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Chapter 10
LONG-TERM LIABILITIES
True / False Questions
1. The legal contract between the issuing corporation and the bondholders is called the bond
indenture.
2. One of the similarities of bond and equity financing is that both dividends and equity
distribution payments are tax deductible.
3. A disadvantage of bond financing over equity financing is the burden on the cash flows of
the company.
4. Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature
at more than one date.
5. Debentures always have specific assets of the issuing company pledged as collateral.
6. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar
amount prior to maturity.
7. Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's
common stock.
8. A particular feature of callable bonds is that they reduce the bondholder's risk by requiring
the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay
the bonds at maturity.
9. Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.
10. A bond's par value is not necessarily the same as its market value.
11. An installment note is an obligation of the issuing company that requires a series of
periodic payments to the lender.
12. Payments on an installment note normally include the accrued interest expense plus a
portion of the amount borrowed.
13. Bonds and long-term notes are similar in that they are typically transacted with multiple
lenders.
14. The carrying value of a long-term note is computed as the present value of all remaining
future payments, discounted using the market rate at the time of issuance.
15. Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale
of a borrower’s assets identified in the mortgage if the borrower fails to make the required
payments.
16. Mortgage bonds are backed only by the good faith and credit of the issuing company.
17. A basic present value concept is that cash paid or received in the future has less value now
than the same amount of cash today.
18. A basic present value concept is that cash paid or received in the future has more value
now than the same amount of cash received today.
19. Compounded means that interest during a second period is based on the total amount
borrowed plus the interest accrued in the first period.
20. A company invests $10,000 at 7% compounded annually. At the end of the second year,
the company should have $11,400 in the fund.
21. An annuity is a series of equal payments at equal time intervals.
22. The present value of an annuity can be best or quickly computed as the sum of the
individual future values for each payment.
23. The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies
that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.
24. The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies
that an annuity of six $2,000 payments at 10% would equal $8,710.60.
25. A lease is a contractual agreement between a lessor and a lessee that grants the lessee the
right to use the asset for a period of time in return for cash payment(s) to the lessor.
26. Operating leases are long-term or noncancelable leases in which the lessor transfers
substantially all the risks and rewards of ownership to the lessee.
27. An advantage of lease financing is the lack of an immediate large cash payment for the
leased asset.
28. A disadvantage of an operating lease is the inability to deduct rental payments in
computing taxable income.
29. A pension plan is a contractual agreement between an employer and its employees to
provide benefits to employees after they retire.
30. A bond is an issuer’s written promise to pay an amount identified as the par value of the
bond along with interest.
31. An advantage of bond financing is that issuing bonds does not affect owner control.
32. Interest payments on bonds are determined by multiplying the par value of the bond by the
stated contract rate.
33. The contract rate of interest is the rate that borrowers are willing to pay and lenders are
willing to accept for a particular bond and its risk level.
34. Return on equity increases when the expected rate of return from the acquired assets is
higher than the interest rate on the debt issued to finance the acquired assets.
35. The use of debt financing ensures an increase in return on equity.
36. Bond interest paid by a corporation is an expense, whereas dividends paid are not an
expense of the corporation.
37. Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in
default.
38. A company's ability to issue unsecured debt depends on its credit standing.
39. A lessee has substantially all of the benefits and risks of ownership in an operating lease.
40. A company with a low level of liabilities in relation to stockholders' equity is likely to
have a very high debt-to-equity ratio.
41. The debt-to-equity ratio is calculated by dividing total stockholders' equity by total
liabilities.
42. The debt-to-equity ratio enables financial statement users to assess the risk of a company's
financing structure.
43. A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio
is 0.6.
44. A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had
increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the
firm's financing structure decreased during Year 2.
45. The contract rate on previously issued bonds changes as the market rate of interest
changes.
46. The market rate for bonds is generally higher when the time period to maturity is longer
due to the risk of adverse events occurring over the time period.
47. A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest
payable semiannually means that the issuer must repay $100,000 at the end of 10 years and
make 20 semiannual interest payments of $4,000 each.
48. When the contract rate on a bond issue is less than the market rate, the bonds will
generally sell at a discount.
49. When the contract rate is above the market rate, a bond sells at a discount.
50. A discount on bonds payable occurs when a company issues bonds with an issue price less
than par value.
51. The carrying (book) value of a bond at the time when it is issued is always equal to its par
value.
52. The carrying (book) value of a bond payable is the par value of the bonds plus any
discount or minus any premium.
53. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received
proceeds of $473,845. Interest is payable each June 30 and December 31. The total interest
expense on the bond over its eight-year life is $400,000.
54. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received
proceeds of $473,845. Interest is payable each June 30 and December 31. The company uses
the straight-line method to amortize the discount. The amount of discount amortized each
period is $1,634.69.
55. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received
proceeds of $473,845. Interest is payable each June 30 and December 31. The company uses
the straight-line method to amortize the discount. The amount of interest expense to be
recorded on June 30 is $25,000.
56. A premium on bonds occurs when bonds carry a contract rate greater than the market rate
at issuance.
57. A premium reduces the interest expense of a bond over its life.
58. A discount reduces the interest expense of a bond over its life.
59. The market value (issue price) of a bond is equal to the present value of all future cash
payments provided by the bond.
60. Premium on Bonds Payable is an adjunct or accretion liability account.
61. If a bond's interest period does not coincide with the issuing company's accounting period,
an adjusting entry is necessary to recognize bond interest expense accruing since the most
recent interest payment.
62. The issue price of bonds is found by computing the future value of the bond's cash
payments, discounted at the market rate of interest.
63. The effective interest method assigns a bond interest expense amount that increases over
the life of a premium bond.
64. Two common ways of retiring bonds before maturity are to (1) exercise a call option or
(2) purchase them on the open market.
65. When convertible bonds are converted to a company's stock, the carrying value of the
bonds is transferred to equity accounts and no gain or loss is recorded.
66. Payments on installment notes normally include accrued interest plus a portion of the
principal amount borrowed.
67. The equal total payments pattern for installment notes consists of changing amounts of
interest but constant amounts of principal over the life of the note.
68. Sinking fund bonds:
A. Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
B. Require equal payments of both principal and interest over the life of the bond issue.
C. Decline in value over time.
D. Are registered bonds.
E. Are bearer bonds.
69. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount
prior to maturity are known as:
A. Convertible bonds.
B. Sinking fund bonds.
C. Callable bonds.
D. Serial bonds.
E. Junk bonds.
70. A bond traded at 102½ means that:
A. The bond pays 2.5% interest.
B. The bond traded at 102.5% of its par value.
C. The market rate of interest is 2.5%.
D. The bonds were retired at $1,025 each.
E. The market rate of interest is 2 ½ % above the contract rate.
71. Secured bonds:
A. Are called debentures.
B. Have specific assets of the issuing company pledged as collateral.
C. Are backed by the issuer's bank.
D. Are subordinated to those of other unsecured liabilities.
E. Are the same as sinking fund bonds.
72. Bonds that have interest coupons attached to their certificates, which the bondholders
present to a bank or broker for collection, are called:
A. Coupon bonds.
B. Callable bonds.
C. Serial bonds.
D. Convertible bonds.
E. Registered bonds.
73. Bonds owned by investors whose names and addresses are recorded by the issuing
company, and for which interest payments are made with checks or cash transfers to the
bondholders, are called:
A. Callable bonds.
B. Serial bonds.
C. Registered bonds.
D. Coupon bonds.
E. Bearer bonds.
74. The contract between the bond issuer and the bondholders identifying the rights and
obligations of the parties, is called a(n):
A. Debenture.
B. Bond indenture.
C. Mortgage.
D. Installment note.
E. Mortgage contract.
75. Bonds that mature at more than one date with the result that the principal amount is repaid
over a number of periods are known as:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Sinking fund bonds.
E. Serial bonds.
76. A contract pledging title to assets as security for a note or bond is known as a (an):
A. Sinking fund.
B. Mortgage.
C. Equity.
D. Lease.
E. Indenture.
77. Promissory notes that require the issuer to make a series of payments consisting of both
interest and principal are:
A. Debentures.
B. Discounted notes.
C. Installment notes.
D. Indentures.
E. Investment notes.
78. The carrying value of a long-term note payable is computed as:
A. The future value of all remaining payments, using the market rate of interest.
B. The face value of the long-term note less the total of all future interest payments.
C. The present value of all remaining payments, discounted using the market rate of interest at
the time of issuance.
D. The present value of all remaining interest payments, discounted using the note's rate of
interest.
E. The face value of the long-term note plus the total of all future interest payments.
79. The carrying value of bonds at maturity always equals:
A. the amount of cash originally received in exchange for the bonds.
B. the par value of the bond.
C. the amount of discount or premium.
D. the amount of cash originally received in exchange for the bonds plus any unamortized
discount or less any premium.
E. $0.
80. A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it
entered into. The loan is at 8% interest compounded annually. The present value factor for 3
years at 8% is 0.7938. The present value of the loan (rounded) is:
A. $15,877.
B. $12,400.
C. $ 5,592.
D. $ 9,200.
E. $ 47,630.
81. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The
present value of an annuity factor at 8% for 5 years is 3.9927. Each annual payment equals
$75,000. The present value of the note is:
A. $ 56,352.84.
B. $ 93,921,41.
C. $375,000.
D. $299,452.50.
E. $187,842.81.
82. A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual
interest. The present value of an annuity factor for 6 years at 7% is 4.7665. The annual
annuity payments equal:
A. $ 10,489.88.
B. $ 8,391.91.
C. $ 40,000.00.
D. $ 52,450.00.
E. $190,660.00.
83. A company purchased equipment and signed a 7-year installment loan at 9% annual
interest. The annual payments equal $9,000. The present value of an annuity factor for 7 years
at 9% is 5.0330. The present value of the loan is:
A. $ 9,000.
B. $ 5,033.
C. $63,000.
D. $57,330.
E. $45,297.
84. A pension plan:
A. Is a contractual agreement between an employer and its employees in which the employer
provides benefits to employees after they retire.
B. Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C. Is always funded fully by employers.
D. Can be a defined benefit plan or an undefined benefit plan. .
E. Is the same as Other Postretirement Benefits.
85. All of the following statements regarding leases are true except:
A. For a capital lease the lessee records the leased item as its own asset.
B. For a capital lease the lessee depreciates the asset acquired under the lease, but for an
operating lease the lessee does not.
C. Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D. Capital leases do not transfer ownership of the asset under the lease, but operating leases
often do.
E. For an operating lease the lessee reports the lease payments as rental expense.
86. A disadvantage of bond financing is:
A. Bonds do not affect owners' control.
B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. Bonds pay periodic interest and the repayment of par value at maturity.
87. An advantage of bonds is:
A. Bonds do not affect owner control.
B. Bonds require payment of par value at maturity.
C. Bonds can decrease return on equity.
D. Bond payments can be burdensome when income and cash flow are low.
E. Bonds require payment of periodic interest.
88. Which of the following statements is true?
A. Interest on bonds is tax deductible.
B. Interest on bonds is not tax deductible.
C. Dividends to stockholders are tax deductible.
D. Bonds do not have to be repaid.
E. Bonds always increase return on equity.
89. A bondholder that owns a $1,000, 10%, 10-year bond has:
A. Ownership rights in the issuing company.
B. The right to receive $10 per year until maturity.
C. The right to receive $1,000 at maturity.
D. The right to receive $10,000 at maturity.
E. The right to receive dividends of $1,000 per year.
90. Collateral agreements for a note or bond can:
A. Reduce the risk of loss in comparison with unsecured debt.
B. Increase the risk of loss in comparison with unsecured debt.
C. Have no effect on risk.
D. Reduce the issuer's assets.
E. Increase total cost for the borrower.
91. The party that has the right to exercise a call option on callable bonds is:
A. The bondholder.
B. The bond issuer.
C. The bond indenture.
D. The bond trustee.
E. The bond underwriter.
92. Which of the following accurately describes a debenture?
A. A bond with specific assets pledged as collateral.
B. A type of bond issued in the names and addresses of the bondholders.
C. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at
specified amounts and dates to repay the bonds.
D. A type of bond which is not collateralized but backed only by the issuer's general credit
standing.
E. A type of bond that can be exchanged for a fixed number of shares of the issuing
corporation's common stock.
93. A company's total liabilities divided by its total stockholders' equity is called the:
A. Equity ratio.
B. Return on total assets ratio.
C. Pledged assets to secured liabilities ratio.
D. Debt-to-equity ratio.
E. Times secured liabilities earned ratio.
94. The debt-to-equity ratio:
A. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B. Is a means of assessing the risk of a company's financing structure.
C. Is not relevant to secured creditors.
D. Can always be calculated from information provided in a company's income statement.
E. Must be calculated from the market values of assets and liabilities.
95. Charger Company’s most recent balance sheet reports total assets of $27,000,000, total
liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the
period is (rounded to two decimals):
A. 0.56
B. 1.80
C. 0.44
D. 0.80
E. 1.25
96. Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and
total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value
bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any,
would issuing the bonds have on the company's debt-to-equity ratio?
A. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C. Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
97. Saffron Industries most recent balance sheet reports total assets of $42,000,000, total
liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is
considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds.
What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?
A. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
C. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
D. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
E. Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
98. A bond is issued at par value when:
A. The bond pays no interest.
B. The bond is not between interest payment dates.
C. Straight line amortization is used by the company.
D. The market rate of interest is the same as the contract rate of interest.
E. The bond is callable.
99. When a bond sells at a premium:
A. The contract rate is above the market rate.
B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. It means that the bond is a zero coupon bond.
E. The bond pays no interest.
100. A bond sells at a discount when the:
A. Contract rate is above the market rate.
B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond has a short-term life.
E. Bond pays interest only once a year.
101. Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay
interest semi-annually. The current market rate is 8%. The amount of interest owed to the
bondholders for each semiannual interest payment is.
A. $ 60,000.
B. $ 33,750.
C. $ 67,500.
D. $ 30,000.
E. $ 375,000.
102. A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest
semi-annually. The current market rate is 8%. The journal entry to record each semiannual
interest payment is:
A. Debit Bond Interest Expense $22,000; credit Cash $22,000.
B. Debit Bond Interest Expense $44,000; credit Cash $44,000.
C. Debit Bond Interest Payable $22,000; credit Cash $22,000.
D. Debit Bond Interest Expense $550,000; credit Cash $550,000.
E. No entry is needed, since no interest is paid until the bond is due.
103. On January 1 of 2015, Parson Freight Company issues 7%, 10-year bonds with a par
value of $2,000,000. The bonds pay interest semi-annually. The market rate of interest is 8%
and the bond selling price was $1,864,097. The bond issuance should be recorded as:
A. Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B. Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C. Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds
Payable $135,903.
D. Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable
$2,000,000.
E. Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
104. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that.
pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and
the market rate of interest for similar bonds is 8%. The bond premium or discount is being
amortized at a rate of $10,087 every six months. The company's December 31, Year 1
balance sheet should reflect total liabilities associated with the bond issue in the amount of:
A. $3,220,000.
B. $3,340,063.
C. $3,097,500.
D. $3,780,000.
E. $3,902,500.
105. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay
interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the
market rate of interest for similar bonds is 8%. The bond premium or discount is being
amortized at a rate of $10,087 every six months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in
Year 1 would be:
A. $132,500.
B. $225,000.
C. $265,174.
D. $245,000.
E. $224,826.
106. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that
pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 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 $10,087 every six months. The life of
these bonds is:
A. 15 years.
B. 30 years.
C. 26.5 years.
D. 32 years
E. 35 years.
107. Amortizing a bond discount:
A. Allocates a portion of the total discount to interest expense each interest period.
B. Increases the market value of the Bonds Payable.
C. Decreases the Bonds Payable account.
D. Decreases interest expense each period.
E. Increases cash flows from the bond.
108. The Discount on Bonds Payable account is:
A. A liability.
B. A contra liability.
C. An expense.
D. A contra expense.
E. A contra equity.
109. A discount on bonds payable:
A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.
110. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and
received proceeds of $396,000. 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:
A. Debit Bond Interest Expense $14,000; credit Cash $14,000.
B. Debit Bond Interest Expense $28,000; credit Cash $28,000.
C. Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit
Cash $14,200.
D. Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash
$14,000.
E. Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds
Payable $200.
111. A company issued 10-year, 7% bonds with a par value of $100,000. The company
received $96,526 for the bonds. Using the straight-line method, the amount of interest
expense for the first semiannual interest period is:
A. $3,326.
B. $3,500.00.
C. $3,673.70.
D. $7,000.00.
E. $7,347.40.
112. The effective interest amortization method:
A. Allocates bond interest expense over the bond’s life using a changing interest rate.
B. Allocates bond interest expense over the bond’s life using a constant interest rate.
C. Allocates a decreasing amount of interest over the life of a discounted bond.
D. Allocates bond interest expense using the current market rate for each interest period.
E. Is not allowed by the FASB.
113. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when
the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using
the effective interest method, the amount of interest expense for the first semiannual interest
period is:
A. $3,500.00.
B. $3,673.01.
C. $3,705.30.
D. $7,000.00.
E. $7,346.03.
114. The market value (price) of a bond is equal to:
A. The present value of all future cash payments provided by a bond.
B. The present value of all future interest payments provided by a bond.
C. The present value of the principal for an interest-bearing bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.
115. The Premium on Bonds Payable account is a(n):
A. Revenue account.
B. Adjunct or accretion liability account.
C. Contra revenue account.
D. Contra asset account.
E. Equity account.
116. Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is
paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in
cash proceeds. Which of the following statements is true?
A. Adidas must pay $200,000 at maturity and no interest payments.
B. Adidas must pay $206,948 at maturity and no interest payments.
C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
117. A company received cash proceeds of $206,948 on a bond issue with a par value of
$200,000. The difference between par value and issue price for this bond is recorded as a:
A. Credit to Interest Income.
B. Credit to Premium on Bonds Payable.
C. Credit to Discount on Bonds Payable.
D. Debit to Premium on Bonds Payable.
E. Debit to Discount on Bonds Payable.
118. If an issuer sells bonds at a date other than an interest payment date:
A. This means the bonds sell at a premium.
B. This means the bonds sell at a discount.
C. The issuing company will report a loss on the sale of the bonds.
D. The issuing company will report a gain on the sale of the bonds.
E. The buyers normally pay the issuer the purchase price plus any interest accrued since the
prior interest payment date.
119. A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4
months after the most recent interest date. The cash received for accrued interest on April 1 by
the bond issuer is:
A. $ 750.
B. $5,250.
C. $1,500.
D. $3,000.
E. $6,000.
120. A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds
pay interest semi-annually on January 1 and July 1. The cash paid on July 1 to the bond
holder(s) is:
A. $1,500.
B. $3,000.
C. $4,500.
D. $6,000.
E. $7,500.
121. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when
the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using
the straight-line method, the amount of recorded interest expense for the first semiannual
interest period is:
A. $3,289.50.
B. $3,500.00.
C. $3,613,70.
D. $6,633.70.
E. $7,000.00.
122. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when
the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using
the effective interest method, the amount of recorded interest expense for the first semiannual
interest period is:
A. $3,500.00.
B. $7,000.00
C. $3,318.41.
D. $6,573.90
E. $1,750.00
123. A company may retire bonds by all but which of the following means?
A. Exercising a call option.
B. The holders converting them to stock.
C. Purchasing the bonds on the open market.
D. Paying them off at maturity.
E. Paying all future interest and cancelling the debt.
124. Bonds that give the issuer an option of retiring them before they mature are:
A. Debentures.
B. Serial bonds.
C. Sinking fund bonds.
D. Registered bonds.
E. Callable bonds.
125. A company has bonds outstanding with a par value of $100,000. The unamortized
discount on these bonds is $4,500. The company retired these bonds by buying them on the
open market at 97. What is the gain or loss on this retirement?
A. $0 gain or loss.
B. $1,500 gain.
C. $1,500 loss.
D. $3,000 gain.
E. $3,000 loss.
126. Clabber Company has bonds outstanding with a par value of $100,000 and a carrying
value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on
retirement is:
A. $5,000 loss
B. $2,700 gain
C. $2,700 loss
D. $2,300 loss
E. $2,300 gain
127. A company has bonds outstanding with a par value of $100,000. The unamortized
premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the
gain or loss on this retirement is:
A. $ 1,000 gain.
B. $ 1,000 loss.
C. $ 2,700 loss.
D. $ 2,700 gain.
E. $ 3,700 gain.
128. Chang Industries has bonds outstanding with a par value of $200,000 and a carrying
value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on
retirement is:
A. $1,000 gain
B. $2,000 loss
C. $3,000 gain
D. $1,000 loss
E. $2,000 gain
129. A company retires its bonds at 105. The face value is $100,000 and the carrying value of
the bonds at the retirement date is $103,745. The issuer's journal entry to record the retirement
will include a:
A. Debit to Premium on Bonds.
B. Credit to Premium on Bonds.
C. Debit to Discount on Bonds.
D. Credit to Gain on Bond Retirement.
E. Credit to Bonds Payable.
130. A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000
premium. On the interest date 5 years later, after the bond interest was paid and after 40% of
the premium had been amortized, the corporation purchased the entire issue on the open
market at 99 and retired it. The gain or loss on this retirement is:
A. $0.
B. $10,000 gain.
C. $10,000 loss.
D. $22,000 gain.
E. $22,000 loss.
131. On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company.
The note requires equal payments of principal plus accrued interest be paid each year on July
31. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment each July
31 will be:
A. $10,000.00.
B. $11,223.34.
C. $10,800.00.
D. $10,400.00.
E. $1,223.34.
132. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8%
installment note requiring equal payments each June 30 of $37,258. What is the appropriate
journal entry to record the issuance of the note?
A. Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B. Debit Notes Payable $250,000; credit Cash $250,000.
C. Debit Cash $37,258; credit Notes Payable $37,258.
D. Debit Cash $250,000; credit Notes Payable $250,000.
E. Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.
133. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8%
installment note requiring equal payments each June 30 of $37,258. What amount of interest
expense will be included in the first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $17,258
E. $232,742
134. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8%
installment note requiring equal payments each June 30 of $37,258. What amount of
principle will be included in the first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $232,742
E. $17,258
135. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note
requiring equal annual payments each December 31 of $32,136. What journal entry would the
issuer record for the first payment?
A. Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B. Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C. Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D. Debit Notes Payable $32,136; credit Cash $32,136.
E. Debit Notes Payable $11,250; credit Cash $11,250.
136. On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7%
installment note payable. The terms of the note require Stratton to pay 10 equal payments of
$14,238 each December 31 for 10 years. The required general journal entry to record the first
payment on the note on December 31, Year 1 is:
A. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
D. Debit Notes Payable $14,238; credit Cash $14,238.
E. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
137. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the issuance of the bond is:
A. Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable
$300,000.
B. Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable
$312,177.
C. Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash
$312,177.
D. Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable
$300,000.
E. Debit Cash $312,177; credit Bonds Payable $312,177.
138. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the first interest payment using straight-line amortization is:
A. Debit Interest Payable $13,500; credit Cash $13,500.00.
B. Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70;
credit Cash $13,500.00.
C. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70;
credit Cash $13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70;
credit Cash $13,500.00.
E. Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70;
credit Cash $13,500.00.
139. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the first interest payment using the effective interest method of amortization is:
A. Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit
Cash $13,500.00.
B. Debit Interest Payable $13,500; credit Cash $13,500.00.
C. Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92;
credit Cash $13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70;
credit Cash $13,500.00.
E. Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70;
credit Cash $13,500.00.
140. Marwick Corporation issues 8%, 5 year bonds with a par value of $1,000,000 and
semiannual interest payments. On the issue date, the annual market rate for these bonds is
6%. What is the bond’s issue (selling) price, assuming the Present Value of $1 factor for 3%
and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same
rate and period is 8.5302?
A. $1,000,000
B. $789,244
C. $1,341,208
D.$ 1,085,308
E.$658,792
141. Sharmer Company issues 5%, 5 year bonds with a par value of $1,000,000 and
semiannual interest payments. On the issue date, the annual market rate for these bonds is
6%. What is the bond’s issue (selling) price, assuming the Present Value of $1 factor for 3%
and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same
rate and period is 8.5302?
A. $957,355
B. $1,000,000
C. $1,250,000
D. $786,745
E. $1,213,255
142. On January 1, a company issues bonds dated January 1 with a par value of $400,000. 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 $383,793. The journal
entry to record the issuance of the bond is:
A. Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$416,207.
B. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$400,000.
C. Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash
$416,207.
D. Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable
$400,000.
E. Debit Cash $383,793; credit Bonds Payable $383,793.
143. On January 1, a company issues bonds dated January 1 with a par value of $400,000. 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 $383,793. The journal
entry to record the first interest payment using straight-line amortization is:
A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B. Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit
Cash $14,000.00.
D. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit
Cash $14,000.00.
E. Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit
Cash $14,000.00.
144. On January 1, a company issues bonds dated January 1 with a par value of $400,000. 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 $383,793. The journal
entry to record the first interest payment using the effective interest method of amortization is:
A. Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit
Cash $14,000.00.
B. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit
Cash $14,000.00.
D. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit
Cash $14,000.00.
E. Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit
Cash $14,000.00.
145. All of the following statements regarding accounting treatments for liabilities under U.S.
GAAP and IFRS are true except:
A. Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
B. Both U.S. GAAP and IFRS require companies to distinguish between operating leases and
capital leases.
C. The criteria for identifying a lease as a capital lease are more general under IFRS.
D. Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as
employees work and earn them.
E. Use of the fair value option to account for bonds and notes is not acceptable under U.S.
GAAP or IFRS.
146. On January 1, $300,000 of par value bonds with a carrying value of $310,000 is
converted to 50,000 shares of $5 par value common stock. The entry to record the conversion
of the bonds includes all of the following entries except:
A. Debit to Bonds Payable $310,000.
B. Debit to Premium on Bonds Payable $10,000.
C. Credit to Common Stock $250,000.
D. Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E. Debit to Bonds Payable $300,000.
147. On January 1, a company issues 8%. 5 year, $300,000 bonds that pay interest
semiannually. On the issue date, the annual market rate of interest is 6%. The following
information is taken from present value tables:
Present value of an annuity for 10 periods at 3%........ 8.5302
Present value of an annuity for 10 periods at 4%........ 8.1109
Present value of 1 due in 10 periods at 3%................ 0.7441
Present value of 1 due in 10 periods at 4%................ 0.6756
What is the issue (selling) price of the bond?
A. $420,000
B. $402,362
C. $300,010
D. $308,107
E. $325,592
148. Match each of the following terms with the appropriate definitions.
(a) Discount on bonds
(b) Callable bonds
(c) Annuity
(d) Debt-to-equity ratio
(e) Sinking fund bonds
(f) Secured bonds
(g) Carrying value
(h) Premium on bonds
(i) Bond indenture
(j) Contract rate
__________ (1) Bonds that have specific assets of the issuer pledged as
collateral.
__________ (2) A series of equal payments at equal time intervals.
__________ (3) The amount by which the bond issue (selling) price exceeds the
bond par value.
__________ (4) Bonds that give the issuer an option of retiring them at a stated
dollar amount prior to maturity.
__________ (5) The interest rate specified in the bond indenture.
__________ (6) The contract between the bond issuer and the bondholder(s) that
identifies the rights and obligations of the parties.
__________ (7) Bonds that require the issuer to create a fund of assets at
specified amounts and dates to repay the bonds at maturity.
__________ (8) The net amount at which bonds are reported on the balance
sheet.
__________ (9) The ratio of total liabilities to total stockholders’ equity.
__________ (10) The amount by which the bond par value exceeds the bond
issue (selling) price
1. F; 2. C; 3. H; 4. B; 5. J; 6. I; 7. E; 8. G; 9. D; 10. A
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 1 Easy
Learning Objective: 10-A1
Learning Objective: 10-A2
Learning Objective: 10-A3
Learning Objective: 10-P1
Topic: Bond Financing
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-68
Topic: Features of Bonds and Notes
Topic: Debt-to-Equity Ratio
Topic: Issuing Bonds at Par
149. Match each of the following terms with the appropriate definitions.
(a) Term bonds
(b) Coupon bonds
(c) Market rate
(d) Bond indenture
(e) Convertible bonds
(f) Bearer bonds
(g) Installment note
(h) Unsecured bonds
(i) Serial bonds
(j) Effective interest rate method
__________ (1) An obligation requiring a series of periodic payments to the lender.
__________ (2) Bonds that are payable to whoever holds them; also called unregistered
bonds.
__________ (3) Bonds that are backed by the issuer's general credit standing.
__________ (4) Bonds that are scheduled for maturity on one specified date.
__________ (5) The contract between the bond issuer and the bondholders; it identifies the
rights and obligations of the parties.
__________ (6) An accounting method that allocates interest expense over the bonds' life
in a way that yields a constant rate of interest.
__________ (7) Bonds with interest coupons attached to their certificates; the bondholders
detach the coupons when they mature and present them to a bank or broker for
collection.
__________ (8) The interest rate that borrowers are willing to pay and lenders are willing to
accept for a particular bond at its risk level.
__________ (9) Bonds that can be exchanged by the bondholders for a fixed number shares
of the issuing corporation's common stock.
__________ (10)Bonds that mature at more than one date and are usually paid over a
number of periods.
1. G; 2. F; 3. H; 4. A; 5. D; 6. J; 7. B; 8. C; 9. E; 10. I
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-69
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 1 Easy
Learning Objective: 10-A1
Learning Objective: 10-A2
Learning Objective: 10-C1
Learning Objective: 10-P1
Learning Objective: 10-P5
Topic: Bond Financing
Topic: Features of Bonds and Notes
Topic: Installment Notes
Topic: Issuing Bonds at Par
Topic: Effective Interest Amortization of a Discount Bond
Short Answer Questions
150. What is a bond? Identify and discuss the different characteristics and features bonds may
possess.
151. Describe installment notes and the nature of the typical payment pattern.
152. On January 1, a company borrowed $70,000 cash by signing a 9% installment note that
is to be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000
and 4 years of interest at 9% equals $25,200, for a total of $95,200, yet the total payments on
the note amount to only $86,428. Explain.
153. Explain the present value concept as it applies to long term liabilities.
154. What is a lease? Explain the difference between an operating lease and a capital lease.
155. Identify the advantages and disadvantages of bond financing.
156. A corporation plans to invest $1 million in oil exploration. The corporation is
considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest
of 6% would be issued. Under Plan #2, 50,000 additional shares of common stock would be
issued at $20 per share. The corporation currently has 300,000 shares of stock outstanding,
and it expects to earn $700,000 per year before bond interest and income taxes. The net
income and return on investment for both plans is shown below:
Plan #1 Plan #2
Earnings before bond interest and taxes…….. $ 700,000 $ 700,000
Bond interest expense……………………… (60,000)
Income before taxes……………………….. $ 640,000 $ 700,000
Income taxes………………………………. (224,000) (245,000)
Net income………………………………… $ 416,000 $ 455,000
Equity……………………………………… $8,000,000 $9,000,000
Return on Equity…………………………… 5.2% 5.06%
Comment on the relative effects of each alternative, including when one form of financing is
preferred to another.
157. Describe the journal entries required to record the issuance of bonds at par and the
payment of bond interest.
158. Describe the journal entries required to record the issuance of bonds at a premium and
the payment of bond interest, including any applicable amortization.
159. Describe the journal entries required to record the issuance of bonds at a discount and the
payment of bond interest, including any applicable amortization.
160. Explain the amortization of a bond discount. Identify and describe the amortization
methods available.
161. Explain how to record the issuance and sale of a bond between interest payment dates.
162. Explain the accounting procedures when a bond's interest period does not coincide with
the issuer's accounting period.
163. How are bond issue prices determined?
164. Explain the amortization of a bond premium. Identify and describe the amortization
methods available.
165. What are methods that a company may use to retire its bonds?
166. Describe the recording procedures for the issuance, retirement, and paying of interest for
installment notes.
167. Zhang Company has a loan agreement that provides it with cash today, and the company
must pay $25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value
factor for 4 periods at 6% is 0.7921. What is the amount of cash that Zhang Company receives
today?
168. Wasp Corporation has a loan agreement that provides it with cash today, and the
company must pay $25,000 one year from today, $15,000 two years from today, and $5,000
three years from today. Wasp agrees to pay 10% interest. The following are factors from a
present value table:
Interest rate
Periods 10%
1 0.9091
2 0.8264
3 0.7513
What is the amount of cash that Wasp receives today?
169. A company enters into an agreement to make 5 annual year-end payments of $3,000
each, starting one year from now. The annual interest rate is 6%. The present value of an
annuity factor for 5 periods at 6% is 4.2124. What is the present value of these five
payments?
170. On January 1, the Rodrigues Corporation leased some equipment on a 2-year lease,
paying $15,000 per year each December 31. The lease is considered to be an operating lease.
Prepare the general journal entry to record the first lease payment on December 31.
171. On January 1, Haymark Corporation leased a truck, agreeing to pay $15,252 every
December 31 for the six-year life of the lease. The present value of the lease payments, at 6%
interest, is $75,000. The lease is considered a capital lease.
(a) Prepare the general journal entry to record the acquisition of the truck with the capital
lease.
(b) Prepare the general journal entry to record the first lease payment on December 31.
(c) Record straight-line depreciation on the truck on December 31, assuming a 6-year life and
no salvage value.
172. Sharma Company's balance sheet reflects total assets of $250,000 and total liabilities of
$150,000. Calculate the company's debt-to-equity ratio.
173. On October 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds
at par plus accrued interest. The bonds were dated July 1 of this year. What amount of bond
interest expense should the company report on its current year income statement?
174. A company issued 9%, 10-years bonds with a par value of $1,000,000 on September 1,
Year 1 when the market rate was 9%. The bonds were dated June 30, Year 1. The bond issue
price included accrued interest. Interest is paid semiannually on December 31 and June 30.
(a) Prepare the issuer's journal entry to record the issuance of the bonds on September 1.
(b) Prepare the issuer's journal entry to record the semiannual interest payment on December
31, Year 1.
175. On June 1, a company issued $200,000 of 12% bonds at their par value plus accrued
interest. The interest on these bonds is payable semiannually on January 1 and July 1. Prepare
the issuer's journal entry to record the bond issuance of June 1.
176. Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on
January 1. Interest is payable each June 30 and December 31.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1.
(b) Prepare the general journal entry to record the first interest payment on June 30.
177. A company issued 9%, 10-year bonds with a par value of $100,000. Interest is paid
semiannually. The market interest rate on the issue date was 10%, and the issuer received
$95,016 cash for the bonds. On the first semiannual interest date, what amount of cash should
be paid to the holders of these bonds for interest?
178. On January 1, a company issued 10-year, 10% bonds payable with a par value of
$500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of
issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer
uses the straight-line method for amortization. Prepare the issuer's journal entry to record the
first semiannual interest payment on July 1.
179. A company issued 10-year, 9% bonds, with a par value of $500,000 when the market
rate was 9.5%. The issuer received $484,087 in cash proceeds. Prepare the issuer's journal
entry to record the bond issuance.
180. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate
was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method,
prepare the issuer's journal entry to record the first semiannual interest payment and the
amortization of any bond discount or premium. (Round amounts to the nearest whole dollar)
181. A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual
interest payments. On the issue date, the annual market rate of interest is 8%. Compute the
issue (selling) price of the bonds.. The following information is taken from present value
tables:
Present value of an annuity for 10 periods at 3%. 8.5302
Present value of an annuity for 10 periods at 4%. 8.1109
Present value of 1 due in 10 periods at 3%................... 0.7441
Present value of 1 due in 10 periods at 4%............ 0.6756
182. A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid
semiannually. The annual market interest rate on the issue date was 10%, and the issuer
received $95,016 cash for the bonds. The issuer uses the effective interest method for
amortization. On the first semiannual interest date, what amount of discount should the issuer
amortize?
183. A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, at a
selling price of $885,295 when the annual market interest rate was 12%. The company uses
the effective interest amortization method. Interest is paid semiannually each June 30 and
December 31.
(1) Prepare an amortization table for the first two payment periods using the format shown
below:
Semiannual Cash Bond
Interest Interest Interest Discount Unamortized Carrying
Period Paid Expense Amortization Discount Value
(2) Prepare the journal entry to record the first semiannual interest payment.
184. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate
was 9.5%. The company received $484,087 in cash proceeds. Using the effective interest
method, prepare the issuer's journal entry to record the first semiannual interest payment and
the amortization of any bond discount or premium.
185. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate
was 9.5%. The company received $484,087 in cash proceeds. Prepare the issuer's journal
entry to record the issuance of the bond.
186. On January 1, a company issued 10%, 10-year bonds payable with a par value of
$720,000. The bonds pay interest on July 1 and January 1. The bonds were issued for
$817,860 cash, which provided the holders an annual yield of 8%. Prepare the journal entry to
record the first semiannual interest payment, assuming it uses the straight-line method of
amortization.
187. On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest
semiannually each June 30 and December 31. On the issue date, the annual market rate of
interest is 6%. Compute the price of the bonds on their issue date. The following information
is taken from present value tables:
Present value of an annuity for 10 periods at 3%........ 8.5302
Present value of an annuity for 10 periods at 4%........ 8.1109
Present value of 1 due in 10 periods at 3%................ 0.7441
Present value of 1 due in 10 periods at 4%................ 0.6756
188. On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest
semiannually each June 30 and December 31. On the issue date, the annual market rate of
interest for the bonds is 10%. Compute the price of the bonds on their issue date. The
following information is taken from present value tables:
Present value of an annuity for 10 periods at 4% 8.1109
Present value of an annuity for 10 periods at 5% 7.7217
Present value of 1 for 10 periods at 4% 0.6756
Present value of 1 for 10 periods at 5% 0.6139
Present value of principle $300,000 * 0.6139 = $184,170
Present value of interest $300,000 * 0.04 * 7.7217 = 92,660
Selling price of the bond $276,830
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: w Medium
Learning Objective: 10-C2
Topic: Present Value Concepts
189. On March 1, a company issues 6%, 10 year $300,000 par value bonds that pay
semiannual interest each June 30 and December 31. The bonds sell at par value plus interest
accrued since January 1. Prepare the general journal entry to record the issuance of the bonds
on March 1.
190. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest
semiannually each February 1 and August 1. The bonds sold at $632,000. The company uses
the straight-line method of amortizing bond premiums. The company's year-end is December
31. Prepare the general journal entry to record the interest accrued at December 31.
191. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest
semiannually each February 1 and August 1. The bonds sold at $592,000. The company uses
the straight-line method of amortizing bond discounts. The company's year-end is December
31. Prepare the general journal entry to record the interest accrued at December 31.
192. Strider Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January
1, Year 1. Interest is to be paid semiannually on each June 30 and December 31. The bonds
are issued at $5,368,035 cash when the market rate for this bond is 12%.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1, year 1.
(b) Show how the bonds would be reported on Strider’s balance sheet at January 1, Year 1.
(c) Assume that Strider uses the effective interest method of amortization of any discount or
premium on bonds. Prepare the general journal entry to record the first semiannual interest
payment on June 30, Year 1.
(d) Assume instead that Strider uses the straight-line method of amortization of any discount
or premium on bonds. Prepare the general journal entry to record the first semiannual interest
payment on June 30, Year 1.
193. On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The
bonds pay interest each July 1 and January 1. The bonds were sold for $817,860 cash, based
on an annual market rate of 8%. Prepare the issuer's journal entry to record the first
semiannual interest payment assuming the effective interest method is used.
194. A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1.
Interest is to be paid semiannually each June 30 and December 31. The bonds were sold at
$2,162,290 based on an annual market rate of 8%. The company uses the effective interest
method of amortization.
(1) Prepare an amortization table for the first two semiannual payment periods using the
format shown below.
Semiannual Cash Bond
Interest Interest Interest Premium Unamortized Carrying
Period Paid Expense Amortization Premium Value
(2) Prepare the journal entry to record the first semiannual interest payment.
195. A company holds $150,000 par value of bonds with a carrying value of $147,950. The
company calls the bonds at $151,000. Prepare the journal entry to record the retirement of the
bonds.
196. A company has 10%, 20-year bonds outstanding with a par value of $500,000. The
company calls the bonds at 96 when the unamortized discount is $24,500. Calculate the gain
or loss on the retirement of these bonds.
197. Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and
a carrying value of $475,000. The company calls the bonds at $482,000. Calculate the gain or
loss on the retirement of these bonds.
198. A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium.
On the current year's interest date, after the bond interest was paid and after 40% of the total
premium had been amortized, the company purchased the entire bond issue on the open
market at 98 and retired it. Prepare the journal entry to record the retirement of these bonds.
199. On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment
note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due
on December 31, Year 1.
(a) Prepare the company's journal entry to record the note's issuance.
(b) Prepare the journal entries to record the first and second installment payments.
200. On January 1, a company borrowed $50,000 cash by signing a 7% installment note that
is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on
December 31. Prepare the journal entries to record the first and second installment payments.
201. On January 1, Year 1 Cleaver Company borrowed $85,000 cash by signing a 7%
installment note that is to be repaid with 4 annual year-end payments of $25,094, the first of
which is due on December 31, Year 1.
(a) Prepare the company's journal entry to record the note's issuance.
(b) Prepare the journal entries to record the first installment payment.
202. A company purchased two new delivery vans for a total of $250,000 on January 1, Year
1. The company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining
balance. The note is to be paid in three annual end-of-year payments of $81,487 each, with the
first payment on December 31, Year 1. Each payment includes interest on the unpaid balance
plus principal.
(1) Prepare a note amortization table using the format below:
Period Debit Debit
Ending Beginning Interest Notes Credit Ending
Date Balance Expense Payable Cash Balance
12/31/Yr 1
12/31/Yr 2
12/31/Yr 3
(2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the
second annual installment payment on December 31, Year 2.
203. _______________ bonds have specific assets of the issuing company pledged as
collateral.
204. ______________ bonds are bonds that are scheduled for maturity on one specified date.
205. _______________ bonds are bonds that mature at more than one date, often in a series,
and thus are usually repaid over a number of periods.
206. ____________________ bonds reduce a bondholder's risk by requiring the issuer to
create a fund of assets set aside as specified amounts and dates to repay the bonds.
207. Bonds payable to whoever holds them are called _________________ bonds.
208. _____________________ bonds can be exchanged for a fixed number of shares of the
issuing corporation's common stock.
209. ___________________ bonds have an option exercisable by the issuer to retire them at a
stated dollar amount prior to maturity.
210. The legal document identifying the rights and obligations of both the bondholders and
the issuer is called the ____________________________________.
211. An ________________________________ is an obligation requiring a series of
payments to the lender.
212. When applying equal total payments to a note, with each payment the amount applied to
the note principal ____________ while the interest expense for the note _____________.
213. The ____________ concept is the idea that cash paid (or received) in the future has less
value now than the same amount of cash paid (or received) today.
214. An _______________ is a series of equal payments at equal time intervals.
215. A _______________________ is a contractual agreement between an employer and its
employees for the employer to provide benefits (payments) to employees after they retire.
216. _________________________ leases are short-term or cancelable leases in which the
lessor retains the risks and rewards of ownership.
217. ____________________ leases are long-term or noncancelable leases by which the
lessor transfers substantially all risks and rewards of ownership to the lessee.
218. Return on equity increases when the expected rate of return from the acquired assets is
__________________than the rate of interest on the bonds used to finance the asset
acquisition.
219. Bonds issued in the names and addresses of their holders are ________________ bonds.
230. The ______________ ratio is used to assess the risk of a company's financing structure.
231. The rate of interest that borrowers are willing to pay and lenders are willing to accept for
a particular bond and its risk level is the ____________________ of interest.
232. The _________________________ method of amortizing a bond discount allocates an
equal portion of the total bond interest expense to each interest period.
