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154)
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 Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.
B)
Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable
$400,000.
C)
Debit Cash $383,793; credit Bonds Payable $383,793.
D)
Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$400,000.
E)
Debit Cash $400,000; credit Discount on Bonds Payable $16,207; credit Bonds Payable
$416,207.
155)
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 Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
B)
Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C)
Debit Interest Payable $14,000.00; credit Cash $14,000.00.
D)
Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash
$14,000.00.
E)
Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
156)
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 Payable $14,000.00; credit Cash $14,000.00.
B)
Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; 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 $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash
$14,000.00.
157)
On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds
mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30 and
December 31. The market rate is 5%. Using the present value factors below, the issue (selling) price
of the bonds is:
n= i=
Present Value of an
Annuity Present value of $1
3 4.0 % 2.7751 0.8890
6 2.0 % 5.6014 0.8880
3 5.0 % 2.7232 0.8638
6 2.5 % 5.5081 0.8623
A) $172,460. B) $194,492. C) $22,032. D) $205,607. E) $200,000.
158)
On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds
mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and
December 31. The bonds are sold for $564,000. The journal entry to record the first interest
payment using straight-line amortization is:
A)
Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash
$21,000.
B)
Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash
$15,000.
C)
Debit Interest Expense $21,000; credit Cash $21,000.
D)
Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash
$21,000.
E)
Debit Interest Payable $21,000; credit Cash $21,000.
159)
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 second interest payment using the effective interest method of amortization is:
A)
Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
B)
Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash
$14,000.00.
C)
Debit Interest Payable $14,000.00; credit Cash $14,000.00.
D)
Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash
$14,000.00.
E)
Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
160)
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 record costs of retirement benefits as
employees work and earn them.
C)
Both U.S. GAAP and IFRS require companies to distinguish between operating leases and
capital leases.
D)
The criteria for identifying a lease as a capital lease are more general under IFRS.
E)
Use of the fair value option to account for bonds and notes is not acceptable under U.S.
GAAP or IFRS.
161)
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)
Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
B)
Debit to Bonds Payable $310,000.
C)
Debit to Premium on Bonds Payable $10,000.
D)
Credit to Common Stock $250,000.
E)
Debit to Bonds Payable $300,000.
162)
On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the
issue date, the annual market rate of interest is 6%. The following information is taken from present
value tables:
Present value of an annuity for 10 periods at 3%
8.5302
Present value of an annuity for 10 periods at 4%
8.1109
Present value of 1 due in 10 periods at 3%
0.7441
Present value of 1 due in 10 periods at 4%
0.6756
What is the issue (selling) price of the bond?
A) $402,362 B) $300,010 C) $420,000 D) $308,107 E) $325,592
SHORT ANSWER QUESTIONS
163)
Match each of the following terms with the appropriate definitions.
(a) Discount on bonds
(b) Callable bonds
(c) Annuity
(d) Debt-to-equity ratio
(e) Sinking fund bonds
(f) Secured bonds
(g) Carrying value
(h) Premium on bonds
(i) Bond indenture
(j) Contract rate
________
(1) Bonds that have specific assets of the issuer pledged as collateral.
________
(2) A series of equal payments at equal time intervals.
________
(3) The amount by which the bond issue (selling) price exceeds the
bond par value.
________
(4) Bonds that give the issuer an option of retiring them at a stated
dollar amount prior to maturity.
________
(5) The interest rate specified in the bond indenture.
________
(6) The contract between the bond issuer and the bondholder(s) that
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) The amount by which the bond par value exceeds the bond issue
(selling) price
164)
Match each of the following terms with the appropriate definitions.
(a) Term bonds
(b) Coupon bonds
(c) Market rate
(d) Bond indenture
(e) Convertible bonds
(f) Bearer bonds
(g) Installment note
(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 payable to whoever holds them; also called
unregistered bonds.
__________
(3) Bonds that are backed by the issuer's general credit standing.
__________
(4) Bonds that are scheduled for maturity 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 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.
ESSAY QUESTIONS
165)
What is a bond? Identify and discuss the different characteristics and features bonds may possess.
166)
Describe installment notes and the nature of the typical payment pattern.
SHORT ANSWER QUESTIONS
167)
On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be
repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of
interest at 9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to
only $86,428. Explain.
168)
Explain the present value concept as it applies to long-term liabilities.
169)
What is a lease? Explain the difference between an operating lease and a capital lease.
170)
Identify the advantages and disadvantages of bond financing.
ESSAY QUESTIONS
171)
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, 50,000 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
Earnings before bond interest and taxes……..
$
700,000
$ 700,000
Bond interest expense………………………
(60,000)
Income before taxes………………………..
$
640,000
$ 700,000
Income before taxes………………………..
$ 640,000
$ 700,000
Income taxes……………………………….
(224,000)
(245,000)
Net income…………………………………
$ 416,000
$ 455,000
Equity………………………………………
$8,000,000
$9,000,000
Return on Equity……………………………
5.2%
5.06%
Comment on the relative effects of each alternative, including when one form of financing is
preferred to another.
SHORT ANSWER QUESTIONS
172)
Describe the journal entries required to record the issuance of bonds at par and the payment of
bond interest.
173)
Describe the journal entries required to record the issuance of bonds at a premium and the payment
of bond interest, including any applicable amortization.
174)
Describe the journal entries required to record the issuance of bonds at a discount and the payment
of bond interest, including any applicable amortization.
175)
Explain the amortization of a bond discount. Identify and describe the amortization methods
available.
176)
How are bond issue prices determined?
177)
Explain the amortization of a bond premium. Identify and describe the amortization methods
available.
178)
What are methods that a company may use to retire its bonds?
179)
Describe the recording procedures for the issuance, retirement, and paying of interest for
installment notes.
180)
Zhang Company has a loan agreement that provides it with cash today, and the company must pay
$25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4
periods at 6% is 0.7921. What is the amount of cash that Zhang Company receives today?
181)
Wasp Corporation has a loan agreement that provides it with cash today, and the company must pay
$25,000 one year from today, $15,000 two years from today, and $5,000 three years from today.
Wasp agrees to pay 10% interest. The following are factors from a present value table:
Interest rate
Periods
10%
1
0.9091
2
0.8264
3
0.7513
What is the amount of cash that Wasp receives today?
182)
A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting
one year from now. The annual interest rate is 6%. The present value of an annuity factor for 5
periods at 6% is 4.2124. What is the present value of these five payments?
