Question 1

A company prepared the following journal entry:  Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 2

If a bond is issued at 101, the coupon rate was

Accepted Answer

If a bond is issued at 101, it means the bond has been sold for more than its face value. This indicates that the coupon rate is higher than the market rate of interest.

Question 3

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. The interest expense for the six-month period ending December 31, 2016 is closest to:

Accepted Answer

First, we need to calculate the semi-annual interest payment:
$400,000 x 12% x 6/12 = $24,000

Then, we need to calculate the semi-annual interest expense using the effective-interest method of amortization. We start by calculating the effective interest rate:
PV of bond = $413,153
Payment amount = $24,000
n = 20 (number of semi-annual periods)
Solve for i:
PV of bond = Payment amount x (1 - (1 + i)^-n)/i + FV x (1 + i)^-n
$413,153 = $24,000 x (1 - (1 + i)^-20)/i + $0 x (1 + i)^-20
i = 5.92%

Using this effective interest rate, we can calculate the interest expense for the first six months:
Carrying value at issuance = $413,153
Interest expense = Carrying value x Effective interest rate = $413,153 x 5.92% = $24,425

Therefore, the closest answer choice is B) $20,491, which represents half of the total interest expense for the year.

Question 4

When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?

Accepted Answer

The amount of amortization would not be reported as an increase in cash flow from operating activities. This is because the amortization of a bond discount or premium is a non-cash expense and is added back to net income in the operating activities section of the cash flow statement.

Question 5

A company prepared the following journal entry:  Which of the following statements correctly describes the effect of this journal entry on the financial statements?

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 6

A company prepared the following journal entry:  Which of the following statements is incorrect?

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 7

If a bond is issued at 98, the coupon rate was

Accepted Answer

If a bond is issued at 98, it means that it is sold at a discount from its face value. This indicates that the coupon rate is lower than the market rate of interest, as investors are willing to pay less than the face value in order to receive the bond's interest payments.

Question 8

Which of the following statements regarding the effective-interest method of amortization is incorrect?

Accepted Answer

The answer of Which of the following statements regarding the...

Question 9

A company prepared the following journal entry:  Which of the following statements is correct?

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 10

Which of the following statements regarding the debt-to-equity ratio is correct?

Accepted Answer

The debt-to-equity ratio is indeed a measure of investor and creditor risk, as it indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity. A higher ratio suggests more risk, as the company is more leveraged.

Question 11

On March 31, 2016, Bundy Company retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. What is the amount of the gain or loss on the retirement of the bonds?

Accepted Answer

The carrying amount of the bonds is $10,500,000 ($10,000,000 face value + $500,000 unamortized premium). The bonds were retired for $9,850,000, resulting in a gain of $650,000 ($10,500,000 - $9,850,000).

Question 12

When recording bond issuance costs for underwriter fees:

Accepted Answer

The answer of When recording bond issuance costs for underwriter...

Question 13

On July 1, 2017, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2012. Which of the following statements is correct?

Accepted Answer

When a bond is retired before its maturity date, the company may incur a gain or loss on the retirement. In this case, the bonds have a carrying value of $100,000 (original cost of $500,000 divided by 5), but Salsa, Inc. retired the bonds for $97,500, which means the company received $2,500 less than the carrying value. Therefore, a gain of $2,500 will be reported on the income statement. Stockholders' equity will be affected because the bonds are a liability, and retiring them reduces the liability, which increases the stockholders' equity.

Question 14

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Accepted Answer

The effective-interest method results in an increasing amount of interest expense recognized each period because it applies a constant interest rate to the carrying amount of the bonds, which increases as the discount is amortized.

Question 15

When a bond payable is issued at a premium, subsequent amortization of the premium does which of the following?

Accepted Answer

Amortization of the premium decreases the book value of the bonds over time as the premium is amortized to interest expense, reducing the carrying amount of the bond liability.

Question 16

A company prepared the following journal entry:  Which of the following statements correctly describes the effect of this journal entry on the financial statements?

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 17

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

Accepted Answer

Straight-line amortization of a bond premium involves calculating a constant amount of premium to be amortized each period, which is then subtracted from the cash interest paid to determine the interest expense recognized in the financial statements.

Question 18

When recording bond issuance costs for fees paid to underwriters:

Accepted Answer

Bond issuance costs paid to underwriters are recorded as a reduction in the bond premium account if the bonds were issued at a premium. This is because the underwriting fee paid to the underwriters is considered to be a component of the total premium amount paid by the investors to purchase the bonds.

Question 19

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. The book value of the bond liability on December 31, 2016 is closest to:

Accepted Answer

The book value of the bond liability on December 31, 2016 is $406,302. This is because the bond was issued at a premium, and the premium is amortized over the life of the bond. The effective-interest method of amortization allocates the premium to the interest expense over the life of the bond.

Question 20

A company prepared the following journal entry:  Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

Accepted Answer

The answer of A company prepared the following journal entry:...

Quiz 10: Reporting and Interpreting Bond Securities

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

If a bond is issued at 101, the coupon rate was

When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?

A company prepared the following journal entry: Which of the following statements is incorrect?

If a bond is issued at 98, the coupon rate was

Which of the following statements regarding the effective-interest method of amortization is incorrect?

A company prepared the following journal entry: Which of the following statements is correct?

Which of the following statements regarding the debt-to-equity ratio is correct?

On March 31, 2016, Bundy Company retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. What is the amount of the gain or loss on the retirement of the bonds?

When recording bond issuance costs for underwriter fees:

On July 1, 2017, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2012. Which of the following statements is correct?

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

When a bond payable is issued at a premium, subsequent amortization of the premium does which of the following?

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

When recording bond issuance costs for fees paid to underwriters:

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?