Ch 10 Acg
The following partial amortization schedule is available for Cox Company which sold $100,000, ten-year, 10% bonds on January 1, 2016 for $110,000 and uses annual straight-line amortization.
(i) Interest to be paid = Face value x bond's stated interest rate = $100,000 x 10% = $10,000(ii) Interest expense = Interest to be paid minus premium amortization (see below) = $10,000 - 1,000 = $9,000(iii) Premium amortization = Premium/Amortization period = $10,000/10 years = $1,000 per year(iv) Unamortized premium = $10,000 - 1,000 = $9,000
Which of the following is not a typical current liability?
Bonds payable
How is the market value of a bond issuance determined?
By adding the present value of the principal amount to the present value of the interest payments
The cash register tape indicates sales are $1,000 and sales taxes are $75. What journal entry is needed to record this information?
Debit the Cash account for $1,075, credit the Sales account for $1,000, and credit the Sales Taxes Payable for $75.
The Laramie Company operates a consulting practice. New clients are required to pay the firm in two transactions. First, clients must pay $100 before receiving consulting services. Second, clients must pay $900 once the consulting firm finishes providing services to the client. How does The Laramie Cojmpany account for the second transaction?
Debit the Cash account for $900, debit the Unearned Revenue account for $100, and credit the Service Revenue account for $1,000. First, record the initial payment received from the customer:Debit: Cash for $100Credit: Unearned Revenue for $100 Second, record the remaining payment from the customer, eliminate the liability for unearned revenue, and record the full amount as earned:Debit: Cash for $900Debit: Unearned Revenue for $100Credit: Service Revenue for $1,000
Drake Builders Company issues a $200,000, 6%, 6-month note due on October 1. It has a December 31 year-end, and it recorded its year-end adjusting entries properly. What entry will Drake Builders Company record on March 31 when the note matures?
Interest Payable............................................................... 3,000 Notes Payable................................................................... 200,000 Interest Expense............................................................... 3,000 Cash.................................................................. 206,000
On January 1, a corporation issues $200,000 of 8%, 5-year bonds for $208,400. Interest is paid annually. If the corporation uses the straight-line method of amortization, the amount of bond interest expense for the first year is
Interest expense on bonds issued at a discount equals (i) interest paid plus (ii) amortization of the discount on the bond. Interest paid = Bond face value x contractual interest rate = $200,000 x 8% = $16,000 per year Amortization of discount = Original discount/10 years = ($208,400 - 200,000)/5 years = $1,680 per year Interest expense = $14,320
On January 1, Foley Company issued $400,000 of 6%, 5-year bonds at 99. The bond requires interest to be paid annually. Assuming straight-line amortization, what is the bond interest expense recorded for the first year?
Interest expense on bonds issued at a discount equals (i) interest paid plus (ii) amortization of the discount on the bond. Interest paid = Bond face value x contractual interest rate = $400,000 x 6% = $24,000 per year Amortization of discount = Original discount/10 years = $400,000 x (100% - 99%)/5 years = $800 per year Interest expense = $24,800
What is the effect of amortizing a bond premium?
It decreases the carrying value of the bonds.
The Russell Painting Company issues a $200,000, 8%, 9-month note on September 1. It has a December 31 year-end. The entry made by the Russell Painting Company on September 1 to record the issuance of the note is
Notes Payable................................................................ 200,000 Cash............................................................... 200,000
Which of the following is true with regards to bond discounts?
Reporting a bond discount on the balance sheet decreases the bond's carrying value.
Dawson Company's cash register tape shows cash sales of $6,000 not including sales tax. The sales tax rate is 5% of sales. The journal entry to record the cash sales with sales tax includes a
Sales tax is computed by multiplying sales by the sales tax rate. The computation is as follows: $6,000 x 5% = $300.The journal-entry to record the sale, including sales taxes is as follows:Debit: Cash for $6,300Credit: Sales for $6,000Credit: Sales Taxes Payable for $300
Low Flow Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued for $204,000, what does this indicate?
The contractual interest rate exceeds the market interest rate.
Which of the following is true for bonds that have been issued at a discount?
The discount indicates that the cost of the bonds is higher than the bond interest paid.
On January 1, Pierce Corporation issues $500,000, 5-year, 8% bonds at 102 with interest payable on January 1. Which of the following is one part of the entry on December 31 to record accrued bond interest and the amortization of the bond premium using the straight-line method?
The entry to record accrued bond interest and the premium amortization includes a debit to interest expense for $38,000, a debit to premium on bond payable for $2,000 and a credit to interest payable for $40,000.
A $500,000 bond is redemption at 96 when the carrying value of the bond is $483,000. Which of the following is one effect of recording the redemption?
The excess of the cash used to redeem the bonds and the carrying value is a loss on redemption. If the carrying value exceeds the cash necessary to redeem the bonds, a gain on redemption occurs. The difference between the carrying value and the cash used to redeem the bonds is a gain or loss on redemption. Since the bonds were redemption for $480,000 ($500,000 x 96%) and the carrying value is $483,000, the company should record a gain of $3,000.
A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 7.5%. The 7.5% rate of interest is called the __________ rate.
The interest rate printed on the bonds is the contractual, face, or stated rate. The 8% rate is the contractual interest rate. Yield, effective, and market rates are different terms used to describe the interest rate that an investment can earn in the market. The 7.5% rate is this bond's effective rate.
On January 1, Slick Corp. issues $1,000,000 of 10-year, 6% bonds at face value. Which one of the following is one effect of the entry to record the issuance of the bonds?
The journal entry for the issuance of bonds issued at face value includes a debit to cash for the proceeds collected (i.e., $1,000,000) and a credit to obligation associated with the bonds (i.e., Bonds Payable for $1,000,000). Since the bonds were issued at face value, neither a premium nor a discount would be recorded. No interest is recognized or due on the bonds at the issue date.
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?
The portion of the premiums not yet earned should be recognized as a liability by Sensible. Since there are 3 months remaining on the insurance policy, the remaining liability is 3/12 of $18,000 or $4,500.
Suarez Corporation issued 10-year bonds with a face value of $600,000 and a contractual rate of interest of 7% at 98 on July 1. What is the total cost of borrowing for Suarez Corporation?
The total cost is the sum of the interest payments and the difference between the cash received from bondholders and the maturity value of the bonds.Principal at maturity = $600,000 Interest payments = $600,000 × 7% × 10 years = $420,000Total cash paid to bondholders = $1,020,000Cash received from bondholders (98% × $600,000) = $588,000Total cost of borrowing = $1,020,000 - 588,000 = $432,000
If the market interest rate for a bond is lower than the stated interest rate, the bond will sell at
a premium.
When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the
carrying value of the bonds at the beginning of the period by the effective interest rate.
The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)
constant rate of interest.
On January 1, Sewell Corporation issues $2,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The year-end adjusting entry to record accrued bond interest and the amortization of bond discount using the straight-line method will include a
credit to Discount on Bonds Payable, $16,000.
The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that
exceeds the amount of cash to be paid for interest for the period.
The carrying value of bonds will equal the market price of the bonds
on the date of issuance.
The sale or issuance of bonds for more than their face value
will cause the total cost of borrowing to be less than the bond interest paid.
The time period for classifying a liability as a current liability rather than as a long-term liability can be determined by whether it is expected to be paid
within one year or the operating cycle, whichever is longer.
