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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 1

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Dylan Corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

A) The amount of annual interest paid to bondholders remains the same over the life of the bonds.
B) The amount of annual interest expense decreases as the bonds approach maturity.
C) The amount of annual interest paid to bondholders increases over the 15-year life of the bonds.
D) The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity.

E) B) and D)
F) A) and D)

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Question 2

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Match each description below to the appropriate term (a-g) . ​ -The contract between bond issuer and bond purchaser

A) Contract rate
B) Effective rate
C) Bond discount
D) Bond premium
E) Bond
F) Bond indenture
G) Principal

H) C) and G)
I) A) and D)

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Question 3

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The balance in Premium on Bonds Payable

When the effective interest rate method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond's carrying value at the beginning of the given period.

Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the interest method.

Bonds Payable has a balance of $900,000, and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?

If $500,000 of 10-year bonds with interest payable semiannually are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.

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

On January 1, Elias Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is

Freeman Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1 at 96. The journal entry to record the issuance will show a

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?

Basil Corporation issues for cash $1,000,000 of 8%, 10-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Match each description below to the appropriate term (a-g) . ​ -The return required by the market on the day of issuance

(a) Prepare the journal entry to issue $100,000 bonds that sold for $94,000. (b) Prepare the journal entry to issue $100,000 bonds that sold for $104,000.

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

When the corporation issuing the bonds has the right to redeem the bonds prior to maturity, the bonds are

On January 1, Yeargan Company obtained a $125,000, seven-year 5% installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352.Journalize the following entries: (a)Issued the installment notes for cash on January 1. (b)Paid the first annual payment on the note.

A company issued $1,000,000 of 30-year, 8% callable bonds on April 1, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:Year 1Apr. 1Issued the bonds for cash at their face amount.Oct. 1Paid the interest on the bonds.Year 3Oct. 1Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry for payment of interest.)

On January 1 of the current year, Barton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31, and the maturity date is December 31, five years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 is

Which of the following is not an advantage of issuing bonds instead of common stock?