Chapter 10 MCQ's

Marwick Corporation issues 10%, 5-year bonds with a par value of $1,160,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%. What is the bond's issue (selling) price, assuming the following Present Value factors:

$1,254,128 Interest Expense = $1,160,000 par × 0.10 stated (contract) interest rate × ½ = $58,000 (this is an annuity)($1,160,000 × 0.6756) + ($58,000 × 8.1109) = $1,254,128

On January 1, Forward Company issues bonds that have a $27,000 par value, mature in 6 years, and pay 10% interest per year. Interest payments are paid to bondholders semiannually on June 30 and December 31. How much interest does Forward Company pay to bondholders every six months if the bonds are sold at par?

$1,350 $27,000 × 0.10 × 1/2 = $1,350

A company has bonds outstanding with a par value of $180,000. The unamortized premium on these bonds is $4,860. If the company retired these bonds at a call price of $174,600, the gain or loss on this retirement is:

$10,260 gain.

A company issues 9%, 5-year bonds with a par value of $250,000 on January 1 at a price of $260,139, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

$11,250. $250,000 × 0.09 × 6/12 year = $11,250

On January 1, a company issues bonds dated January 1 with a par value of $230,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8%. Using the present value factors below, the issue (selling) price of the bonds is:

$223,968.

A company issued 5-year, 7% bonds with a par value of $800,000. The market rate when the bonds were issued was 6.5%. The company received $808,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

$27,200. Cash interest paid: $800,000 × 0.07 × ½ year = $28,000Premium amortized: ($808,000 − $800,000)/10 = $800Interest expense: $28,000 − $800 = $27,200

A company issues 6% bonds with a par value of $100,000 at par on January 1. The market rate on the date of issuance was 5%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bondholder(s) is:

$3,000. $100,000 × 0.06 × 1/2 year = $3,000

A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $5,300. The company calls these bonds at a price of $91,000 the gain or loss on retirement is:

$3,700 gain.

A company issued 5-year, 7% bonds with a par value of $105,000. The company received $102,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

$3,880.30. Cash interest paid: $105,000 × 0.07 × ½ year = $3,675.00Discount amortization: ($105,000 − $102,947)/10 periods = $205.30Interest expense = $3,675.00 + $205.30 = $3,880.30

Morgan Company issues 9%, 20-year bonds with a par value of $780,000 that pay interest semiannually. The amount paid to the bondholders for each semiannual interest payment is.

$35,100. $780,000 × 0.09 × ½ year = $35,100

Chang Industries has bonds outstanding with a par value of $208,800 and a carrying value of $216,200. If the company calls these bonds at a price of $212,000, the gain or loss on retirement is:

$4,200 gain.

Clabber Company has bonds outstanding with a par value of $119,000 and a carrying value of $108,700. If the company calls these bonds at a price of $104,500, the gain or loss on retirement is:

$4,200 gain.

On January 1, a company issued and sold a $470,000, 3%, 10-year bond payable, and received proceeds of $464,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

$464,300. Discount amortized = ($470,000 − $464,000)/20 = $300Carrying Value = $470,000 bond payable less $5,700 unamortized discount ($6,000 − $300).

A company's balance sheet reveals it has total assets of $7,729,200, total liabilities of $2,644,200, and total equity of $5,085,000. The current debt-to-equity ratio for this company is:

0.52. $2,644,200/$5,085,000 = 0.52

Charger Company's most recent balance sheet reports total assets of $27,702,000, total liabilities of $15,552,000 and total equity of $12,150,000. The debt to equity ratio for the period is (rounded to two decimals):

1.28 $15,552,000/$12,150,000 = 1.28

On January 1 of Year 1, Congo Express Airways issued $5,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $5,007,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $14,500 every six months. The life of these bonds is:

17 years. Annual discount amortization = $29,000 ($14,500 × 2)Bond discount = $5,500,000 − $5,007,000 = $493,000Discount/Amortization = Life of bonds ($493,000/$29,000 = 17 years)

Adonis Corporation issued 10-year, 9% bonds with a par value of $260,000. Interest is paid semiannually. The market rate on the issue date was 8%. Adonis received $277,671 in cash proceeds. Which of the following statements is true?

Adonis must pay $260,000 at maturity plus 20 interest payments of $11,700 each. $260,000 × 9% × ½ = $11,700 each interest payment

On January 1, a company issued and sold a $396,000, 7%, 10-year bond payable, and received proceeds of $391,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Debit Bond Interest Expense $14,110; credit Cash $13,860; credit Discount on Bonds Payable $250. Cash = $396,000 × 0.07 × 1/2 = $13,860Discount amortized = ($396,000 − $391,000)/20 = $250Interest expense = $13,860 + $250 = $14,110

A company issued 8%, 15-year bonds with a par value of $450,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

Debit Bond Interest Expense $18,000; credit Cash $18,000. $450,000 × 0.08 × ½ year = $18,000

On January 1, a company issues bonds dated January 1 with a par value of $710,000. The bonds mature in 3 years. The contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $698,000. The journal entry to record the first interest payment using straight-line amortization is:

Debit Bond Interest Expense $30,400; credit Discount on Bonds Payable $2,000; credit Cash $28,400. Cash payment of interest = $710,000 × 0.08 × ½ = $28,400Discount Amortization = $710,000 − $698,000 = $12,000/6 = $2,000Interest Expense = $28,400 + $2,000 = $30,400 picture = #24 explanation

On January 1, a company issues bonds dated January 1 with a par value of $290,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $302,371. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.)

Debit Bond Interest Expense $8,913; debit Premium on Bonds Payable $1,237; credit Cash $10,150. Cash payment = $290,000 × 0.07 × ½ = $10,150Premium Amortization = $302,371 − $290,000 = $12,371/10 = $1,237Interest Expense = $290,000 × 0.07 × ½ = $10,150 − $1,237 = $8,913

On January 1, Parson Freight Company issues 8.0%, 10-year bonds with a par value of $3,200,000. The bonds pay interest semiannually. The market rate of interest is 9.0% and the bond selling price was $2,982,557. The bond issuance should be recorded as:

Debit Cash $2,982,557; debit Discount on Bonds Payable $217,443; credit Bonds Payable $3,200,000.

On January 1, a company issues bonds dated January 1 with a par value of $210,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $218,105. The journal entry to record the issuance of the bonds is:

Debit Cash $218,105; credit Premium on Bonds Payable $8,105; credit Bonds Payable $210,000. Premium = $218,105 − $210,000 = $8,105The issued bond is always recorded at par (face) value in the Bonds Payable account, with the difference between par value and issue price recorded as a discount or premium, depending on whether the issue price is greater than par (premium) or less than par (discount).

On January 1, a company issues bonds dated January 1 with a par value of $370,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 12% and the bonds are sold for $356,386. The journal entry to record the issuance of the bond is:

Debit Cash $356,386; debit Discount on Bonds Payable $13,614; credit Bonds Payable $370,000. Discount = $370,000 − $356,386 = $13,614The issued bond is always recorded at par (face) value in the Bonds Payable account, with the difference between par value and issue price recorded as a discount or premium, depending on whether the issue price is greater than par (premium) or less than par (discount).

On January 1, a company issues bonds dated January 1 with a par value of $460,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $441,361. The journal entry to record the first interest payment using straight-line amortization is:

Debit Interest Expense $17,963.90; credit Discount on Bonds Payable $1,863.90; credit Cash $16,100.00. Cash payment of interest = $460,000 × 0.07 × ½ = $16,100Discount Amortization = ($460,000 − $441,361)/10 = $1,863.90Interest Expense = $16,100 + $1,863.90 = $17,963.90