Cash 3,000
47. Suffolk Corporation issued $100,000 of 20-year, 6 percent bonds at 98 on one of its semi-annual
interest dates. The straight-line method of amortization is to be used. After seven years, what is the
carrying value of the bonds?
a.
$98,350
b.
$98,700
c.
$99,300
d.
$99,650
48. Suffolk Corporation issued $100,000 of 20-year, 6 percent bonds at 98 on one of its semi-annual
interest dates. The straight-line method of amortization is to be used. What is the total interest cost of
the bonds?
a.
$120,000
b.
$122,000
c.
$118,000
d.
$117,500
49. Knollwood Corporation issued $278,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual
interest dates. The straight-line method of amortization is to be used. The entry to record the bond
interest expense on the next interest payment date is:
a.
Bond Interest Expense 11,120
Cash 11,120
b.
Bond Interest Expense 11,398
Cash 11,398
c.
Bond Interest Expense 10,520
Cash 10,520
d.
Bond Interest Expense 10,842
Unamortized Bond Premium 278
Cash 11,120
50. Knollwood Corporation issued $300,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual
interest dates. The straight-line method of amortization is to be used. What is the total interest cost of
the bonds?
a.
$719,500
b.
$702,000
c.
$720,000
d.
$738,000
51. Knollwood Corporation issued $281,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual
interest dates. The straight-line method of amortization is to be used. After 11 years, what is the
carrying value of the bonds?
a.
$289,430
b.
$289,992
c.
$288,025
d.
$291,678
52. The effective interest method of amortization of bond premiums and discounts is superior to the
straight-line method because it results in a(n)
a.
more variable interest rate.
b.
uniform rate of interest.
c.
interest rate that increases or decreases slightly over time.
d.
interest rate that is close to the market interest rate.
53. A company issued $300,000 of 20-year, 8 percent bonds at 96. If interest is paid semi-annually, the
entry to record the amount of bond interest expense (assuming the straight-line method of
amortization) on any interest date is
a.
Bond Interest Expense 12,000
Cash 12,000
b.
Bond Interest Expense 24,300
Unamortized Bond Discount 300
Cash 24000
c.
Bond Interest Expense 23,700
Cash 23,700
d.
Bond Interest Expense 12,300
Unamortized Bond Discount 300
Cash 12000
54. A ten-year bond has a face value of $10,000, a face interest rate of 11 percent, an unamortized bond
premium of $400, and an effective interest rate of 10 percent. The bonds were issued on one of the
semi-annual interest payment dates. The entry to record the bond interest expense on the first
semi-annual interest payment date is: (assuming the effective interest method of amortization),
a.
Bond Interest Expense 520
Unamortized Bond Premium 30
Cash 550
b.
Bond Interest Expense 520
Cash 520
c.
Bond Interest Expense 550
Cash 550
d.
Unamortized Bond Premium 520
Cash 520
55. In 2007, Horwitz Corporation issued ten-year, 9 percent bonds when the market interest rate was 11
percent. Interest is payable annually. During 2010, the market rate of interest for similar bonds was 12
percent. Using the effective interest method of amortization, what interest rate will be used to calculate
interest expense for 2010?
a.
12 percent
b.
9 percent
c.
6 percent
d.
11 percent
56. Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The
face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The
bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest
method of amortization is to be used. The entry to record the bond interest expense on the first interest
payment date is: (Round answer to the nearest dollar.)
a.
Bond Interest Expense 24,000
Cash 24,000
b.
Bond Interest Expense 27,638
Unamortized Bond Discount 3,638
Cash 24,000
c.
Bond Interest Expense 27,638
Cash 27,638
d.
Bond Interest Expense 27,638
Unamortized Bond Discount 27,638
57. Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The
face interest rate is 8 percent and interest is payable semi-annually on June 30 and December 31. The
bonds were issued for $690,960 to yield an effective annual rate of 10 percent. The effective interest
method of amortization is to be used. The entry on June 30, 2010, to record the payment of interest and
amortization of discount will be:
a.
Bond Interest Expense 32,000
Cash 32,000
b.
Bond Interest Expense 34,548
Unamortized Bond Discount 2,548
Cash 32,000
c.
Bond Interest Expense 34,548
Cash 34,548
d.
Bond Interest Expense 32,000
Unamortized Bond Discount 32,000
58. Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The
face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The
bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest
method of amortization is to be used. How much bond interest expense (rounded to the nearest dollar)
should be reported on the income statement for the year ended December 31, 2010?
a.
$48,000
b.
$55,422
c.
$55,131
d.
$55,276
59. Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The
face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The
bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest
method of amortization is to be used. The entry to be recorded on December 31, 2010, for the payment
of interest (rounded to the nearest dollar) and the amortization of discount is:
a.
Bond Interest Expense 3,638
Unamortized Bond Discount 3,638
b.
Bond Interest Expense 27,784
Unamortized Bond Discount 3,784
Cash 24,000
c.
Bond Interest Expense 27,784
Cash 27,784
d.
Bond Interest Expense 24,000
Unamortized Bond Discount 24,000
60. Lassen Corporation issued ten-year term bonds on January 1, 2010, with a face value of $800,000. The
face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The
bonds were issued for $690,960 to yield an effective annual rate of 8 percent. The effective interest
method of amortization is to be used. The carrying value of the bonds payable on the December 31,
2010, balance sheet date should be (rounded to the nearest dollar)
a.
$696,412.
b.
$698,236.
c.
$698,382.
d.
$690,960.
61. Lenz Corporation issued ten-year, 8 percent bonds payable in 2009 at a premium. During 2009, the
company’s accountant failed to amortize any of the bond premium. The omission of the premium
amortization will
a.
cause net income for 2009 to be overstated.
b.
not affect net income reported for 2009.
c.
cause net income for 2009 to be understated.
d.
cause retained earnings at the end of 2009 to be overstated.
62. Penmark Corporation issued 15-year term bonds at a discount in 2010. Interest is payable
semi-annually. Which of the following statements is true, assuming that the effective interest method
of amortization is used for the bond discount?
a.
Interest expense decreases each six-month interest period.
b.
Interest expense as a percentage of the bond’s book value changes from period to period.
c.
Interest expense increases each six-month interest period.
d.
Interest expense remains constant in amount for each interest period.
63. When the effective interest method of amortization is used for a bond premium, the amount of interest
expense for an interest period is calculated by multiplying the
a.
carrying value of the bonds at the beginning of the period by the face interest rate.
b.
face value of the bonds at the beginning of the period by the effective interest rate.
c.
carrying value of the bonds at the beginning of the period by the effective interest rate.
d.
face value of the bonds at the beginning of the period by the face interest rate.
64. The amortization of a bond premium will result in reporting an amount of interest expense for an
interest period that
a.
exceeds the amount of cash to be paid for interest for the period.
b.
is less than the amount of cash to be paid for interest for the period.
c.
has no predictable relationship with the amount of cash to be paid for interest for the
period.
d.
equals the amount of cash to be paid for interest for the period.
65. When the straight-line method of amortization is used for a bond discount, the amount of interest
expense for an interest period is calculated by
a.
adding the amount of discount amortization for the period to the amount of cash paid for
interest during the period.
b.
deducting the amount of discount amortization for the period from the amount of cash paid
for interest during the period.
c.
multiplying the carrying value of the bonds by the effective interest rate.
d.
multiplying the face value of the bonds by the face interest rate.
66. If bonds payable were issued initially at a discount, the carrying value of the bonds at a balance sheet
date will be calculated by
a.
deducting the amount of discount amortized between the issuance date and the balance
sheet date from the face value.
b.
deducting the balance of unamortized bond discount from the face value.
c.
adding the balance of unamortized bond discount to the face value.
d.
adding the amount of discount amortized between the issuance date and the balance sheet
date to the face value.
67. When bonds have been issued at a premium, the periodic amortization of the premium will
a.
increase the carrying value of the bonds.
b.
have no effect on the carrying value of the bonds.
c.
decrease the carrying value of the bonds.
d.
cause the carrying value always to equal the face value of the bonds.
68. A company has $817,000 in bonds payable with an unamortized premium of $20,000. If one-fourth of
the bonds are converted to common stock, the entry that would record the conversion is:
a.
Bonds Payable 204,250
Common Stock 204,250
b.
Bonds Payable 224,250
Common Stock 224,250
c.
Common Stock 199,250
Bonds Payable 199,250
d.
Bonds Payable 204,250
Unamortized Bond Premium 5,000
Common Stock 209,250
69. A $300,000 bond issue with a carrying value of $311,000 is called at 103 and retired. The entry to
record the retirement of bonds would be:
a.
Bonds Payable 309,000
Cash 309,000
b.
Bonds Payable 311,000
Cash 311,000
c.
Cash 300,000
Bonds Payable 300,000
d.
Bonds Payable 300,000
Unamortized Bond Premium 11,000
Cash 309,000
Gain on Retirement of Bonds 2,000
70. A $50,000 bond issue with a carrying value of $47,000 is called at 102 and retired. The entry to record
the retirement of bonds would be:
a.
Bonds Payable 50,000
Loss on Retirement of Bonds 4,000
Unamortized Bond Discount 3,000
Cash 51,000
b.
Bonds Payable 47,000
Cash 47,000
c.
Bonds Payable 50,000
Gain on Retirement of Bonds 3,000
Cash 47,000
d.
Bonds Payable 50,000
Loss on Retirement of Bonds 1,000
Cash 51,000
71. When bonds are converted to common stock, which of the following could be part of the entry?
a.
Credit to Gain on Conversion of Bonds
b.
Credit to Unamortized Bond Premium
c.
Credit to Unamortized Bond Discount
d.
Debit to Common Stock
72. A company has $900,000 in bonds payable with an unamortized discount of $21,000. If two-thirds of
the bonds are converted to common stock, the carrying value of the bonds payable will decrease by
a.
$293,000.
b.
$586,000.
c.
$614,000.
d.
$628,000.
73. A $200,000 bond issue with a carrying value of $194,000 is called at 101 and retired. The entry to
record the retirement of bonds would be:
a.
Bonds Payable 200,000
Gain on Retirement of Bonds 6,000
Cash 194,000
b.
Bonds Payable 200,000
Cash 200,000
c.
Bonds Payable 200,000
Loss on Retirement of Bonds 8,000
Unamortized Bond Discount 6,000
Cash 202,000
d.
Bonds Payable 194,000
Loss on Retirement of Bonds 8,000
Cash 202,000
74. A $100,000 bond issue with a carrying value of $103,000 is called at 101 and retired. The entry to
record the retirement of bonds would be:
a.
Bonds Payable 101,000
Loss on Retirement of Bonds 2,000
Cash 103,000
b.
Bonds Payable 100,000
Unamortized Bond Premium 3,000
Cash 101,000
Gain on Retirement of Bonds 2,000
c.
Bonds Payable 100,000
Loss on Retirement of Bonds 3,000
Cash 103,000
d.
Bonds Payable 103,000
Cash 103,000
75. A bond issue of $50,000 with a carrying value of $49,000 is converted into $10 par value common
stock at the rate of fifty shares for each $1,000 bond. The entry to record the conversion of bonds
would be:
a.
Bonds Payable 50,000
Loss on Retirement of Bonds 1,000
Unamortized Bond Discount 1,000
Common Stock 50,000
b.
Bonds Payable 50,000
Common Stock 25,000
Additional Paid-In Capital 25,000
c.
Bonds Payable 50,000
Common Stock 25,000
Additional Paid-In Capital 24,000
Unamortized Bond Discount 1,000
d.
Bonds Payable 49,000
Unamortized Bond Discount 1,000
Common Stock 25,000
Additional Paid-In Capital 25,000
76. Hooper Corporation has bonds outstanding with a face value of $100,000 and a carrying value of
$103,000 on December 31, 2010. If the company calls in and retires these bonds on December 31,
2010, for $105,000, the entry to record the retirement would be:
a.
Bonds Payable 103,000
Cash 103,000
b.
Bonds Payable 105,000
Cash 105,000
c.
Bonds Payable 100,000
Loss on Retirement of Bonds 3,000
Cash 103,000
d.
Bonds Payable 100,000
Loss on Retirement of Bonds 2,000
Unamortized Bond Premium 3,000
Cash 105,000
77. Bonds that contain a provision that allows the issuing corporation to buy back the bonds prior to the
maturity date are called
a.
secured bonds.
b.
callable bonds.
c.
convertible bonds.
d.
debenture bonds.
78. When bonds payable are converted into stock, the carrying value of the bonds should be
a.
credited to Retained Earnings.
b.
credited to contributed capital accounts.
c.
debited to Retained Earnings.
d.
debited to Loss on Conversion of Bonds.
79. Bonds that contain a provision that allows the holders to exchange the bonds for other securities of the
issuing corporation are called
a.
debenture bonds.
b.
secured bonds.
c.
callable bonds.
d.
convertible bonds.
80. When bonds are sold at face value between interest dates, the result is a debit to the Cash account that
a.
equals face value.
b.
depends on the circumstances.
c.
is less than face value.
d.
exceeds face value.
81. Peng Corporation has been authorized to issue bonds with interest payment dates of March 1 and
September 1. If the bonds are sold at face amount on April 1, the amount of cash to be received by the
issuer is equal to the face amount of the bonds
a.
minus the interest accrued from March 1 to April 1.
b.
plus the interest accrued from April 1 to September 1.
c.
minus the interest accrued from April 1 to September 1.
d.
plus the interest accrued from March 1 to April 1.
82. If $110,000 of 12 percent bonds are issued (at face value) one month after the last semi-annual interest
date, the entry made to record the issue is:
a.
Cash 111,100
Bonds Payable 110,000
Bond Interest Expense 1,100
b.
Cash 111,100
Bonds Payable 111,100
c.
Cash 105,600
Bond Interest Expense 5,500
Bonds Payable 111,100
d.
Cash 115,500
Bonds Payable 110,000
Bond Interest Expense 5,500
83. A corporation issues bonds that pay interest each February 1 and August 1. The corporation’s
December 31 adjusting entry might include a
a.
debit to Unamortized Bond Premium.
b.
debit to Cash.
c.
debit to Bond Interest Payable.
d.
credit to Bond Interest Income.
84. On March 1, 2010, Darby Corporation sold 82 of its 9 percent, $1,000 bonds for a price of 96 plus
accrued interest. The accrued interest amounted to $1,000. If a balance sheet were to be prepared at the
end of the day, March 1, 2010, the carrying value reported for the bonds payable would be
a.
$82,000.
b.
$78,720.
c.
$79,540.
d.
$77,900.
85. The amount of cash received on issuance of a 9 percent, $10,000 bond dated February 1 and issued
June 1 at 102 1/2 is
a.
$10,300.
b.
$11,100.
c.
$10,200.
d.
$10,550.
SHORT ANSWER
1. Alby Corporation purchased a warehouse by signing a long-term $800,000 mortgage with monthly
payments of $6,200. The mortgage carries an interest rate of 9 percent. Prepare entries in journal form
without explanations to record the purchase and the first two monthly payments. Round answers to the
nearest dollar.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
($800,000 0.09 1/12)
2. When fixed mortgage payments are made, in what way does the interest portion change each month,
and why?
3. Boris Corporation had income before income taxes of $4,000,000 and interest expense of $450,000.
Calculate Boris’s interest coverage ratio, rounded to one decimal place.
4. Dennis Corporation entered into a long-term lease for a piece of equipment. The lease term calls for an
annual payment of $2,000 for six years, which approximates the useful life of the equipment. Assume
a discount factor of 16 percent. (Note: Present value of a single sum factor at six years and 16% is
0.410; present value of an annuity factor at six years and 16% is 3.685.) Round answers to the nearest
dollar.
a. Prepare the entry without explanation to record the leased equipment.
b. Prepare the entry without explanation to record annual depreciation, assuming the straight-line
method and no residual value.
c. Prepare the entry without explanation to record the first annual payment of $2,000, after the
company has had the equipment for one year.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
5. On July 1, 20xx, Halo Corporation issued bonds with a face value of $500,000. The bonds carry a face
interest rate of 10 percent that is payable each July 1 and January 1.
a. Prepare the entry in journal form without explanation for the issuance assuming the bonds are issued
at 97.
b. Prepare the entry in journal form without explanation for the issuance assuming the bonds are issued
at 102.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Cash ($500,000 0.97)
Capital Lease Equipment ($2,000 3.685)
6. On July 1, 20xx, Aloha Corporation issued bonds with a face value of $400,000. The bonds carry a
face interest rate of 8 percent that is payable each July 1 and January 1.
a. Prepare the entry in journal form without explanation for the issuance of the bonds assuming the
bonds are issued at 98.
b. Prepare the entry in journal form without explanation for the issuance of the bonds assuming the
bonds are issued at 101.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Cash ($400,000 0.98)
($400,000 – $392,000)
Cash ($400,000 1.01)
Unamortized Bond Premium
Cash ($500,000 1.02)
7. When a bond sells at a premium, what is probably true about the market interest rate versus the face
interest rate? Discuss.
8. When a bond sells at a discount, what is probably true about the market interest versus the face interest
rate? Discuss.
9. Flint Corporation issues $1,000,000 of 30-year, 8 percent bonds at 106. Interest is paid semi-annually,
and the effective interest method is used for amortization. Assume that the market interest rate for
similar investments is 7 percent and that the bonds are issued on an interest date.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. How much bond interest expense is recorded on the first interest date (after the issue date)?
d. What is the carrying value of the bonds after the first interest date (after the issue date)?
10. West Valley Corporation issues $800,000 of 20-year, 9 percent bonds at 95. Interest is paid
semi-annually, and the effective interest method is used for amortization. Assume that the market
interest rate for similar investments is 10 percent and that the bonds are issued on an interest date.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. How much bond interest expense is recorded on the first interest date (after the issue date)?
d. What is the carrying value of the bonds after the first interest date (after the issue date)?
11. On January 1, 20xx, Lurline Corporation issued ten-year, 8 percent bonds with a face value of
$500,000. The semi-annual interest dates are June 30 and December 31. The bonds were issued for
$437,740 to yield an effective annual rate of 10 percent. The accounting year ends on December 31.
Prepare entries in journal form without explanations to record the bond issue on January 1, 20xx, and
the payments of interest and amortization of discount on June 30 and December 31, 20xx. Use the
effective interest method of amortization. Round answers to the nearest dollar.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
12. On January 2, 20xx, Horst Corporation issued ten-year, 8 percent bonds with a face value of
$1,000,000. The semi-annual interest dates are June 30 and December 31. The bonds were issued for
$875,480 to yield a market interest rate of 10 percent. The accounting year ends on December 31.
Prepare entries in journal form without explanations to record the bond issue on January 2, 20xx, and
the payments of interest and amortization of discount on June 30 and December 31, 20xx. Use the
straight-line method of amortization. Round answers to the nearest dollar.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Bond Interest Expense ($437,740 0.05)
($21,887 – $20,000 = $1,887)
Bond Interest Expense
[($437,740 + $1,887) 0.05 = $21,981]
($21,981 – $20,000 = $1,981)
13. On November 1, 2009, Fields Corporation issued $800,000 worth of ten-year, 9 percent bonds. The
semi-annual interest dates are November 1 and May 1. Because the market interest rate of similar
investments was 8.5 percent, the bonds were issued at a price of 103. Ignoring year-end accruals,
prepare entries in journal form without explanations to record the bond issue on November 1, 2009,
and the payments of interest and amortization of premium on May 1 and November 1, 2010. Use the
effective interest method of amortization. Round answers to the nearest dollar.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Cash ($1,000,000 0.08 1/2)