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113. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when
the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using
the effective interest method, the amount of recorded interest expense for the first semiannual
interest period is:
A. $3,500.00.
B. $7,000.00
C. $3,286.95.
D. $6,573.90
E. $1,750.00
114. A company may retire bonds by:
A. Exercising a call option.
B. The holders converting them to stock.
C. Purchasing the bonds on the open market.
D. Paying them off at maturity.
E. All of the choices are correct.
115. Bonds that give the issuer an option of retiring them before they mature are:
A. Debentures.
B. Serial bonds.
C. Sinking fund bonds.
D. Registered bonds.
E. Callable bonds.
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116. A company has bonds outstanding with a par value of $100,000. The unamortized
discount on these bonds is $4,500. The company retired these bonds by buying them on the
open market at 97. What is the gain or loss on this retirement?
A. $0 gain or loss.
B. $1,500 gain.
C. $1,500 loss.
D. $3,000 gain.
E. $3,000 loss.
117. A company has bonds outstanding with a par value of $100,000. The unamortized
premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the
gain or loss on this retirement is:
A. $ 1,000 gain.
B. $ 1,000 loss.
C. $ 2,700 loss.
D. $ 2,700 gain.
E. $ 3,700 gain.
118. A company retires its bonds at 105. The face value is $100,000 and the carrying value of
the bonds at the retirement date is $103,745. The issuer’s journal entry to record the retirement
will include a:
A. Debit to Premium on Bonds.
B. Credit to Premium on Bonds.
C. Debit to Discount on Bonds.
D. Credit to Gain on Bond Retirement.
E. Credit to Bonds Payable.
119. A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000
premium. On the interest date 5 years later, after the bond interest was paid and after 40% of
the premium had been amortized, the corporation purchased the entire issue on the open
market at 99 and retired it. The gain or loss on this retirement is:
A. $0.
B. $10,000 gain.
C. $10,000 loss.
D. $22,000 gain.
E. $22,000 loss.
120. On October 1, a $30,000, 6%, 3-year installment note payable is issued by a company.
The note requires equal payments of principal plus accrued interest be paid at the end of each
year on September 30. The present value of an annuity factor for 3 years at 6% is 2.6730. The
payment will be:
A. $10,000.00.
B. $11,223.34.
C. $10,800.00.
D. $10,400.00.
E. $1,223.34.
121. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note
requiring equal annual payments each December 31 of $32,136. What journal entry would the
issuer record for the first payment?
A. Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B. Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C. Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D. Debit Notes Payable $32,136; credit Cash $32,136.
E. Debit Notes Payable $11,250; credit Cash $11,250.
122. On January 1, Year 1, Merrill Company borrowed $100,000 on a 10-year, 7%
installment note payable. The terms of the note require Merrill to pay 10 equal payments of
$14,238 each December 31 for 10 years. The required general journal entry to record the first
payment on the note on December 31, Year 1 is:
A. Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
D. Debit Notes Payable $14,238; credit Cash $14,238.
E. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
123. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the issuance of the bond is:
A. Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable
$300,000.
B. Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable
$312,177.
C. Debit Bonds Payable $300,000; debit Interest Expense $12,177; credit Cash $312,177.
D. Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable
$300,000.
E. Debit Cash $312,177; credit Bonds Payable $312,177.
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124. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the first interest payment using straight-line amortization is:
A. Debit Interest Payable $13,500; credit Cash $13,500.00.
B. Debit Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit
Cash $13,500.00.
C. Debit Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
D. Debit Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit
Cash $13,500.00.
E. Debit Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
125. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal
entry to record the first interest payment using the effective interest method of amortization is:
A. Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit
Cash $13,500.00.
B. Debit Interest Payable $13,500; credit Cash $13,500.00.
C. Debit Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit
Cash $13,500.00.
D. Debit Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
E. Debit Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
126. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal
entry to record the issuance of the bond is:
A. Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$416,207.
B. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$400,000.
C. Debit Bonds Payable $400,000; debit Interest Expense $16,207; credit Cash $416,207.
D. Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable
$400,000.
E. Debit Cash $383,793; credit Bonds Payable $383,793.
127. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal
entry to record the first interest payment using straight-line amortization is:
A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B. Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit
Cash $14,000.00.
D. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit
Cash $14,000.00.
E. Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit
Cash $14,000.00.
128. On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal
entry to record the first interest payment using the effective interest method of amortization is:
A. Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit
Cash $14,000.00.
B. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit
Cash $14,000.00.
D. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit
Cash $14,000.00.
E. Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit
Cash $14,000.00.
129. All of the following statements regarding accounting treatments for liabilities under U.S.
GAAP and IFRS are true except:
A. Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
B. Both U.S. GAAP and IFRS require companies to distinguish between operating leases and
capital leases.
C. The criteria for identifying a lease as a capital lease are more general under IFRS.
D. Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as
employees work and earn them.
E. Use of the fair value option to account for bonds and notes is not acceptable under U.S.
GAAP or IFRS.
130. On January 1, $300,000 of par value bonds with a carrying value of $310,000 is
converted to 50,000 shares of $5 par value common stock. The entry to record the conversion
of the bonds includes all of the following entries except:
A. Debit to Bonds Payable $310,000.
B. Debit to Premium on Bonds Payable $10,000.
C. Credit to Common Stock $250,000.
D. Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E. Debit to Bonds Payable $300,000.
131. Match each of the following terms with the appropriate definitions.
(a) Bond
(b) Callable bonds
(c) Annuity
(d) Contract rate
(e) Sinking fund bonds
(f) Secured bonds
(g) Carrying value
(h) Premium on bonds
(i) Bond indenture
(j) Debt-to-equity ratio
__________ (1) Bonds that have specific assets of the issuer pledged as collateral.
__________ (2) A series of equal payments at equal intervals.
__________ (3) The difference between the par value of a bond and its higher issue price or
carrying value.
__________ (4) Bonds that give the issuer an option of retiring them at a stated amount prior
to maturity.
__________ (5) The interest rate specified in the bond indenture.
__________ (6) The contract between the bond issuer and the bondholder(s); it identifies the
rights and obligations of the parties.
__________ (7) Bonds that require the issuer to create a fund of assets at specified amounts
and dates to repay the bonds at maturity.
__________ (8) The net amount at which bonds are reported on the balance sheet.
__________ (9) The ratio of total liabilities to total stockholders’ equity.
__________ (10) A written promise to pay an amount identified as the par value along with
interest at a stated rate.
132. Match each of the following terms with the appropriate definitions.
(a) Installment note
(b) Coupon bonds
(c) Market rate
(d) Bond indenture
(e) Convertible bonds
(f) Bearer bonds
(g) Term bonds
(h) Unsecured bonds
(i) Serial bonds
(j) Effective interest rate method
__________ (1) An obligation requiring a series of periodic payments to the lender.
__________ (2) Bonds that are made payable to whoever holds them; also called unregistered
bonds.
__________ (3) Bonds that are backed by the issuer’s credit standing.
__________ (4) Bonds that are scheduled for payment on one specified date.
__________ (5) The contract between the bond issuer and the bondholders; it identifies the
rights and obligations of the parties.
__________ (6) An accounting method that allocates interest expense over the bonds’ life in a
way that yields a constant rate of interest.
__________ (7) Bonds with interest coupons attached to their certificates; the bondholders
detach the coupons when they mature and present them to a bank or broker for collection.
__________ (8) The interest rate that borrowers are willing to pay and that lenders are willing
to accept for a particular bond at its risk level.
__________ (9) Bonds that can be exchanged by the bondholders for a fixed number shares of
the issuing corporation’s common stock.
__________ (10)Bonds that mature at more than one date and are usually paid over a number
of periods.
133. What is a bond? Identify and discuss the different types of bonds.
134. Describe installment notes and the way in which installment notes are paid.
135. On January 1, a company borrowed $70,000 cash by signing a 9% installment note that
is to be repaid with 4 annual year-end payments of $21,607. While the amount borrowed
equals $70,000, the total payments on this note amount to $86,428. Explain.
136. Explain the present value concept as it applies to long term liabilities.
137. What is a lease? Explain the difference between an operating lease and a capital lease.
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138. Identify the advantages and disadvantages of bond financing.
139. A corporation plans to invest $1 million in oil exploration. The corporation is
considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest
of 6% would be issued. Under Plan #2, additional shares of common stock would be issued at
$20 per share. The corporation currently has 300,000 shares of stock outstanding, and it
expects to earn $700,000 per year before bond interest and income taxes. The net income and
return on investment for both plans is shown below:
Plan #1
Plan #2
$ 700,000
$ 700,000
(60,000)
$ 640,000
$ 700,000
(224,000)
(245,000)
$ 416,000
$ 455,000
$8,000,000
$9,000,000
5.2%
5.06%
Comment on the relative effects of each alternative, including when one form of financing is
preferred to another.
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140. Describe the journal entries required to record the issuance of bonds and the payment of
bond interest.
141. Explain the amortization of a bond discount. Identify and describe the amortization
methods available.
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142. Explain how to record the issuance and sale of a bond between interest payment dates.
143. Explain the accounting procedures when a bond’s interest period does not coincide with
the issuer’s accounting period.
144. How are bond issue prices determined?
145. Explain the amortization of a bond premium. Identify and describe the amortization
methods available.
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146. What are methods that a company may use to retire its bonds?
147. Describe the recording procedures for the issuance, retirement, and paying of interest for
notes.
Problems