Chapter 11 – Liabilities: Bonds Payable
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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
117. The Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay
interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of
12%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year,
Merchant should record interest expense (round to the nearest dollar) of
a.
$7,032
b.
$7,500
c.
$8,790
d.
$14,065
ANSWER:
a
RATIONALE:
As Merchant 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) = $117,205 × (12% ÷ 2) = $117,205 × 6% = $7,032
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
FNMN.WAJO.19.11-APP2 – LO: 11–APP2
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
118. When the effective interest method is used, the amortization of the bond premium
a.
increases interest expense each period
b.
decreases interest expense each period
c.
increases interest expense in some periods and decreases interest expense in other periods
d.
has no effect on the interest expense in any period
ANSWER:
POINTS:
DIFFICULTY:
QUESTION TYPE:
HAS VARIABLES:
LEARNING OBJECTIVES:
ACCREDITING STANDARDS:
DATE CREATED:
Matching
False
ANSWER:
a
POINTS:
1
127. The entire principal of the bond is paid back on maturity date
ANSWER:
e
POINTS:
1
128. The value of a bond stated on the bond certificate
ANSWER:
b
POINTS:
1
ANSWER:
d
POINTS:
1
ANSWER:
POINTS:
1
125. The contract between bond issuer and bond purchaser
ANSWER:
f
POINTS:
1
Chapter 11 – Liabilities: Bonds Payable
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ANSWER:
g
POINTS:
1
132. Allows the bond holder to exchange bond for shares of stock
ANSWER:
f
POINTS:
1
133. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that pays semiannual interest of
$35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the entry to record the issuance of the bonds.
ANSWER:
Cash
884,171
Discount on Bonds Payable
115,829
Bonds Payable
1,000,000
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Easy
QUESTION TYPE:
Subjective Short Answer
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
134. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of
$20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds.
ANSWER:
Cash
437,740
Discount on Bonds Payable
62,260
Bonds Payable
500,000
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Easy
QUESTION TYPE:
Subjective Short Answer
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
135. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that pays semiannual interest of
$35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization
of the related bond discount using the straight-line method. Round answers to the nearest dollar.
ANSWER:
Interest Expense
46,583
Discount on Bonds Payable
11,583
Cash
35,000
ANSWER:
Bonds Payable
500,000
Discount on Bonds Payable
35,000
Cash
475,000
POINTS:
1
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
138. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of
$20,000 ($500,000 × 8% × 1/2), receiving cash of $520,000. Journalize the entry to record the first interest payment and
amortization of premium using the straight-line method.
ANSWER:
Interest Expense
19,000
Premium on Bonds Payable
1,000
Cash
20,000
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Subjective Short Answer
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
139. A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for $320,000. Journalize
the redemption of the bonds.
ANSWER:
Bonds Payable
375,000
Discount on Bonds Payable
40,000
Gain on Redemption of Bonds
15,000
Cash
320,000
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Subjective Short Answer
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
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143. Brubeck Co. issued $10,000,000 of 30-year, 8% callable bonds on May 1 of Year 1, with interest payable on May 1
and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following
selected transactions:
(a) Issued the bonds for cash at their face amount.
(b) Paid the interest on the bonds on November 1 of Year 3.
(c) Called one-fourth of the bonds at 104, the rate provided in the bond indenture, on May 1 of Year 10. (Omit entry for
payment of interest.)
ANSWER:
(a)
Cash
10,000,000
Bonds Payable
10,000,000
(b)
Interest Expense
400,000
Cash
400,000
(c)
Bonds Payable
2,500,000
Loss on Redemption of Bonds
100,000
Cash
2,600,000
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Subjective Short Answer
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
144. On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable semiannually, were
sold for $1,225,000. Present entries to record the following transactions for the current fiscal year:
(a)
Issuance of the bonds.
(b)
First semiannual interest payment (record as separate entry from discount amortization).
(c)
Amortization of bond discount for the year, using the straight-line method of amortization.
ANSWER:
(a)
Cash
1,225,000
Discount on Bonds Payable
275,000
Bonds Payable
1,500,000
(b)
Interest Expense
60,000
Cash
60,000
(c)
Interest Expense
27,500
Discount on Bonds Payable
27,500
POINTS:
1
DIFFICULTY:
Bloom’s: Applying
Moderate
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False