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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 31

True/False

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When the effective interest 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.

A) True
B) False

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Question 32

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On January 1, 2014, $1,000,000, 5-year, 10% bonds, were issued for $980,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is

A) $8,000.
B) $4,000.
C) $2,000
D) $5,000

E) B) and C)
F) All of the above

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Question 33

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Bonds may be purchased directly from the issuing corporation or through one of the bond exchanges.

If a company borrows money from a bank as an installment note, the interest portion of each annual payment will:

Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, 2011, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1, 2011, at 97. Glover's year-end is December 31. a) Were the bonds issued at a premium, a discount, or at par? b) Was the market rate of interest higher, lower, or the same as the contract rate of interest? c) If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31, 2011? d) What is the carrying value of the bonds on December 31, 2011?

Using the following table, what is the present value of $5,000 to be received 5 years, if the market rate is 10% compounded annually?

Bonds with a face amount $1,000,000, are sold at 96. The entry to record the issuance is

The balance in Premium on Bonds Payable

On January 1, 2011, Zero Company obtained a $52,000, four-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, 2011. The December 31, 2011 carrying amount in the amortization table for this installment note will be equal to:

The journal entry a company records for the payment of interest, interest expense, and amortization of bond premium is

On the first day of the current fiscal year, $2,000,000 of 10-year, 7% bonds, with interest payable annually, were sold for $2,125,000. Present entries to record the following transactions for the current fiscal year:

The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar)

If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount.

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

The interest rate specified in the bond indenture is called the

Bonds with a face amount $1,000,000, are sold at 108. The entry to record the issuance is

Only callable bonds can be purchased by the issuing corporation before maturity.

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount

Two companies are financed as follows: Income tax is estimated at 40% of income. Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each.

A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for $475,000. Journalize the redemption of the bonds.