Accounting Quiz: Ch 10/G

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Interest expense minus interest payable (second column minus first column)

How do you calculate the amortization?

The previous plus or minus (depending on premium or discount) the amortization

How do you calculate the carrying value?

The previous column number minus the amortization amount

How do you calculate the unamortized amount?

Face Value multiplied by contractual rate

How do you find the interest payable amount

Carrying value multiplied by market rate

How to calculate interest expense

Higher

If bonds are issued at a premium, the stated interest rate is (higher or lower) than the market rate of interest

Interest JE

Interest Expense Discount on Bonds Payable Interest Payable

Discount JE

Cash Discount on Bonds Payable Bonds Payable

Premium JE

Cash Premium on Bonds Payable Bonds Payable

Types of bonds

The market value (present value) of a bond is a function of all of the following except: -Dollar amounts to be received -Maturity date -Market interest rate -Types of bonds

Market rate o f interest decreases, then bond prices will go up

The statement "Bond prices vary inversely with changes in the market rate of interest " means that if the -Market rate o f interest increases, the contractual interest rate will decrease -Contractual interest rate increases, then bond prices will go down -Market rate of interest decreases, then bond prices will go up -Contractual interest rate increase" means that if the -Market rate o f interest increases, the contractual interest rate will decrease -Contractual interest rate increases, then bond prices will go down -Market rate of interest decreases, then bond prices will go up -Contractual interest rate increases, the market rate of interest will decreasees, the market rate of interest will decrease

Unamortized

What is the fourth column in the table

Carrying value

What is the last column in the table?

Interest Expense

What is the second column (out of 5) for the table?

Amortization

What is the third column in the table

Straight line

What method for calculating for interest is not allowed by GAAP? Straight-line or Effective interest method of Amortizing

Interest Payable

What will be a constant number throughout the table

B

Which of the following statements regarding the effective interest method of accounting for bonds is false? a.GAAP requires use of the effective interest method. b.The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective interest method is used. c.Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method. d.The effective interest method applies a constant percentage to the bond carrying value to compute interest expense.


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