry is the one that reflects the interest expense based on the effective interest rate, the cash payment based on the stated rate, and the amortization of the bond premium. The interest expense is calculated using the market rate at issuance (11% annually or 5.5% semiannually on the carrying amount of the bond), the cash interest payment is based on the stated rate (12% annually or 6% semiannually on the face value), and the difference is the amortization of the premium. Option C correctly shows the interest expense ($9,460), the amortization of the premium ($680), and the cash payment ($10,140), which aligns with these principles.

Question 5

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.)
 $$\begin{array} { | l | l | l | l | l | } 
\hline \text { Date } & \text { Cash Paid } & \begin{array} { l } 
\text { Interest } \
\text { Expense }
\end{array} & \begin{array} { l } 
\text { Discount } \
\text { Amortized }
\end{array} & \begin{array} { l } 
\text { Carrying } \
\text { Amount }
\end{array} \
\hline 1 / 1 / 19 & & & & \
\hline 6 / 30 / 19 & & & & \
\hline 12 / 31 / 19 & & & & \
\hline 6 / 30 / 20 & & & & \
\hline 12 / 31 / 20 & & & & \
\hline
\end{array}$$

Accepted Answer

The answer of On January 1,2019,Parker Advertising Company issued $50,000...

Question 6

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 $140,000 of...

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.)
A) $10,627
B) $9741
C) $10,080
D) $9240

Accepted Answer

Interest Expense = $177,110 × 11% × 6/12 = $9741

Quiz 14: Long-Term Liabilities

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.

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 amount of premium amortization remains the same over the life of the bond.