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54) List three disadvantages of borrowing.
55) Define financial leverage and discuss how it is used to increase earnings per share.
1) On July 1, 2018, Jordie Equipment Dealer issued $600,000 of 9% bonds payable that mature in seven
years. These bonds were issued at face value and pay interest each June 30 and December 31. Each
semiannual interest payment is $27,000.
2) On July 1, 2018, Shannon Equipment Dealer issued $590,000 of 6% bonds payable that mature in seven
years. These bonds were issued at face value and pay interest each June 30 and December 31. Each
semiannual interest payment will be higher than the interest expense.
3) When bonds are issued at face value, ________.
A) the amount of cash received depends on the amount of bond discount or premium
B) for each interest payment, the amount of Interest Expense equals the amount of cash paid
C) for each interest payment, the amount of Interest Expense depends on the amortization of the bond
discount or premium
D) the journal entry to record the issuance of the bonds includes a debit to the Bonds Payable account
4) On July 1, 2018, Mason & Beech Services issued $33,000 of 10% bonds that mature in five years. They
were issued at par. The bonds pay semiannual interest payments on June 30 and December 31 of each
year. On December 31, 2018, what is the total amount paid to bondholders?
A) $1650
B) $3300
C) $825
D) $1100
5) On November 1, 2018, Arch Services issued $313,000 of eight-year bonds with a stated rate of 12% at
par. Interest payments occur each April 30 and October 31. On December 31, 2018, Arch made an
adjusting entry to accrue interest at year-end. What is the amount of Interest Expense that will be
recorded on December 31, 2018? (Do not round any intermediate calculations, and round your final
answer to the nearest dollar.)
A) $37,560
B) $6260
C) $18,780
D) $783
6) On November 1, 2018, Cleveland Services issued $305,000 of five-year bonds with a stated rate of 12%.
The bonds were issued at par, and Cleveland makes semiannual payments on April 30 and October 31.
On December 31, 2018, Cleveland made an adjusting entry to accrue interest at year-end. No further
entries were made until April 30, 2019, when the first payment was made. What amount of interest
expense was recorded for the period of January 1 to April 30, 2019? (Do not round any intermediate
calculations, and round your final answer to the nearest dollar.)
A) $12,200
B) $36,600
C) $18,300
D) $29,280
7) On January 1, 2019, Drake Services issued $20,000 of 8% bonds that mature in five years. The bonds
were issued at par. Prepare the journal entry to issue bonds. Omit explanation.
8) On January 1, 2019, Outdoor Services issued $20,000 of 8% bonds that mature in five years. They were
issued at par. The bonds pay semiannual interest payments on June 30 and December 31 of each year.
Provide the journal entry for the payment made on June 30, 2019. Omit explanation.
9) The balance in the Bonds Payable account is a credit of $67,000. The balance in the Discount on Bonds
Payable account is a debit of $2,650. The bond's carrying amount is $64,350.
10) The balance in the Bonds Payable account is a credit of $77,000. The balance in the Discount on Bonds
Payable is a debit of $3,600. The balance sheet will report the bond balance as $80,600.
11) Discount on Bonds Payable is additional Interest Expense of the company that issues the bond.
12) The discount on bonds payable becomes interest expense through a process of depreciation.
13) Which of the following is true of the Discount on Bonds Payable account? The bonds are due in ten
years.
A) It is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet.
B) It is subtracted from the Bonds Payable balance and shown with the current liabilities on the balance
sheet.
C) It is added to the Bonds Payable balance and shown with stockholders' equity on the balance sheet.
D) It is subtracted from the Bonds Payable balance and shown with long-term liabilities on the balance
sheet.
14) The balance in the Bonds Payable account is a credit of $67,000. The balance in the Discount on Bonds
Payable account is a debit of $3350. What is the bond's carrying amount?
A) $3350
B) $70,350
C) $67,000
D) $63,650
15) On December 31, 2018, Country Living Sales has 10-year Bonds Payable of $89,000 and Discount on
Bonds Payable of $2350. How will this be shown on the December 31, 2018 Balance Sheet?
A) Bonds Payable $89,000 less Discount on Bonds Payable $2350 for a carrying amount of $86,650
B) Bonds Payable $89,000 plus Discount on Bonds Payable for a carrying amount of $91,350
C) Bonds Payable $89,000
D) Bonds Payable $89,000 less one-tenth of $2350 for a carrying amount of $88,765
16) On January 1, 2019, Commercial Equipment Sales issued $28,000 in bonds for $15,700. These are six-
year bonds with a stated interest rate of 10%, and pay semiannual interest on June 30 and December 31.
Commercial Equipment Sales uses the straight-line method to amortize the Bond Discount. What amount
is debited to Interest Expense on June 30, 2019?
A) $1400
B) $2425
C) $1025
D) $25,067
17) On January 1, 2019, First Street Sales issued $38,000 in bonds for $15,700. These are six-year bonds
with a stated interest rate of 16% that pay semiannual interest. First Street Sales uses the straight-line
method to amortize the Bond Discount. Immediately after the issue of the bonds, the ledger balances
appeared as follows:
Bonds Payable
38,000
Discount on Bonds Payable
22,300
After the first interest payment on June 30, 2019, what is the balance of Discount on Bonds Payable?
(Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) debit of $20,442
B) debit of $22,300
C) debit of $24,158
D) credit of $1858
18) On January 1, 2018, Statewide Sales issued $29,000 in bonds for $20,700. These are six-year bonds with
a stated rate of 12% and pay semiannual interest. Statewide Sales uses the straight-line method to
amortize the Bond Discount. Immediately after the issue of the bonds, the ledger balances appeared as
follows:
Bonds Payable
29,000
Discount on Bonds Payable
8300
After the second interest payment on December 31, 2018, what is the balance of Discount on Bonds
Payable? (Round any intermediate calculations to two decimal places, and your final answer to the
nearest dollar.)
A) debit of $7608
B) debit of $8992
C) debit of $6917
D) credit of $8300
19) On January 1, 2018, Wonderland Sales issued $30,000 in bonds for $22,300. These are eight-year bonds
with a stated interest rate of 12% and pay semiannual interest. Wonderland Sales uses the straight-line
method to amortize the bond discount. What is the bond carrying amount after the first interest payment
on June 30, 2018? (Round your intermediate answers to the nearest dollar.)
A) $30,000
B) $18,931
C) $22,781
D) $26,631
20) On January 1, 2018, Waller Sales issued $30,000 in bonds for $23,300. These are eight-year bonds with
a stated rate of 11%, and pay semiannual interest. Waller Sales uses the straight-line method to amortize
the bond discount. After the second interest payment on December 31, 2018, what is the bond carrying
amount? (Round your intermediate answers to the nearest cent, and your final answer to the nearest
dollar.)
A) $24,138
B) $23,719
C) $30,000
D) $23,300
21) Landings Glassware Company issues $1,150,000 of 15%, 10-year bonds at 95 on February 28, 2019. The
bonds pay interest on February 28 and August 31. The journal entry to record the issuance includes a
________.
A) debit to Cash for $1,150,000
B) credit to Bonds Payable for $1,092,500
C) credit to Discount on Bonds Payable for $57,500
D) debit to Cash for $1,092,500
22) Great Lake Glassware Company issues $1,121,000 of its 12%, 10-year bonds at 99 on February 28,
2018. The bonds pay interest on February 28 and August 31. Assume that Great Lake uses the straight-
line method for amortization. The journal entry to record the first interest payment on August 31, 2018
includes a ________.
A) debit to Cash for $67,260
B) debit to Interest Expense for $67,821
C) debit to Interest Expense for $66,699
D) debit to Discount on Bonds Payable for $561
