Chapter 14

If bonds are issued initially at a premium, and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of interest payments. c. the same as if the straight-line method were used. d. less than if the straight-line method were used.

A

1. On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2031. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Solis's adjusted unamortized bond premium should be a. $1,080,000. b. $1,006,400. c. $972,000. d. $812,000.

B

1. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

B

1. Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to a. multiply $5,000 by the table value for 10 periods and 10% from the present value of an ordinary annuity table. b. multiply $5,000 by the table value for 20 periods and 5% from the present value of an ordinary annuity table. c. multiply $5,000 by the table value for 20 periods and 4% from the present value of an ordinary annuity table. d. None of these answers is correct.

C

1. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Loss. d. Unrealized Holding Gain.

D

1. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d.the market rate multiplied by the beginning-of-period carrying amount of the bonds.

D

The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate.

D

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet? a. $14,709,481 b. $15,000,000 c. $14,718,844 d. $14,706,232

a

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a discount, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

a

1. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a a. credit of $18,725 to Loss on Bond Redemption. b. debit of $18,725 to Premium on Bonds Payable. c. credit of $6,275 to Gain on Bond Redemption. d. debit of $25,000 to Premium on Bonds Payable.

b

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a a. credit of $18,750 to Loss on Bond Redemption. b. credit of $18,750 to Discount on Bonds Payable. c. debit of $28,750 to Gain on Bond Redemption. d. debit of $10,000 to Premium on Bonds Payable.

b

On January 1, 2020, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semi-annually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2020 is a. $200,000. b. $214,836. c. $215,400. d. $240,000.

b

On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000.

b

The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2020. The bonds, which had a face value of $3,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2021, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2021 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2021? Ignore taxes. a. $60,000. b. $189,000. c. $168,000. d. $210,000.

b

1. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2020? (Hint: after calculate interest for the first six months (January 1 to June 30), you should determine the carrying value of bonds as of June 30, 2020 to compute interest expense for the period from July 1 to December 31) a. $585,000 b. $1,170,000 c. $1,176,373 d. $1,176,249

c

1. Downing Company issued $400,000 of 6% bonds on June 30, 2020. The bonds mature in 10 years. For bonds of similar risk and maturity, the market interest rate is 4%. Interest is paid semiannually on December 31 and June 30. (i.e., the first interest payment will be made on December 31, 2020). What are the proceeds from the bond issue? a. $500,000 b. $516,494 c. $465,417 d. $517,309

c

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,192. Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $723,504 b. $745,347 c. $784,259 d. $768,346

c

Bond interest paid is equal to the a. carrying value of the bonds multiplied by the effective-interest rate. b. carrying value of the bonds multiplied by the stated interest rate. c. face amount of the bonds multiplied by the stated interest rate. d. face amount of the bonds multiplied by the effective-interest rate.

c

Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2020 on January 1, 2020. The bonds pay interest semi-annually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5%. 3.0%. 5.0%. 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 a. $5,000,000 b. $5,216,494 c. $5,218,809 d. $5,217,309

c

If a company chooses the fair value option, an increase in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Loss. d. Unrealized Holding Gain.

c

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition a. A gain or loss must be recognized for the difference between the net carrying amount of the bonds and the reacquisition price. b. the premium must be amortized up to the purchase date. c. interest must be accrued from the last interest date to the purchase date. d. All of these answers are correct.

d

Premium on bonds payable is a. a contra account. b. reported as a reduction of the bond liability. c. debited to a deferred charge account and amortized over the life of the bonds. d. an adjunct account.

d

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

d