Chapter 10 – Reporting and Interpreting Bonds
10–21
51. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, how much is the
interest expense on the income statement for the year ended December 31, 2010 (to the
nearest dollar)?
52. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, which of the
following journal entries correctly records the 2010 interest expense (to the nearest dollar)?
Chapter 10 – Reporting and Interpreting Bonds
53. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, what is the book
value of the bonds as of December 31, 2010 (to the nearest dollar)?
Chapter 10 – Reporting and Interpreting Bonds
54. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, what is the 2011
interest expense (to the nearest dollar)?
55. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, what is the December
31, 2011 book value after the December 31, 2011 interest payment was made (to the nearest
dollar)?
Chapter 10 – Reporting and Interpreting Bonds
56. On January 1, 2010, Broker Corp. issued $3,000,000 par value 12%, 10 year bonds which
pay interest each December 31. If the market rate of interest was 14%, what was the issue
price of the bonds? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14%
is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at
14% is 5.2161.)
Chapter 10 – Reporting and Interpreting Bonds
57. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided:
What was the issuance price of the bonds if the market rate of interest was 8%?
58. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided:
Calculate the issuance price if the market rate of interest is 12%.
Chapter 10 – Reporting and Interpreting Bonds
59. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided:
Calculate the issuance price if the market rate of interest was 10%.
Chapter 10 – Reporting and Interpreting Bonds
60. Gammell Company issued $50,000 of 9% bonds with annual interest payments. The
bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the
straight-line method of amortization. How much is the annual interest expense?
61. Gammell Company issued $50,000 of 9% bonds with annual interest payments. The
bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the
straight-line method of amortization. Which of the following statements is incorrect?
Chapter 10 – Reporting and Interpreting Bonds
62. Which of the following statements incorrectly describes the accounting for bonds that
were issued at a premium?
63. Which of the following statements correctly describes the accounting for bonds that were
issued at a premium?
Chapter 10 – Reporting and Interpreting Bonds
64. Assuming no adjusting journal entries have been made during the year, the journal entry
to record the cash interest payment on the due date for bonds issued at a premium results in
which of the following?
65. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000.
The bonds were dated July 1, 2010, and semi-annual interest will be paid each December 31
and June 30. Garden Works Inc. uses the straight-line method of amortization. How much is
the semi-annual interest expense?
Chapter 10 – Reporting and Interpreting Bonds
66. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000.
The bonds were dated July 1, 2010, and semi-annual interest will be paid each December 31
and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to
be reported on the December 31, 2010 balance sheet?
67. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000.
The bonds were dated July 1, 2010, and semi-annual interest will be paid each December 31
and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to
be reported on the December 31, 2011 balance sheet?
Chapter 10 – Reporting and Interpreting Bonds
10–31
68. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000.
The bonds were dated July 1, 2010, and semi-annual interest will be paid each December 31
and June 30. Garden Works Inc. uses straight-line amortization. Which of the following
statements is incorrect?
69. Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2009, for $102,360
on April 1, 2009. The bonds pay interest annually on April 1. Straight-line amortization is
used by the company. What entry is needed at April 1, 2010 for the first interest payment?
Chapter 10 – Reporting and Interpreting Bonds
70. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable
semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10%
market interest rate. Assuming the effective-interest method of amortization is used, what is
the interest expense for the six-month period ending June 30, 2010 (to the nearest dollar)?
Chapter 10 – Reporting and Interpreting Bonds
71. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable
semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10%
effective (market) interest rate. Assuming the effective-interest method of amortization is
used, what is the book value of the bond liability as of June 30, 2010 (to the nearest dollar)?
72. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable
semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the
effective-interest method of amortization is used, which of the following statements is
incorrect?
Chapter 10 – Reporting and Interpreting Bonds
73. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable
semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10%
effective (market) interest rate. Assuming the effective-interest method of amortization is
used, what is the interest expense for the six-month period ending December 31, 2010 (to the
nearest dollar)?
74. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable
semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10%
effective (market) interest rate. Assuming the effective-interest method of amortization is
used, what is the book value of the bond liability on December 31, 2010 (to the nearest
dollar)?
Chapter 10 – Reporting and Interpreting Bonds
75. Which of the following statements regarding the effective-interest method of amortization
is incorrect?
76. Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2010. On
December 31, 2010 the bonds were trading on the bond exchange at 102.5. Since the issue
date, what has happened to the market rate of interest?
Chapter 10 – Reporting and Interpreting Bonds
77. Straight-line amortization of a premium related to a bond issuance would result in which
of the following?
78. Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the
market rate was 11%. Which of the following statements is correct?
Chapter 10 – Reporting and Interpreting Bonds
79. A company issued bonds when the stated rate of interest was 10% and the market rate was
8%. Which of the following statements is incorrect?
80. A company issued bonds when the stated rate of interest was 10% and the market rate was
10%. Which of the following statements is incorrect?
Chapter 10 – Reporting and Interpreting Bonds
81. A company prepared the following journal entry:
Which of the following statements correctly describes the effect of this journal entry on the
financial statements?
82. A company prepared the following journal entry:
Which of the following statements incorrectly describes the effect of this journal entry on the
financial statements?
Chapter 10 – Reporting and Interpreting Bonds
83. A company prepared the following journal entry:
Which of the following statements incorrectly describes the effect of this journal entry on the
financial statements?
84. A company prepared the following journal entry:
Which of the following statements correctly describes the effect of this journal entry on the
financial statements?
Chapter 10 – Reporting and Interpreting Bonds
85. During 2010, Patty’s Pizza reported net income of $4,212 million, interest expense of
$167 million and income tax expense of $1,372 million. During 2009, they reported net
income of $3,568 million, interest expense of $163 million and income tax expense of $1,424
million. What was the times interest earned ratio for 2010 and 2009 respectively?
86. When a bond payable is issued at a discount, subsequent amortization of the discount
doesn’t do which of the following?