Chapter 11 – Liabilities: Bonds Payable
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LEARNING OBJECTIVES:
FNMN.WAJO.19.11-02 – LO: 11–02
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
99. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If the issuing
corporation redeems the bonds at 98 1/2, what is the amount of gain or loss on redemption?
a.
$500 loss
b.
$15,500 loss
c.
$15,500 gain
d.
$500 gain
ANSWER:
a
RATIONALE:
Loss on redemption = Redemption value of bonds + Balance of Discount on Bonds
Payable– Balance of Bonds Payable = ($1,000,000 × 0.985) + $15,500 – $1,000,000 =
$985,000 + $15,500 – $1,000,000 = $500
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-02 – LO: 11–02
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
100. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest
payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal entry to record
the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to
a.
Interest Expense for $2,500
b.
Premium on Bonds Payable for $2,500
c.
Interest Expense for $5,000
d.
Premium on Bonds Payable for $5,000
ANSWER:
d
RATIONALE:
Amortization of the premium by the straight-line method for the year = [ Premium
amount / (10 years × 2)] × 2 = [($1,050,000 – $1,000,000) / 20] × 2 = ($50,000 / 20) ×
2 = $5,000
The journal entry to record the amortization of the premium (by the straight-line
method) for the year by Lisbon Co. includes a debit to Premium on Bonds Payable for
$5,000.
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Challenging
Chapter 11 – Liabilities: Bonds Payable
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Page 47
Income tax for year
80,000
Interest payable
9,000
Interest receivable
26,000
Based on the data presented above, what is the times interest earned ratio? (Round to two decimal places.)
a.
5.72
b.
6.83
c.
4.72
d.
4.83
ANSWER:
a
RATIONALE:
Times Interest Earned Ratio = (Income Before Income Tax + Bonds Interest Expense)
/ Bonds Interest Expense = [($340,000 + ($1,200,000 × 6%)] / ($1,200,000 × 6%) =
5.72
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-04 – LO: 11–04
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.ACBSP.APC.23 – Financial Statement Analysis
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
112. The present value of $60,000 to be received in one year, at 6% compounded annually, is _____ (rounded to nearest
dollar). Use the following table, if needed.
Present Value of $1 at Compound Interest
Periods
5%
6%
7%
10%
12%
1
0.95238
0.94340
0.93458
0.90909
0.89286
2
0.90703
0.89000
0.87344
0.82645
0.79719
3
0.86384
0.83962
0.81630
0.75132
0.71178
4
0.82270
0.79209
0.76290
0.68301
0.63552
5
0.78353
0.74726
0.71299
0.62092
0.56743
6
0.74622
0.70496
0.66634
0.56447
0.50663
7
0.71068
0.66506
0.62275
0.51316
0.45235
8
0.67684
0.62741
0.58201
0.46651
0.40388
9
0.64461
0.59190
0.54393
0.42410
0.36061
10
0.61391
0.55840
0.50835
0.38554
0.32197
a.
$56,604
b.
$63,396
c.
$60,000
d.
$3,396
Chapter 11 – Liabilities: Bonds Payable
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Page 48
ANSWER:
a
RATIONALE:
The present value of $60,000 to be received in one year, at 6% compounded annually
= $60,000 × Present value factor of $1 to be received in one year, at 6% compounded
annually = $60,000 × 0.94340 = $56,604
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-APP1 – LO: 11–APP1
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.15 – Current Assets Reporting
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
113. A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received
for the bonds will be
a.
present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in
30 years
b.
present value of 30 annual interest payments of $720,000
c.
present value of 30 annual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30
years
d.
present value of $9,000,000 to be repaid in 30 years, less present value of 60 semiannual interest payments of
$360,000
ANSWER:
a
RATIONALE:
Semiannual interest payment = $9,000,000 × (8% ÷ 2) = $360,000
The amount received for the bonds will be present value of 60 semiannual interest
payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-APP1 – LO: 11–APP1
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
114. The present value of $40,000 to be received in two years, at 12% compounded annually, is _____ (rounded to nearest
dollar). Use the following table, if needed.
Present Value of $1 at Compound Interest
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Page 50
8
0.67684
0.62741
0.58201
0.46651
0.40388
9
0.64461
0.59190
0.54393
0.42410
0.36061
10
0.61391
0.55840
0.50835
0.38554
0.32197
a.
$321,970
b.
$1,000,000
c.
$943,494
d.
$621,524
ANSWER:
c
RATIONALE:
Selling price of bonds = Present value of face amount of $1,000,000 due in ten years,
at 12% compounded annually + Present value of 10 annual interest payments of
$110,000, at 12% compounded annually
Present value of face amount of $1,000,000 due in ten years, at 12% compounded
annually = $1,000,000 × 0.32197 = $321,970
Present value of 10 annual interest payments of $110,000, at 12% compounded
annually = $110,000 × 5.65022 = $621,524
Selling price of bonds = $321,970 + $621,524 = $943,494
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-APP1 – LO: 11–APP1
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 6:29 PM
DATE MODIFIED:
10/16/2017 6:10 PM
116. The Designer Company issued 10-year bonds on January 1. The 6% bonds have a face value of $800,000 and pay
interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer
uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Designer should
record interest expense (round to the nearest dollar) of
a.
$27,638
b.
$24,000
c.
$48,000
d.
$55,277
ANSWER:
a
RATIONALE:
As Designer uses the effective interest method to amortize bond discounts and
premiums, the interest expense on July 1, Year 1 = Bond carrying amount × (Market
interest rate ÷ 2) = $690,960 × (8% ÷ 2) = $690,960 × 4% = $27,638
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-APP2 – LO: 11–APP2