Question 1

What is a bond? Identify and discuss the different types of bonds.

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Question 2

Describe installment notes and the way in which installment notes are paid.

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Question 3

Identify the advantages and disadvantages of bond financing.

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Question 4

Match each of the following terms with the appropriate definitions.

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Question 5

Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

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Question 6

How are bond issue prices determined?

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Question 7

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

Under the effective interest method of amortization, the interest expense is calculated based on the market interest rate, which is 8%. The premium on the bonds payable is amortized over the life of the bonds as a reduction to interest expense. 
The semi-annual interest payment can be calculated as:
(Par value x contract rate x time) / 2 
= ($300,000 x 9% x 6/12) / 2 
= $13,500

The interest expense can be calculated as:
Beginning carrying value x market rate per period 
= ($312,177 - $1,012.92) x 8% x 6/12 
= $12,487.08

Therefore, the journal entry to record the first interest payment would be:
Debit Interest Expense $12,487.08
Debit Premium on Bonds Payable $1,012.92
Credit Cash $13,500.00

Question 8

What are the methods that a company may use to retire its bonds?

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Question 9

Describe the recording procedures for the issuance, retirement, and paying of interest for notes.

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Question 10

On January 1, Year 1, Merrill Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Merrill to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:

Accepted Answer

The correct entry involves debiting Interest Expense for the interest portion of the payment ($7,000, which is 7% of $100,000) and debiting Notes Payable for the principal portion ($7,238, which is the total payment of $14,238 minus the interest expense of $7,000), then crediting Cash for the total payment amount of $14,238.

Question 11

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607. While the amount borrowed equals $70,000, the total payments on this note amount to $86,428. Explain.

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Question 12

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

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Question 13

On January 1, $300,000 of par value bonds with a carrying amount of $310,000 is converted to 50,000 $5 par value ordinary shares. The entry to record the conversion of the bonds includes all of the following entries except:

Accepted Answer

The correct entry to record the conversion of bonds into shares includes debiting Bonds Payable for the par value of the bonds ($300,000, not $310,000), debiting Premium on Bonds Payable for the amount above par ($10,000), and crediting Share Capital and Share Premium for the appropriate amounts based on the shares issued.

Question 14

Explain the amortization of a bond discount. Identify and describe the amortization method.

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Question 15

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

Accepted Answer

The amount of cash received in the sale of the bonds is $383,793, not the par value of $400,000. This means that there is a discount on the bonds because the market rate is higher than the contract rate. The discount is calculated as the difference between the par value and the sale price, which is $16,207. Therefore, the journal entry would be to debit Cash for $383,793, debit Discount on Bonds Payable for $16,207, and credit Bonds Payable for $400,000.

Question 16

Match each of the following terms with the appropriate definitions.

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Question 17

Explain the amortization of a bond premium. Identify and describe the amortization method.

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Question 18

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond is:

Accepted Answer

The bonds were sold for more than their par value, indicating a premium on bonds payable. The correct journal entry debits Cash for the amount received ($312,177), credits Bonds Payable for the par value ($300,000), and credits Premium on Bonds Payable for the difference ($12,177).

Question 19

Explain the present value concept as it applies to long-term liabilities.

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Question 20

A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under Plan #2, additional ordinary shares would be issued at $20 per share. The corporation currently has 300,000 shares outstanding, and it expects to earn $700,000 per year before bond interest and income taxes. The net income and return on investment for both plans is shown below:

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Quiz 14: Long-Term Liabilities

What is a bond? Identify and discuss the different types of bonds.

Describe installment notes and the way in which installment notes are paid.

Identify the advantages and disadvantages of bond financing.

Match each of the following terms with the appropriate definitions.

Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

How are bond issue prices determined?

What are the methods that a company may use to retire its bonds?

Describe the recording procedures for the issuance, retirement, and paying of interest for notes.

On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607. While the amount borrowed equals $70,000, the total payments on this note amount to $86,428. Explain.

On January 1, $300,000 of par value bonds with a carrying amount of $310,000 is converted to 50,000 $5 par value ordinary shares. The entry to record the conversion of the bonds includes all of the following entries except:

Explain the amortization of a bond discount. Identify and describe the amortization method.

Match each of the following terms with the appropriate definitions.

Explain the amortization of a bond premium. Identify and describe the amortization method.

Explain the present value concept as it applies to long-term liabilities.