52) Island Corporation issued $500,000 of 6%, 10-year bonds at 104 on May 1, 2009. Interest is paid
semiannually on October 31 and April 30. Journalize the entries for the issuance of the bond on May 1,
the first interest payment on October 31 using the straight-line method, and the adjusting entry on
December 31.
1) A bond that pays interest on February 28 and August 31 will have to be adjusted for 2 months interest
on December 31.
2) All bonds have accrued interest adjustments on December 31.
3) The interest method amortizes an equal amount of discount to Bonds Interest Expense each period.
4) To determine the bond interest expense using effective interest method, the computation is the
________ times the ________ of interest.
5) On July 1, Shooter’s Poultry Company issued 10% 10-year, $500,000 bonds for $462,000. This price will
yield a market rate of 11%. Interest dates are June 30 and December 31. Prepare the journal entries to
record:
a. Issuance of the bond.
b. Payment for the first semiannual interest period plus amortization of the discount using the interest
method.
c. Payment for the second semiannual interest period plus amortization of the discount using the interest
method.
6) On July 1, Carly Corporation issued 10–year 9%, $600,000 bonds for $640,771, a price to yield 8%
market rate. Interest dates are June 30 and December 31. Record the following journal entries:
a. Issuance of the bonds.
b. The semiannual interest payment and amortization of the premium on December 31 using the interest
method.
20.4 Learning Objective 20-4
1) Assume the following account balances immediately after an interest payment date:
Bonds Payable $270,000
Premium on Bonds Payable 10,453
If the bonds are retired immediately at a total cost of $207,000, the journal entry to record this event is:
A)
Cash $207,000
Loss on Bond Retirement 73,453
Premium on Bonds Payable 10,453
Bonds Payable 270,000
B)
Bonds Payable $270,000
Premium on Bonds Payable 10,453
Cash 207,000
Gain on Bond Retirement 73,453
C)
Bonds Payable $270,000
Loss on Bond Retirement 10,453
Premium on Bonds Payable 73,453
Cash 207,000
D) None of these answers is correct.
2) A bond sinking fund is a:
A) short-term investment.
B) long-term investment.
C) current liability.
D) long-term liability.
3) The journal entry to establish a bond sinking fund would include:
A) a credit to Bond Sinking Fund.
B) a debit to Bond Sinking Fund Expense.
C) a debit to Bond Sinking Fund.
D) a credit to Bonds Payable.
4) A fund set up so that a bond can be retired at maturity is called a:
A) bond sinking fund.
B) bond payable fund.
C) stock fund.
D) retirement fund.
5) A $200,000, 10% bond issue was sold at face value and later redeemed at 109. The corporation would
have a:
A) gain of $18,000.
B) loss of $18,000.
C) gain of $9,000.
D) loss of $9,000.
6) A long-term investment established to pay off bondholders at maturity is called a(n):
A) discount fund.
B) maturity fund.
C) bond sinking fund.
D) annuity fund.
7) A bond sinking fund is reported as an asset on the balance sheet.
8) Usually, there is a gain or loss associated with early retirement of bonds.
9) When bonds are retired, the Bonds Payable account is credited for face value even if the bonds were
originally sold at a premium.
10) When bonds are retired at less than book value, the company records a loss on the retirement.
11) Interest earned on the sinking fund will be added to the Interest Revenue account.
12) Bonds that can be bought back by the corporation before the maturity date are called ________ bonds.
Using the following accounts:
[1] Cash
[2] Bond Sinking fund
[3] Equipment
[4] Building
[5] Land
[6] Accounts payable
[7] Notes payable
[8] Bond payable
[9] Bond interest payable
[10] Premium on bonds payable
[11] Discount on bonds payable
[12] Common stock
[13] Retained earnings
[14] Sinking fund earned
[15] Bond interest expense
[16] Gain on retirement
[17] Loss on retirement
Indicate the account(s) to be debited and credited to record the following transactions.
13) Paid the bondholders the amount due, face value plus accrued interest, using the sinking fund.
Debit ________ & ________ Credit ________
14) Retired bonds plus interest previously accrued when the book value was above the cost of retirement,
cash was paid.
Debit ________ & ________ Credit ________ & ________
15) Retired bonds plus interest previously accrued when the book value was beneath the cost of
retirement, cash was paid.
Debit ________ & ________ & ________ Credit ________
16) Deposited cash in a bond sinking fund.
Debit ________ Credit ________
17) Recorded the interest earned on the bond sinking fund.
Debit ________ Credit ________
18) What is the purpose of a bond sinking fund?
19) Describe bond refunding and explain why it might be advantageous for a company.
20) On January 1, Buy-New Online issued $500,000, 10%, 10-year bonds to lenders at the contract rate.
Interest is to be paid semiannually on July 1 and January 1. Journalize the following entries:
a. Issued the bonds.
b. Paid first semiannual interest payment.
c. Retired the bonds at maturity.
21) Green Corporation issued on January 1, $300,000 of 9%, 5-year bonds at contract rate. Interest is to be
paid semiannually on July 1 and January 1. Journalize the following entries:
a. Issued the bonds.
b. Paid the first semiannual interest payment.
c. Retired the bonds at maturity.
22) Sampson Brothers pays $55,000 into a bond sinking fund each year to redeem the future maturity of
its bonds. During the first year, the fund earned $3,500. At the time of bond redemption, the fund has a
balance of $550,000. Of this, $525,000 was used to redeem the bonds. Journalize the
a) initial deposit;
b) the first year’s interest; and
c) the redemption of the bonds.