M.G.H Connect HW 9 (Chpt 10)
Santa Corporation issued a bond on January 1 of this year with a face value of $1,000. The bond's coupon rate is 8 percent and interest is paid once a year on December 31. The bond matures in three years. The annual market rate of interest was 11 percent at the time the bond was sold. The following amortization schedule pertains to the bond issued: Cash PaidInterest ExpenseAmortizationBalanceJanuary 1, Year 1 $927December 31, Year 1$80$102$22949December 31, Year 28010424973December 31, Year 380107271,000 Required: What was the bond's issue price? Did the bond sell at a discount or a premium? How much was the premium or discount? What amount(s) should be shown on the balance sheet for bonds payable at the end of Year 1 and Year 2? Show how the following amounts were computed for Year 2: (a) $80, (b) $104, (c) $24, and (d) $973.
1. Bond issue price = $927 2. Discount = $73 3. Bonds payable year 1 = $949 3. Bonds payable year 2 = $973 (a) $1,000 × 0.08 = $80 (b) $949 × 0.11 = $104 (rounded) (c) $104 − $80 = $24 (d) $949 + $24 = $973
On January 1, 2022, Pipestone Corporation issued a four-year, $41,400, 7% bond. The interest is payable annually each December 31. The issue price was $40,029 based on an 8% effective interest rate. Pipestone uses the effective-interest amortization method. Rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2022 interest expense? Multiple Choice Account Title-------Debit----Credit Interest expense---3,202 Bond discount----------------304 Cash--------------------------2,898 Account Title--------Debit------Credit Interest expense----3,656 Bond discount--------------------758 Cash------------------------------2,898 Account Title--------Debit------Credit Interest expense----2,802 Bond discount-------96 Cash------------------------------2,898 Account Title-------Debit-------Credit Interest expense---2,898 Cash------------------------------2,898
Account Title------Debit----Credit Interest expense--3,202 Bond discount----------------304 Cash--------------------------2,898
Eaton Company issued $5 million of bonds with a 10% coupon rate of interest when the market rate of interest was 11%. Which of the following statements is correct? Multiple Choice -Annual interest expense will exceed the company's actual cash payments for interest. -The book value of the bond will decrease as the bond matures. -Annual interest expense will be $500,000. -The bonds were issued at a premium.
Annual interest expense will exceed the company's actual cash payments for interest. Explanation The market rate of interest exceeded the coupon rate, so the bonds sold at a discount. The annual interest expense exceeds the cash interest payments by the amortization of the discount on bonds payable.
On January 1 of this year, Ikuta Company issued a bond with a face value of $145,000 and a coupon rate of 7 percent. The bond matures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 8 percent. Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required: Complete a bond amortization schedule for all three years of the bond's life. What amounts will be reported on the income statement and balance sheet at the end of Year 1 and Year 2?
Date-Cash-Interest-Interest Expense-Amortization-Book Value of Bond Prt 1: January 01, Year 1----------------------------------$141,263 December 31, Year 1--$10,150--$11,301---$1,151---$142,414 December 31, Year 2--$10,150--$11,393--$1,243--$143,657 December 31, Year 3--$10,150--$11,493--$1,343--$145,000 Prt 2: December 31-------Year 1---Year 2 Income statement: Interest expense--$11,301---$11,393 Balance Sheet: Bonds payable---$142,414--$143,657
Park Corporation is planning to issue bonds with a face value of $3,200,000 and a coupon rate of 10 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Park uses the effective-interest amortization method and also uses a premium account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required: 1. and 2. Prepare the journal entry to record the issuance of the bonds and the interest payment on June 30 of this year 3.What bonds payable amount will Park report on its June 30 balance sheet?
No---Date---General Journal----DBT---CRDT --1--Jan 01----Cash-------------3,519,067 ---------------Bond premium-----------319,067 ---------------Bonds payable-----------3,200,000 --2--June-30-Interest expense-149,560 ---------------Bond premium---10,440 ---------------Cash-----------------------160,000 PARK CORPORATION Balance Sheet (Partial) At June 30 Long-term liabilities Bonds payable----$3,200,000 Bond premium------308,627 -------------------------------$3,508,62
Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount? Multiple Choice -The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used. -The book value of the bond liability increases when interest expense is accrued. -The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used. -The interest expense over the life of the bond exceeds the total cash interest payments.
The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used. Explanation When bonds are issued at a discount, their book value increases over time and eventually reaches the bonds' maturity value. Interest expense increases because the book value increases. The amortization of discount on bonds payable is the difference between the increasing interest expense and the constant cash interest payment.
Which of the following statements correctly describes the accounting for bonds that were issued at a discount? Multiple Choice -The book value of the bond liability increases when interest expense is accrued. -The market rate of interest is less than the coupon interest rate. -The interest expense over the life of the bonds will be less than the total cash interest payments. -The present value of the bonds' future cash flows is greater than the bonds' maturity value.
The book value of the bond liability increases when interest expense is accrued. Explanation The accrual of interest expense results in amortization of the discount on the bonds payable account, a contra-liability account. Amortizing (reducing) a contra-liability account increases the book value of the bond liability.
Which of the following statements correctly describes the accounting for bonds that were issued at a premium? Multiple Choice -The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used. -The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is used. -The amount of amortization of the premium on bonds payable decreases as the bonds mature when the effective interest method is used. -The interest expense over the life of the bond is less than the total cash interest payments.
The interest expense over the life of the bond is less than the total cash interest payments. Explanation When bonds are issued at a premium, interest expense over the life of the bonds equals the total payments for interest minus the premium on bonds payable at the issue date.
Which of the following statements is not correct? Multiple Choice -The bond principal is used to determine the cash interest payments. -The coupon rate is used to determine the cash interest payments. -The bond principal is the amount due at the maturity date of the bond. -The market rate of interest is used to determine the cash interest payments.
The market rate of interest is used to determine the cash interest payments. Explanation The market rate of interest is used to determine the selling price of the bond and not used to determine cash interest payments.