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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 71

Multiple Choice

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When the effective interest method is used, the amortization of the bond premium

A) increases interest expense each period
B) decreases interest expense each period
C) increases interest expense in some periods and decreases interest expense in other periods
D) has no effect on the interest expense in any period

E) A) and C)
F) A) and B)

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Question 72

Multiple Choice

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Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption?

A) $500 loss
B) $15,500 loss
C) $15,500 gain
D) $500 gain

E) A) and B)
F) B) and C)

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Question 73

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On January 1, Year 1, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30 and December 31 to yield 6%. Use the following format and round figures to nearest dollar. The bonds were issued for $1,851,234. 1. Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method. Date Cash Paid Interest Expense Amortization Bond Carry Value 2. Show how this bond would be reported on the balance sheet at December 31, Year 2.

The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the same is to

On January 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the current year. The December 31, Year 1 carrying amount in the amortization table for this installment note will be equal to:

Calculate the total amount of interest expense over the life of the bonds for the following independent situations. a) $100,000 face value, 10%, 10-year bonds issued at 101. b) $240,000 face value, 5%, 5-year bonds issued at 100. c) $300,000 face value, 9%, 6-year bonds issued at 98.

On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000. Present entries to record the following transactions. 1) Issuance of bonds. 2) Payment of first semiannual interest on December 31 record separate entry from premium amortization). 3) Amortization by straight-line method of bond premium on December 31.

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at

A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for $320,000. Journalize the redemption of the bonds.

If bonds payable are not callable, the issuing corporation

A corporation often issues callable bonds to protect itself against significant declines in future interest rates.

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

On the first day of the fiscal year, a company issues a $800,000, 6%, 5-year bond that pays semiannual interest of $24,000 $800,000 × 6% × 1/2), receiving cash of $690,960. Journalize the entry to record the first interest payment and the amortization of the related bond discount using the straight-line method.

A $300,000 bond was redeemed at 98 when the carrying value of the bond was $292,000. The entry to record the redemption would include a

On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the issuance of the installment note for cash on January 1 would include a

Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every 6 months.

Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture.

If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is

When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.

Bonds with a face amount $1,000,000 are sold at 106. The journal entry to record the issuance is