16) When computing the present value of a bond, which interest rate is used? Why?
17) When computing a bond’s cash flow for interest, which interest rate is used? Why?
1) The effective-interest amortization method allocates an amount of bond discount or premium, based
on the stated rate of interest, to each interest period over the life of the bond.
2) The effective-interest amortization method allocates an amount of bond discount or premium, based
on the market interest rate at issuance, to each interest period over the life of the bond.
3) Generally accepted accounting principles require that interest expense be measured using the straight–
line amortization method.
4) Generally accepted accounting principles require that interest expense be measured using the effective–
interest amortization method, unless the straight-line amounts are similar.
5) When using the effective-interest amortization method, the discount amortization is the excess of the
calculated interest expense based on the effective interest rate over the interest payment.
6) When using the effective-interest amortization method, the discount amortization is the excess of the
calculated interest expense based on the stated interest rate over the interest payment.
7) When using the effective-interest amortization method, the amount of the interest expense is calculated
using the carrying value of the bonds and the market interest rate.
8) When using the effective-interest amortization method, the amount of the interest expense is calculated
using the face value of the bonds and the market interest rate.
9) When using the effective-interest amortization method, the amount of the interest expense is calculated
using the face value of the bonds and the stated interest rate.
10) When using the effective-interest amortization method, the amount of the interest payment is
calculated using the face value of the bonds and the stated interest rate.
11) On January 1, 2019, French Company issued $74,000 of five-year, 8% bonds when the market interest
rate was 12%. The issue price of the bonds was $62,000. French uses the effective-interest method of
amortization for bond discount. Semiannual interest payments are made on June 30 and December 31 of
each year. How much interest expense will be recorded when the first interest payment is made? (Round
your answer to the nearest dollar number.)
A) $2480
B) $3720
C) $2960
D) $4440
12) On January 1, 2019, Agree Company issued $85,000 of five-year, 8% bonds when the market interest
rate was 12%. The issue price of the bonds was $62,401. Agree uses the effective-interest method of
amortization for bond discount. Semiannual interest payments are made on June 30 and December 31 of
each year. Which of the following is the correct journal entry to record the first interest payment? (Round
all amounts to the nearest whole dollar.)
A)
Interest Expense
5100
Cash
5100
B)
Interest Expense
3744
Discount on Bonds Payable
344
Cash
3400
C)
Interest Expense
3400
Discount on Bonds Payable
1700
Cash
5100
D)
Interest Expense
5100
Discount on Bonds Payable
3400
Cash
1700
13) On January 1, 2019, Parker Advertising Company issued $50,000 of six-year, 3% bonds when the
market interest rate was 4%. The bonds were issued for $47,356. Parker uses the effective-interest method
of amortization for bond discount. Semiannual interest payments are made on June 30 and December 31
of each year. Prepare the amortization table for the first four interest payments. (Round your answers to
the nearest dollar number.)
Date
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
1/1/19
6/30/19
12/31/19
6/30/20
12/31/20
Date
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
1/1/19
$47,356
6/30/19
$750
$947
$197
47,553
12/31/19
750
951
201
47,754
6/30/20
750
955
205
47,959
12/31/20
750
959
209
48,168
Explanation:
Cash paid each interest payment date = $50,000 × 3% × 6/12 = $750
First interest expense = $47,356 × 4% × 6/12 = $947
Diff: 3
LO: 12-8
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Effective-Interest Amortization for a Bond Discount
14) When a bond is issued at a premium, the interest expense calculation using the effective-interest
amortization method uses the carrying amount of the bonds and the market rate of interest.
15) Using the effective-interest amortization method, the calculation for the amount of premium
amortization is the difference between the cash paid for interest and the calculated interest expense based
on the effective interest rate.
16) Using the effective-interest amortization method, the amount of premium amortization remains the
same over the life of the bond.
17) On January 1, 2018, Ling Services issued $168,000 of six-year, 12% bonds when the market interest
rate was 11%. The issue price of the bonds was $177,110. Ling uses the effective-interest method to
amortize the bond premium. Semiannual interest payments are made on June 30 and December 31 of
each year. How much interest expense will be recorded when the first interest payment is made? (Round
the final answer to the nearest dollar.)
A) $10,627
B) $9741
C) $10,080
D) $9240
18) On January 1, 2019, Castle Services issued $169,000 of six–year, 12% bonds when the market interest
rate was 11%. The bonds were issued for $172,000. Castle uses the effective-interest method to amortize
the bond premium. Semiannual interest payments are made on June 30 and December 31 of each year.
Which of the following is the correct journal entry to record the first interest payment? (Round your
answers to the nearest dollar number.)
A)
9295
9295
B)
9295
845
10,140
C)
9460
680
10,140
D)
10,140
845
9295
19) On January 1, 2019, Eastern Services issued $140,000 of four-year, 9% bonds when the market rate was
8%. The bonds were issued at $144,713. Eastern uses the effective-interest method to amortize the bond
premium. Semiannual interest payments are made on June 30 and December 31 of each year. Prepare the
amortization table for the first four interest payments. (Round your answers to the nearest dollar
number.)
Date
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
1/1/19
6/30/19
12/31/19
6/30/20
12/31/20
Date
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
1/1/19
$144,713
6/30/19
$6,300
$5,789
$511
144,202
12/31/19
6,300
5,768
532
143,670
6/30/20
6,300
5,747
553
143,117
12/31/28
6,300
5,725
575
142,542
Explanation:
Interest Payment = $140,000 × 9% × 6/12 = $6,300
First Interest Expense = $144,713 × 8% × 6/12 = $5,789
Diff: 3
LO: 12-8
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Effective-Interest Amortization of a Bond Premium