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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) All of the above

Correct Answer

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Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. What is the entry to record the payment of interest on December 31 in the year the bonds were issued?


A)
Interest Expense \quad 180,000
Cash \quad 180,000
B)
 Interest Payable 90,000 Interest Expense 90,000 Cash 180,000\begin{array}{ll}\text { Interest Payable } & 90,000 \\\text { Interest Expense } & 90,000\\\text { Cash }&180,000\end{array}
C)
Interest Expense \quad 90,000
Cash \quad 90,000

D)
Cash 90,000\quad 90,000
Interest Expense \quad 90,000

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

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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) C) and D)
F) None of the above

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Bonds are sold at face value when the contract rate is equal to the market rate of interest.

A) True
B) False

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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. The bonds are called at the end of year 3 for 104. What is the entry to record the redemption? (Assume the interest payment has been recorded separately.)


A)
 Bonds Payable 1,000,000 Gain on Redemption of Bonds 40,000 Cash 1,040,000\begin{array} { l r r } \text { Bonds Payable } & 1,000,000 & \\\text { Gain on Redemption of Bonds } & 40,000 & \\\quad \text { Cash } & & 1,040,000\end{array}
B)
Bonds Payable 1,000,000\quad 1,000,000
Loss on Redemption of Bonds 40,000\quad 40,000
Cash \quad\quad\quad1,040,0001,040,000
C)
Bonds Payable \quad 1,000,000 1,000,000
Cash \quad1,000,000 1,000,000
D)  Bonds Payable 1,040,000 Cash 1,000,000 Loss on Redemption of Bonds 40,000\begin{array} { l r } \text { Bonds Payable } & 1,040,000 \\\text { Cash } & 1,000,000 \\\text { Loss on Redemption of Bonds } & 40,000\end{array}

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

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The effective interest rate method of amortizing a bond discount or premium is the preferred method.

A) True
B) False

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Using the following table, determine the present value of an annuity of $50,0000 to be received at the end of each of five years at 6 percent interest. Present value of an annuity of $1 at compound interest:  Periods4.0%4.5%5.0%5.5%6.0%6.5%7.0%10.%11.0%12.0%13.0%0.9610.9560.9520.9470.9430.9380.9340.9090.9000.8920.884154943887409758099086961.8861.8721.8591.8461.8331.8201.8081.7351.7121.6901.668209674132396302545205102.7752.7482.7232.6972.6732.6482.6242.4862.4432.4012.361309962593014832857183153.6293.5873.5453.5053.4653.4253.3873.1693.1023.0372.974490539515118021874535474.4514.3894.3294.2704.2124.1554.1003.7903.6953.6043.517582984828366820799078235.2425.1575.0754.9954.9174.8414.7664.3554.2304.1113.997614876953320154265441556.0025.8925.7865.6825.5825.4845.3894.8684.7124.5634.422705703797385229422076616.7326.5956.4636.3346.2096.0885.9715.3345.1464.9674.798874892157797530931264777.4357.2687.1076.9526.8016.6566.5155.7595.5375.3285.131933798220691023020525668.1107.9127.7217.5377.3607.1887.0236.1445.8895.6505.426109072736309835857232224\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\&0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1&54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\&1.886 & 1.872 & 1.859 & 1.846 & 1.833 & 1.820 & 1.808 & 1.735 & 1.712 & 1.690 & 1.668 \\2&09 & 67 & 41 & 32 & 39 & 63 & 02 & 54 & 52 & 05 & 10\\&2.775 & 2.748 & 2.723 & 2.697 & 2.673 & 2.648 & 2.624 & 2.486 & 2.443 & 2.401 & 2.361 \\3&09 & 96 & 25 & 93 & 01 & 48 & 32 & 85 & 71 & 83 & 15\\&3.629 & 3.587 & 3.545 & 3.505 & 3.465 & 3.425 & 3.387 & 3.169 & 3.102 & 3.037 & 2.974 \\4&90 & 53 & 95 & 15 & 11 & 80 & 21 & 87 & 45 & 35 & 47\\&4.451 & 4.389 & 4.329 & 4.270 & 4.212 & 4.155 & 4.100 & 3.790 & 3.695 & 3.604 & 3.517 \\5&82 & 98 & 48 & 28 & 36 & 68 & 20 & 79 & 90 & 78 & 23\\&5.242 & 5.157 & 5.075 & 4.995 & 4.917 & 4.841 & 4.766 & 4.355 & 4.230 & 4.111 & 3.997 \\6&14 & 87 & 69 & 53 & 32 & 01 & 54 & 26 & 54 & 41 & 55\\&6.002 & 5.892 & 5.786 & 5.682 & 5.582 & 5.484 & 5.389 & 4.868 & 4.712 & 4.563 & 4.422 \\7&05 & 70 & 37 & 97 & 38 & 52 & 29 & 42 & 20 & 76 & 61\\&6.732 & 6.595 & 6.463 & 6.334 & 6.209 & 6.088 & 5.971 & 5.334 & 5.146 & 4.967 & 4.798 \\8&74 & 89 & 21 & 57 & 79 & 75 & 30 & 93 & 12 & 64 & 77\\&7.435 & 7.268 & 7.107 & 6.952 & 6.801 & 6.656 & 6.515 & 5.759 & 5.537 & 5.328 & 5.131 \\9&33 & 79 & 82 & 20 & 69 & 10 & 23 & 02 & 05 & 25 & 66\\&8.110 & 7.912 & 7.721 & 7.537 & 7.360 & 7.188 & 7.023 & 6.144 & 5.889 & 5.650 & 5.426 \\10&90 & 72 & 73 & 63 & 09 & 83 & 58 & 57 & 23 & 22 & 24\end{array}


A) $253,785
B) $210,618
C) $173,256
D) $207,784

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

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The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond.

A) True
B) False

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The balance in Discount on Bonds Payable that is applicable to bonds due in three years would be reported on the balance sheet in the section entitled


A) investments
B) long-term liabilities
C) current assets
D) intangible assets

E) C) and D)
F) A) and D)

Correct Answer

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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 1/2, 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 D)
F) None of the above

Correct Answer

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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.

A) True
B) False

Correct Answer

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When there are material differences between the results of using the straight-line method and using the effective interest rate method of amortization, the effective interest rate method should be used.

A) True
B) False

Correct Answer

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The 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


A) debit to Cash of $2,000,000
B) credit to Discount on Bonds Payable for $80,000
C) credit to Bonds Payable for $1,920,000
D) debit to Cash for $1,920,000

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

Correct Answer

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The interest rate specified in the bond indenture is called the


A) discount rate
B) contract rate
C) market rate
D) effective rate

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

Correct Answer

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Bonds that are subject to retirement prior to maturity at the option of the issuer are called


A) debentures
B) callable bonds
C) early retirement bonds
D) options

E) B) and C)
F) B) and D)

Correct Answer

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The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.

A) True
B) False

Correct Answer

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False

The present value of $60,000 to be received in one year, at 6% compounded annually, is _____ (rounded to nearest dollar) . Use the following table, if needed.  Present value of $1 at Compound Interest  Periods 5%6%7%10%12%10.952380.943400.934580.909090.8928620.907030.890000.873440.826450.7971930.863840.839620.816300.751320.7117840.822700.792090.762900.683010.6355250.783530.747260.712990.620920.5674360.746220.704960.666340.564470.5066370.710680.665060.622750.513160.4523580.676840.627410.582010.466510.4038890.644610.591900.543930.424100.36061100.613910.558400.508350.385540.32197\begin{array}{l}\text { Present value of } \$ 1 \text { at Compound Interest }\\\begin{array} { l l l l l l } \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% & 12 \% \\1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 & 0.89286 \\2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 & 0.79719 \\3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 & 0.71178 \\4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 & 0.63552 \\5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 & 0.56743 \\6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 & 0.50663 \\7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 & 0.45235 \\8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 & 0.40388 \\9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 & 0.36061 \\10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 & 0.32197\end{array}\end{array}


A) $56,604
B) $63,396
C) $60,000
D) $3,396

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

Correct Answer

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A

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

A) True
B) False

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Match each description below to the appropriate term.

Premises
The book value of bonds payable
The entire principal of the bond is paid back on maturity date
The value of a bond stated on the bond certificate
The legal contract between issuer and bond holder
Allows the issuer to redeem bonds before maturity date
The principal of the bond issue is paid back in installments
Allows the bond holder to exchange bond for shares of stock
Responses
carrying amount
face value
callable bond
indenture
term bond
convertible bond
serial bond

Correct Answer

The book value of bonds payable
The entire principal of the bond is paid back on maturity date
The value of a bond stated on the bond certificate
The legal contract between issuer and bond holder
Allows the issuer to redeem bonds before maturity date
The principal of the bond issue is paid back in installments
Allows the bond holder to exchange bond for shares of stock

Balance sheet and income statement data indicate the following:  Bonds payable, 6% (this is year 4 of 20 years)  $1,200,000 Income before income tax for year 340,000 Income tax for year 80,000 Interest payable 9,000 Interest receivable 26,000\begin{array} { l r } \text { Bonds payable, } 6 \% \text { (this is year } 4 \text { of } 20 \text { years) } & \$ 1,200,000 \\\text { Income before income tax for year } & 340,000 \\\text { Income tax for year } & 80,000 \\\text { Interest payable } & 9,000 \\\text { Interest receivable } & 26,000\end{array} Based on the data presented above, what is the times interest earned ratio? (Round to two decimal places.)


A) 5.72
B) 6.83
C) 4.72
D) 4.83

E) B) and C)
F) None of the above

Correct Answer

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A

Showing 1 - 20 of 174

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