50) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-
year term and pay interest semiannually. This is the partial bond amortization schedule for the
bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
8,640,967
1
300,000
45,639
8,686,606
2
300,000
47,464
8,734,070
3
300,000
49,363
8,783,433
4
300,000
What is the effective annual rate of interest on the bonds?
A) 3%.
B) 4%.
C) 6%.
D) 8%.
51) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-
year term and pay interest semiannually. This is the partial bond amortization schedule for the
bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
8,640,967
1
300,000
45,639
8,686,606
2
300,000
47,464
8,734,070
3
300,000
49,363
8,783,433
4
300,000
What is the interest expense on the bonds for the year ended December 31, 2019?
A) $700,700.
B) $600,000.
C) $347,464.
D) $100,700.
52) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-
year term and pay interest semiannually. This is the partial bond amortization schedule for the
bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
8,640,967
1
300,000
45,639
8,686,606
2
300,000
47,464
8,734,070
3
300,000
49,363
8,783,433
4
300,000
What is the book value of the bonds as of December 31, 2019?
A) $8,834,770.
B) $8,686,606.
C) $8,734,070.
D) $8,783,433.
53) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-
year term and pay interest semiannually. This is the partial bond amortization schedule for the
bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
8,640,967
1
300,000
45,639
8,686,606
2
300,000
47,464
8,734,070
3
300,000
49,363
8,783,433
4
300,000
What would be the total interest cost of the bonds over their full term?
A) $1,359,033.
B) $4,640,967.
C) $6,000,000.
D) $7,359,033.
54) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a
10-year term and pay interest semiannually. This is the partial bond amortization schedule for
the bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
11,487,747
1
400,000
55,368
11,432,379
2
400,000
57,029
11,375,350
3
400,000
58,739
11,316,611
4
400,000
What is the stated annual rate of interest on the bonds?
A) 3%.
B) 4%.
C) 6%.
D) 8%.
55) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a
10-year term and pay interest semiannually. This is the partial bond amortization schedule for
the bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
11,487,747
1
400,000
55,368
11,432,379
2
400,000
57,029
11,375,350
3
400,000
58,739
11,316,611
4
400,000
What is the effective annual rate of interest on the bonds?
A) 3%.
B) 4%.
C) 6%.
D) 8%.
56) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a
10-year term and pay interest semiannually. This is the partial bond amortization schedule for
the bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
11,487,747
1
400,000
55,368
11,432,379
2
400,000
57,029
11,375,350
3
400,000
58,739
11,316,611
4
400,000
What is the interest expense on the bonds in 2019?
A) $800,000.
B) $680,759.
C) $342,971.
D) $119,241.
57) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a
10-year term and pay interest semiannually. This is the partial bond amortization schedule for
the bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
11,487,747
1
400,000
55,368
11,432,379
2
400,000
57,029
11,375,350
3
400,000
58,739
11,316,611
4
400,000
What is the book value of the bonds as of December 31, 2019?
A) $11,432,379.
B) $11,375,350.
C) $11,316,611.
D) $11,256,109.
58) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a
10-year term and pay interest semiannually. This is the partial bond amortization schedule for
the bonds.
Payment
Cash
Effective
Interest
Decrease in
Balance
Outstanding
Balance
11,487,747
1
400,000
55,368
11,432,379
2
400,000
57,029
11,375,350
3
400,000
58,739
11,316,611
4
400,000
What would be the total interest expense recognized for the bond issue over its full term?
A) $6,512,253.
B) $8,000,000.
C) $9,487,747.
D) $11,487,747.
59) Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of
September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2019. The effective interest rate established by the market
was 6%.
Auerbach issued the bonds:
A) At par.
B) At a premium.
C) At a discount.
D) Cannot be determined from the given information.
60) Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of
September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2019. The effective interest rate established by the market
was 6%.
How much cash interest does Auerbach pay on March 31, 2019?
A) $6.0 million.
B) $12.0 million.
C) $9.0 million.
D) $18.0 million.
61) Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of
September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2019. The effective interest rate established by the market
was 6%.
Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it
recognize in its 2018 income statement?
A) $0.
B) $3,830,535.
C) $5,107,380.
D) $7,661,070.
62) Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of
September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2019. The effective interest rate established by the market
was 6%.
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for
its net bond liability balance at December 31, 2018, rounded up to the nearest thousand?
A) $252,369,000.
B) $256,369,000.
C) $256,200,000.
D) $257,030,070.
63) Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of
September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and
September 30, beginning March 31, 2019. The effective interest rate established by the market
was 6%.
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for
its net bond liability balance after its first interest payment on March 31, 2019, rounded up to the
nearest thousand?
A) $252,369,000.
B) $256,369,000.
C) $256,300,000.
D) $257,030,000.
64) During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved,
paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid
$200,000 to an underwriter as a commission. What is the amount of bond issue costs?
A) $330,000.
B) $300,000.
C) $120,000.
D) $20,000.
65) Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is
the resulting effect on interest expense and the bond book value, respectively?
A) Understated, understated.
B) Understated, overstated.
C) Overstated, understated.
D) Overstated, overstated.
66) Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity
value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for
each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is
correct?
A) Both bonds sell for the same amount.
B) Both bonds sell for more than $100,000.
C) Bond X sells for more than bond Y.
D) Bond Y sells for more than bond X.
67) Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity
value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9%
interest. The current market rate of interest is 8%. Which of the following is correct?
A) Both bonds sell for the same amount.
B) Bond X sells for more than bond Y.
C) Bond Y sells for more than bond X.
D) Both bonds sell at a discount.
68) On June 30, 2018, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million.
The bonds were priced to yield 10%. The bonds are dated June 30, 2018, and mature on June 30,
2028. Interest is payable semiannually on December 31 and July 1. If the effective interest
method is used, by how much should the bond discount be reduced for the six months ended
December 31, 2018?
A) $32,000.
B) $40,000.
C) $46,000.
D) $60,000.
69) On January 1, 2018, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable
semiannually on January 1 and July 1. The bonds mature on January 1, 2028. Solo paid $50,000
in bond issue costs. Solo uses straight-line amortization.
The amount of interest expense for 2018 is:
A) $80,000.
B) $82,000.
C) $87,000.
D) $89,000.
70) On January 1, 2018, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable
semiannually on January 1 and July 1. The bonds mature on January 1, 2028. Solo paid $50,000
in bond issue costs. Solo uses straight-line amortization.
What is the carrying value of the bonds reported in the December 31, 2018, balance sheet?
A) $1,045,000.
B) $1,040,000.
C) $987,000.
D) $937,000.
71) On January 1, 2018, an investor paid $291,000 for bonds with a face amount of $300,000.
The contract rate of interest is 8% while the current market rate of interest is 10%. Using the
effective interest method, how much interest income is recognized by the investor in 2019
(assume annual interest payments and amortization)?
A) $23,280.
B) $25,140.
C) $29,100.
D) $29,610.
72) Cramer Company sold five-year, 8% bonds on October 1, 2018. The face amount of the
bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each
year. The fiscal year of Cramer Company ends on December 31. How much interest expense will
Cramer Company report in its December 31, 2018, income statement (assume straight-line
amortization)?
A) $2,000.
B) $1,900.
C) $1,778.
D) $2,040.
73) In each succeeding payment on an installment note:
A) The amount of interest paid increases.
B) The amount of principal paid increases.
C) The amount of principal paid decreases.
D) The amounts paid for both interest and principal increase proportionately.
74) When a long-term note is given in exchange for equipment, the amount considered as paid
for the machine is:
A) The invoice price.
B) The wholesale price.
C) The present value of cash outflows discounted at the stated rate.
D) The present value of the note payments discounted at the market rate.
75) When the interest payment dates are March 1 and September 1, and notes are issued on July
1, the amount of interest expense to be accrued at December 31 of the year of issue would:
A) Not be required.
B) Be for six months.
C) Be for four months.
D) Be for 10 months.
76) When an equipment dealer receives a long-term note in exchange for equipment, and the
stated rate of interest is indicative of the market rate of interest at the time of the transaction, the
present value of the future cash flows received on the notes:
A) Is treated as a current liability at the exchange date.
B) Is recorded as interest revenue at the exchange date.
C) Is recorded as interest receivable at the exchange date.
D) Is credited to sales revenue at the exchange date.
77) AMC issues a note with no stated interest rate in exchange for a machine. In accounting for
the transaction:
A) The machine should be depreciated over the note’s term to maturity.
B) If fair values of the note and machine are unavailable, the note should be recorded at its
present value, discounted at the market rate of interest.
C) Both the note and machine are recorded at the face amount of the note or the fair value of the
machine, whichever is more clearly determinable.
D) The note is recorded at its face amount unless the fair value of the machine is readily
available.
78) Green Industries purchased a machine from Cyan Corporation on October 1, 2018. In
payment for the $144,000 purchase, Green issued a one-year installment note to be paid in equal
monthly payments at the end of each month. The payments include interest at the rate of 12%.
Monthly installment payments are closest to:
A) $12,000.
B) $12,445.
C) $12,668.
D) $12,794.
79) Magenta Company purchased a machine from Pink Corporation on October 31, 2018. In
payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in
equal monthly payments of $25,588 at the end of each month. The payments include interest at
the rate of 12%. The amount of interest expense that Magenta will report in its income statement
for the year ended December 31, 2018, is:
A) $2,559.
B) $2,880.
C) $5,533.
D) $5,760.
80) To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:
A) Bond ratings provided by financial investment services such as Moody’s.
B) Newspaper articles.
C) Bond interest payments.
D) The company’s audit report.