Question 1

On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds.

Accepted Answer

The answer of On the first day of the fiscal...

Question 2

When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off.

Accepted Answer

A) True 
 B)False

Question 3

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Prepare entries to record the following transactions for the current fiscal year. (a) Issuance of the bonds.
(b) Second semiannual interest payment.
(c) Amortization of bond premium for the first year, using the straight-line method of amortization.

Accepted Answer

The answer of On the first day of the fiscal...

Question 4

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If Lisbon uses the straight-line method for amortizing the premium, the journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to

Accepted Answer

A)  Interest Payable for $30,000 
B)  Interest Expense for $32,500 
C)  Cash for $70,000 
D)  Premium on Bonds Payable for $5,500

Question 5

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

Accepted Answer

A)  convertible bonds 
B)  unsecured bonds 
C)  debenture bonds 
D)  callable bonds

Question 6

The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be

Accepted Answer

A)  debit Bonds Payable, credit Cash 
B)  debit Cash and Discount on Bonds Payable, credit Bonds Payable 
C)  debit Cash, credit Premium on Bonds Payable and Bonds Payable 
D)  debit Cash, credit Bonds Payable

Question 7

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?

Accepted Answer

A)  The carrying amount increases from its amount at issuance date to $1,000,000 at maturity. 
B)  The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. 
C)  The amount of annual interest paid to bondholders increases over the 10-year life of the bonds. 
D)  The amount of annual interest expense decreases as the bonds approach maturity.

Question 8

The adjusting entry to record the amortization of a discount on bonds payable is

Accepted Answer

A)  debit Discount on Bonds Payable, credit Interest Expense 
B)  debit Interest Expense, credit Discount on Bonds Payable 
C)  debit Interest Expense, credit Cash 
D)  debit Bonds Payable, credit Interest Expense

Question 9

If the straight-line method of amortization of bond premium or discount is used, which of the following statements is true?

Accepted Answer

A)  Annual interest expense will increase over the life of the bonds with the amortization of bond premium. 
B)  Annual interest expense will remain the same over the life of the bonds with the amortization of bond discount. 
C)  Annual interest expense will decrease over the life of the bonds with the amortization of bond discount. 
D)  Annual interest expense will increase over the life of the bonds with the amortization of bond discount.

Question 10

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal entry to record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to ​

Accepted Answer

A)  Interest Expense for $2,500 
B)  Premium on Bonds Payable for $2,500 
C)  Interest Expense for $5,000 
D)  Premium on Bonds Payable for $5,000

Question 11

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

Accepted Answer

A)  a premium 
B)  their face value 
C)  their maturity value 
D)  a discount

Question 12

Use the following tables to calculate the present value of a $25,000, 7%, 5-year bond that pays $1,750 ($25,000 × 7%) interest annually, if the market rate of interest is 7%
Present Value of $1 at Compound Interest $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% \
\hline 1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 \
\hline 2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 \
\hline 3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 \
\hline 4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 \
\hline 5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 \
\hline 6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 \
\hline 7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 \
\hline 8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 \
\hline 9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 \
\hline 10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 \
\hline
\end{array}$$ ​
Present Value of Annuity of $1 at Compound Interest $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% \
\hline 1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 \
\hline 2 & 1.85941 & 1.83339 & 1.80802 & 1.73554 \
\hline 3 & 2.72325 & 2.67301 & 2.62432 & 2.48685 \
\hline 4 & 3.54595 & 3.46511 & 3.38721 & 3.16987 \
\hline 5 & 4.32948 & 4.21236 & 4.10020 & 3.79079 \
\hline 6 & 5.07569 & 4.91732 & 4.76654 & 4.35526 \
\hline 7 & 5.78637 & 5.58238 & 5.38929 & 4.86842 \
\hline 8 & 6.46321 & 6.20979 & 5.97130 & 5.33493 \
\hline 9 & 7.10782 & 6.80169 & 6.51523 & 5.75902 \
\hline 10 & 7.72174 & 7.36009 & 7.02358 & 6.14457 \
\hline
\end{array}$$

Accepted Answer

The answer of Use the following tables to calculate the...

Question 13

Present entries to record the selected transactions described below: (a) Issued $\$ 2,750,000$ of 10 -year, $8 \%$ bonds at 97 .
(b) Amortized bond discount for a full year, using the straight-line method.
(c) Called bonds at 98 . Assume the bonds were carried at $\$ 2,692,250$ at the time of the redemption.

Accepted Answer

The answer of Present entries to record the selected transactions...

Question 14

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

Accepted Answer

A)  $2,060,000 
B)  $2,000,000 
C)  $2,100,000 
D)  $1,940,000

Exam 11: Liabilities: Bonds Payable