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Exam 10: Reporting and Interpreting Bonds

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Question 51

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The payment of bond interest on the interest payment date, for bonds issued at par value, reduces both the bond liability and assets, assuming that interest expense is recorded at the time of the cash payment.

A) True
B) False

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Question 52

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A bond issued at a discount will pay total cash payments for interest that are more than the total interest expense recognized over the life of the bond.

A) True
B) False

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Question 53

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On January 1, 2015, Schultz Corporation issued $100,000 of its ten-year, 6% bonds payable at $98,000. The bonds were dated January 1, 2015, and interest is paid each December 31. Required: A. Prepare the journal entry for the sale of the bonds. B. Prepare the journal entry to record the first interest payment. Assume straight-line amortization and no adjusting journal entries were made during the year.

If a bond is issued at 101, the stated rate of interest was

On January 1, 2014, Broker Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interest each December 31. If the market rate of interest was 14%, what was the issue price of the bonds? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Calculate the issuance price if the market rate of interest was 10%. $\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}$

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Calculate the issuance price if the market rate of interest is 12%. $\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}$

Which of the following statements does not correctly describe the accounting for bonds that were issued at their face (maturity) value?

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements? Cash Premium on bonds payable Bonds payable

Grand Company authorized $150,000 of 5-year bonds dated January 1, 2015. The stated rate of interest was 14%, payable annually each December 31. The bonds were issued on January 1, 2013, when the market interest rate was 12%. Assume effective-interest amortization. (The present value factor for $1 at 6% for 10 periods is 0.5584, for $1 at 7% for 10 periods is 0.5083, for $1 at 14% for 5 periods is 0.5194, and for $1 at 12% for 5 periods is 0.5674. The present value of an annuity of $1 for 10 periods at 6% is 7.3601, for 10 periods at 7% is 7.0236, for 5 periods at 6% is 4.2124, for 5 periods at 7% is 4.1002, and for 5 periods at 12% is 3.6048). Round to the nearest dollar. Required: A. What would be the amount of premium amortization for December 31, 2015? No adjusting journal entries have been made during the year. B. What would be the amount of the interest payment on December 31, 2015?

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

TreeTop Corporation had issued $5,000,000 of 10-year bonds with a 12% stated rate and interest to be paid annually. They were issued on January 1, 2008 at 96 and have been amortized using the straight-line method through December 31, 2014. On June 30, 2015, TreeTop retired all the bonds by exercising the call feature. The call price was 101. Required: Prepare the journal entry for the call of the bonds on June 30, 2015. (Remember to amortize the discount and update the book value of the bonds for the half-year prior to retirement).

On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to be reported on the December 31, 2015 balance sheet?

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the semi-annual interest expense when the straight-line method is utilized?

A corporation retired $200,000 of bonds, which have an unamortized premium of $8,000, by purchasing them on the open market for $210,000. How much was the gain or loss on the retirement of the bonds?

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Cash Discount on bonds payable Bonds payable

Rock Company issued a $1,000,000 bond on January 1, 2014. The bond was dated January 1, 2014, had an 8% stated rate, pays interest annually on December 31, and sold for $924,184 at a time when the market rate of interest was 10%. Rock uses the effective-interest method to account for its bonds. Required: Prepare the necessary journal entry for each of the following dates (assuming that no adjusting journal entries have been made during the year): January 1, 2014 December 31, 2014 December 31, 2015