Accounting Chapter 20 Homework Total Amount Received From Sale Bond 194000

Chapter 20

Corporations and Bonds Payable

Chapter Overview

This chapter begins with a discussion of the ways corporations can raise funds – they could issuing issue either

stock or long-term notes payable. Notes or stock are good sources of funds, and current conditions and interest

rates help the company decide the best method for them at the time the funds are needed. If a company decides to

use bonds, they need to understand the different types of bonds available: secured, debentured, serial, registered,

callable, or convertible. The company also needs to consider the interest rate that will be stated on the bonds. The

difference between the current and market value interest rate will dictate if the bonds are issued at a discount or

Learning Objectives

After studying Chapter 20, your students should gain proficiency in the following:

1. Journalize Issuance and Interest Payments of Bonds.

2. Explain and Journalize Amortization of Bonds by the Straight-Line Method.

3. Explain and Journalize Amortization of Bonds by the Interest Method.

4. Journalize Bond Sinking Fund Transactions.

Chapter 20 Assignment Grid

Estimated Level

Learning Time in of

Assignment Topic(s) Objective(s) Minutes Difficulty

Discussion Questions and Critical Thinking/Ethical Case

1 Bond Selling Price 1 5 Easy

2 Types of Bonds 1 5 Easy

3 Dividends 1 5 Easy

4 Accrued Interest on Bond Purchase 1 5 Easy

5 Bond Premium 2 5 Easy

6 Discount on Bonds Payable 2 5 Easy

7 Premium on Bonds Payable 2 5 Easy

8 Amortizing Bond Discount or Premiums 23 5 Easy

9 Carrying Value of Bond 23 5 Easy

10 Interest Method of Amortization 23 5 Easy

11 Retirement of Bonds 4 5 Easy

12 Bond Sinking Fund 4 5 Easy

13 Ethical Case 1 5 Medium

Concept Checks

1 Bond Journal Entries 1 15 Easy

2 Bond Issued at a Discount 1 10 Easy

3 Interest and Amortization of Discount with

Straight-Line Method 2 10 Easy

4 Bond Issued at Premium 2 15 Easy

5 Interest and Amortization of Premium with

Straight-Line Method 2 15 Easy

6 Amortization of Bond Discount by Interest

Method 3 20 Medium

7 Journalizing the Semiannual Payment of

Amortization of Discount 3 10 Easy

8 Amortization of Bond Premium by Interest

Method 3 20 Medium

9 Journalizing the Semiannual Payment and

Amortization of Bond Premium 3 10 Easy

10 Sinking Fund 4 10 Easy

Exercises (Set A)

20A-1 Earnings per Share 1 30 Medium

20A-2 Bond Entries 1 30 Medium

20A-3 Entries: Bond & Straight-Line Amortization 1, 2 50 Medium

20A-4 Entries: Bond & Straight-Line Amortization 1, 2 50 Medium

20A-5 Entries: Bond & Interest Method Amortization 1, 3 50 Medium

20A-6 Sinking Fund Entries 4 35 Medium

20A-7 Balance Sheet Presentation 2, 4 30 Medium

Exercises (Set B)

20B-1 Earnings per Share 1 30 Medium

20B-2 Bond Entries 1 30 Medium

20B-3 Entries: Bond & Straight-Line Amortization 1, 2 50 Medium

20B-4 Entries: Bond & Straight-Line Amortization 1, 2 50 Medium

20B-5 Entries: Bond & Interest Method Amortization 1, 3 50 Medium

20B-6 Sinking Fund Entries 4 35 Medium

20B-7 Balance Sheet Presentation 2, 4 30 Medium

Problems (Set A)

20A-1 Bond Entries 1, 2 60 Hard

20A-2 Amortization Schedule – Straight-Line 1, 2 60 Medium

20A-3 Bond Schedule and Entries – Interest Method 1, 2, 3 70 Hard

20A-4 Bond Schedule and Entries – Interest Method 1, 2, 3 70 Hard

Estimated Level

Learning Time in of

Assignment Topic(s) Objective(s) Minutes Difficulty

Problems (Set B)

20B-1 Bond Entries 1, 2 60 Hard

20B-2 Amortization Schedule – Straight-Line 1, 2 60 Medium

20B-3 Bond Schedule and Entries – Interest Method 1, 2, 3 70 Hard

20B-4 Bond Schedule and Entries – Interest Method 1, 2, 3 70 Hard

Financial Report Problem

Kellogg’s Reading Amazon’s Annual Report 1 10 Easy

Learning Unit 20-1: Journalizing Issuance and Interest Payments of

Bonds

Summary: A Bond bond is an interest-bearing note payable usually in $1,000 denominations issued by a

corporation to a large group of lenders. Each bond certificate, usually issued in denominations of $1,000, contains

the following: face value (principal or par value) and contract rate (interest rate). The face value is the amount that

the corporation must repay to the lender at the maturity date. The contract rate, stated interest rate or coupon rate,

is the annual interest rate based on face value. Usually this interest is paid semi-annually or twice per year. The

dates of interest payment are also printed on the certificate. A bond certificate is a piece of paper held by a

bondholder showing evidence of a bond issued by a corporation to be payable on a specific date for an specific

sum to the order of the person named in the bond certificate or to the bearer.

A bond indenture is the information on the bond certificate written by the corporation into a more formal

agreement. This agreement is usually monitored by a trustee (often a bank), who represents the group of

bondholders. A trustee organization, a bank or person, who monitors a bond indenture for the protection of

bondholders. A secured bond pledges specific assets such as equipment or property as security for meeting the

terms of the bond agreement. A debenture bond does not pledge to any assets as collateral. Therefore, the bonds

are unsecured. Serial bonds are issued in a series, each having its own maturity date.

A registered bond is a bond that the owners are registered with the issuing company, and interest is mailed to the

bondholder’s on record. Callable bonds have a provision stating that they can be called in by a corporation after a

certain date. When a bond issue is called in, the corporation usually has to pay a price above the face value of the

bond. A convertible bond allows bondholders to convert their bonds into shares of stock. For this right,

bondholders give up fixed interest payments for what they hope will be higher dividends and/or stock prices.

There are three entries needs to be made for the bonds: the issuance, the interest payment, and the maturity date

payment. The issuance payment is done when the bond is issued or sold. The entry is a debit to the Cash account

and a credit to the Bonds Payable account. The interest payments are made twice a year. The entry needed is a

debit to the Interest Expense account and the credit to the Cash account. The maturity payment is made at the end

of the bond term. The entry is a debit to Bonds Payable and a credit to Cash.

Key Concepts: Bond, bond certificate, face value, contract rate, bond indenture, trustee, secured bond, debenture

bonds, serial bonds, registered bond, callable bond, convertible bond.

Lecture Outline:

Bond terminology:

1. Face value – the amount the corporations must repay to the lender on the maturity date.

2. Contract rate or stated interest rate – the annual interest rate, which is usually paid semiannually as

stated on the certificate. Remember: Interest = Principal x Rate x Time.

3. The same information is written into the more formal agreement called the bond indenture. (This

agreement is monitored by a trustee (often a bank) who represents the group of bondholders.)

Types of bonds:

1. Secured bonds – bonds issue by a corporation that pledges specific assets as security.

2. Debenture bonds – bonds that are unsecured and are issued only on the general credit of a corporation.

3. Serial Bonds – bonds issued in a series with each series having its own maturity date.

4. Registered bonds – bond owners are registered with the corporation, and interest checks are sent

directly to the owners of record.

5. Callable bonds – bonds with a provision, that after a certain date, they can be called in by the

corporation for a price usually above the face value of the bond.

6. Convertible bonds – bond may be allowed to convert bonds into shares of stock.

Stocks vs. Bonds:

1. Corporations raise funds through the selling of bonds or stocks.

2. Decision is based on the advantages/disadvantages of the following factors: income taxes and cash

flows.

(a) Income and taxes:

(i) Bond interest expense reduces earnings and income taxes.

(ii) Stock dividends do not affect earnings, and taxes remain unchanged.

(iii) Earnings per share (EPS) is computed as:

After-tax Tax Earnings – Dividends for Preferred Stock

Number of Shares of Common Stock Outstanding

(iv) Bond interest expense reduces earnings so the numerator of the EPS calculation is lower

than selling stock.

(v) Stock issuance increases the number of shares outstanding compared to bond issuance.

This increases the denominator of the EPS calculation.

(b) Cash flow:

(i) Bond interest requires the company to pay interest and pay the owners the face value of

the bond at maturity. A company needs to consider their ability to pay this debt.

(ii) The interest rates may affect a company’s ability or desire to make the interest payments

or pay back the bond.

(iii) Stock issuance does not require the company to pay interest or pay the face value of the

stock to the owners.

Bond’s Journal Entries:

1. Issuance of bonds: $500,000 @ 12% for 10 years (See Figure 20.1)

Dr. Cash 500,000

Cr. Bonds Payable 500,000

2. Semiannual interest payments. The interest expense is $500,000 x 12% x 6/12 = $30,000

(See Figure 20.2)

Dr. Bond Interest Expense 30,000

Cr. Cash 30,000

3. Retirement of bond issue when the bond is paid (See Figure 20.3)

Dr. Bonds Payable 500,000

Cr. Cash 500,000

Bonds sold between interest dates:

1. The purchaser of the bonds pays the purchase price of the bond plus the interest that has accrued since

the last interest payment.

2. When the next interest payment date arrives, the company pays the purchaser the interest for the entire

six months.

Example: Bonds discussed above were issued on January 1 and sold on March 1 (two months or 59 days).

The interest is $ 10,000. (Principal x Annual Interest Rate x Time) $500,000 x 12% x 2/12 = $10,000

Dr. Cash 510,000

Cr. Bonds Payable 500,000

Cr. Bond Interest payable 10,000

Bond Payment date: (for the first 6 months)

Dr. Bond Interest payable 10,000

Dr. Bond Interest Expense 20,000

Cr. Cash 30,000

Teaching Tips/Strategy: Clarify the bond concept and the different types of bonds as well as characteristics of

each bond. Discuss the difference between a loan and a bond. Illustrate the different kinds of bonds and why

certain bonds are more appealing to investors than others. Evaluate the interest rate concept and how it is a

determinant factor while pricing bonds. To review all related entries use the “Try It! LU 20-1”. Utilize the

Accounting Success Coach LU 20-1 as an assessment. For class demonstration, utilize the Concept Checks #1 , #2,

and #3 2 to practice the bond’s required entries.

Use the “Ten-Minute Quiz” questions #1 and #21 to reinforce the learning concept.

Learning Unit 20-2: Journalizing Amortization of Bonds by the Straight–

Line Method

Summary: The bonds issued might have a rate of interest stated on the bond, the contract rate, which may be

lower or higher than the current market rate of interest. Investors may require higher rates of interest if the

bond issue appears to be different from others offered by companies that may have had fewer financial

difficulties. The effective rate is the real or actual rate of interest to the borrowing corporation. Bond Quotes

(bond prices) are determined by the comparison of the contract rate and the market rate. The carrying

value (book value) is the face value of a bond less bond discount or plus bond premium. A Discount on Bonds

Payable, a contra-liability account, is an account used when bonds are issued below face value. This indicates

market rate of interest is higher than contract rate. The amortization of the discount on Bonds Payable is the

writing off of the bond discount as an increase to interest expense for each interest period. A Premium on Bonds

Payable, a contra-liability account, is an account used when bonds are issued above face value. This indicates

market rate of interest is lower than the contract rate. The amortization of the premium on Bonds Payable is the

writing off of the bond premium as a decrease to the interest expense for each interest period. Straight-line

amortization is a method that recognizes equal amounts of interest expense for each period when amortizing a

bond discount or premium.

Examples of a $1,000 bond quotes:

If the contract interest rate = market rate, the bond is sold at $1000 or par value.

If the contract interest rate > market rate, the bond is sold at premium (an amount higher than

$1000).

If the contract interest rate < market rate, the bond is sold at discount (an amount below $1,000).

Key Concepts: Effective rate, carrying value (book value), discount on bonds payable, amortization of

discount on bonds payable, amortization of premium on bonds payable, straight-line method, premium on

bonds payable.

Lecture Outline:

1. Interest rate – The market interest rate may be lower or higher than the stated rate.

a. The bond purchasers are interested in receiving the market rate of interest, and the company

adjusts the price of the bond so the effective rate of interest is the market rate.

b. When the company pays off the bond, the purchaser will receive the full face value of the bond

regardless of the price paid for the bond.

c. The difference between the amount paid for the bond and the face value of the bond combines with

the interest payments to yield the effective interest rate.

d. The straight-line method is an amortization method which divides interest expense evenly over the

life of bond.

2. Bonds sell at par – The market rate is the same as the stated rate. The bond price is the same as the face

value of the bond. The bond price or quote is stated as 100. Example: The bond is $200,000 at an

interest rate of 12% payable semi-annually.

The journal entry for the bond issuance is:

Dr. Cash 200,000

Cr. Bonds Payable 200,000

3. Bond discount – Market rate is higher than the stated rate. The bond price is less than the face value of

the bond, and the difference is a bond discount. Bond price (quote) is stated as less than 100. Example:

The journal entry for the bond issuance at 97 is:

Dr. Cash ($200,000 x .97) 194,000

Dr. Discount on Bonds Payable 6,000

Cr. Bonds Payable 200,000

a. The balance sheet would show the bond as:

Long-term Liabilities

12% Bonds Payable $200,000

Less: Discount on Bonds Payable – 6,000

194,000 (Carrying value of bond)

b. Each semi-annual interest payment would reduce the discount on bonds payable.

(a) The bond interest per the bond is: $200,000 bonds x 12% interest x ½ year = $12,000

(b) Over the life of the bond (10 years), the interest per bond certificate is $240,000.

(c) The effective interest rate is:

Principal of bonds $200,000

Interest due per bond certificate 240,000

Total amount to be paid to bondholder $440,000

Total amount received from sale of bond 194,000

Interest to be paid over the life of bond $246,000

The semiannual interest expense is $12,300 ($246,000 / 10 years) x ½ year)

(d) If the interest due (payment) the bond holder is $12,000 and the semiannual interest expense is

$12,300, the difference of $300 will be credited to the discount on bonds payable account.

This will result in a $300 increase in interest expense and a reduction of the discount on bonds

payable.

(e) The amortization or reduction of the discount is done by $300 with each interest payment as

stated Table 20.2. At the end of the 10-year life of the bond, the discount on bonds payable

account will be zero. Amortizing discounts on bonds payable with this method is the straight-

line method.

(f) The journal entry to record each semiannual interest payment is:

Dr. Bond Interest Expense (246,000/10 x 6/12) 12,300

Cr. Discount on Bonds Payable 300

Cr. Cash (200,000 x .12 x 6/12) 12,000

4. Bond Premium – Market rate is lower than the stated rate. The bond price is higher than the bond face

value, and the difference is a bond premium. Bond price (quote) is stated higher than 100. Example:

The journal entry for the bond issuance at 101 is:

Dr. Cash ($200,000 x 1.10) 202,000

Cr. Premium on Bonds Payable 2,000

Cr. Bonds Payable 200,000

Teaching Tips/Strategy: This topic is particularly difficult for students to understand. Utilize examples such as:

Discussion Question #8, Concept Checks #3 – #5, and Exercise 20A-3 and 20A-4. It will be beneficial to present

the bond quotes as they are presented in the Wall Street Journal investment section. It will relate the textbook

terminology to actual investing terms that some of the students are used to hearing and reading about.

Use the “Ten-Minute Quiz” questions #3, #4, and #5 to reinforce the learning concepts.

Learning Unit 20-3: Journalizing Amortization of Bonds by the Interest

Method*

Summary: The straight-line method of amortization recognizes an equal amount of interest for each period even

though the bond’s carrying value changes while the interest method of amortization recognizes a constant

percentage of the bond carrying value. Accountants think it is inconsistent for interest expense to stay the same

while the amount owed changes. Generally Accepted Accounting Principles (GAAP) state interest should be a

constant percentage of the carrying value. Usually the straight-line method may be used only if the results do not

materially differ from those of the interest method. The effective interest method amortizes the premium or

discount to record interest expense, being equal to the carrying value of the bond times the market rate times the

time period. The interest expense is a constant percentage of the carrying value. The discount or premium to be

amortized is the difference between the interest to be recorded and the interest paid to bondholders. (Tables 20.4

and 20.5)

Key Concepts: Interest method of amortization

Lecture Outline:

1. Example: If semiannual interest dates are April 1 and October 1, on December 31, the interest expense

is $6,000 or half of the semiannual interest.

Commented [CS1]: Should this be a 1?

The Journal Entry to record interest expense on December 31 is:

Dr. Bond Interest Expense (12,300 x 3/6 months) 6,150

Cr. Discount on Bonds Payable 150

Cr. Bond Interest Payable 6,000

On January 1, the reversing entry is:

Dr. Bond Interest Payable 6,000

Dr. Discount on Bonds Payable 150

Cr. Bond Interest Expense 6,150

On April 1, the regular semiannual interest entry is:

Dr. Bond Interest Expense 12,300

Cr. Discount on Bonds Payable 300

Cr. Cash 12,000

2. Bond Premium – The market rate is lower than the stated rate. The bond price is higher than the bond

face value making the difference a bond premium

Example: On January 1, the market rate of interest is 11.8%, and the company issued 200, 12% bonds

@ 102.

The Journal Entry to record the issuance is:

Dr. Cash (200 bonds x $1,000 x 102) 204,000

Cr. Premium on Bonds Payable ($204,000 – $200,000) 4,000

Cr. Bonds Payable (200 x $1,000) 200,000

a. The balance sheet would show the bond as:

Long-term Liabilities:

12% Bonds Payable $200,000

Add: Premium on Bonds Payable – 4,000

$204,000 (Carrying value of bond)

b. Each semi-annual interest payment would reduce the premium on bonds payable.

c. The bond interest per the bond is: $200,000 bonds x 12% interest x ½ year = $12,000

d. Over the life of the bond (10 years), the interest per bond certificate is = $240,000.

e. The effective interest rate is:

Principal $200,000

Interest due per bond certificate 240,000

Total amount to be paid to bondholder $440,000

Total amount received from sale of bond 204,000

Interest to be paid over the life of bond $236,000

The semiannual interest expense is $11,800 ($236,000 / 10 years x ½ year)

f. If the interest due the bond holder is $12,000 and the semiannual interest is $11,800, the premium

on bonds payable account will be reduced $200 for each semiannual interest payment. At the end

of the 10-year life of the bond, the premium on bonds payable account will be zero. Amortizing

premium on bonds payable with this method is the straight-line method. See Figure 20.2 for an

illustration of the amortization schedule for bond premium using the straight-line method for each

semiannual period.

The Journal Entry to record each semiannual interest payment is:

Dr. Bond Interest Expense 11,800

Dr. Premium on Bonds Payable 200

Cr. Cash (200,000 x 12 x 6/12) 12,000

3.1. Bond Amortization utilizing the effective interest rate method.

a. Carrying value of bonds at beginning of period x market interest rate = interest expense to be

recorded

b. Face value x contract rate = interest payment to bondholders

c. The discount to be amortized is the difference between (1a) interest paid and (2b) interest

expense recorded.

Example: A company issued $200,000 of 12%, 10-year bonds with interest to be paid on October 1

and April 1. The selling price of the bonds is $178,808, and the market interest rate is 14%. The

discount on the bonds is $200,000 – $178,000 = $21,192. The entry to record the semiannual interest

payment is:

October 1 – payment of interest:

Dr. Bond Interest Expense ($178,808 x 14% x ½ year) 12,517.00

Cr. Discount on Bonds Payable ($12,517 – $12,000) 517.00

Cr. Cash (200,000 x .12 x 6/12) 12,000.00

Dec 31 – Adjusting entry for three months:

Dr. Bond Discount Interest Expense [(178,808 + 517) x 14% x 3/12]6,276.50

Cr. Discount on bonds Bonds payable Payable (6276.20 – 6000) 276.50

Cr. Bond interest Interest payable Payable (200,000 x .12 x 3/12) 6,000.00

January 1 (Reversing Entry):

Dr. Bond Interest Payable 6,000.00

CrDr. Discount on Bonds Payable 276.50

Cr .Bond discount Interest expense 6,276.50

2. Bond Amortization utilizing the effective interest rate method.

d. Carrying value of bonds at beginning of period x market interest rate = interest expense to be

recorded

e. Face value x contract rate = interest payment to bondholders

f. The premium to be amortized is the difference between (a) interest paid and (b) interest

expense recorded.

Example: A company issued $200,000 of 12%, 10-year bonds with interest to be paid on October 1

and April 1. The selling price of the bonds is $224,926, and the market interest rate is 10%. The

premium on the bonds is $224,926 – $200,000 = $24,926. The entry to record the semiannual interest

payment is:

October 1 – payment of interest:

Dr. Bond Interest Expense ($224,926 x 10% x ½ year) 11,246.00

Dr. Premium on Bonds Payable ($12,000 – $11,246) 754.00

Cr. Cash (200,000 x .12 x 6/12) 12,000.00

Dec 31 – Adjusting entry for three months:

Dr. Bond Interest Expense [(224,926 – 754) x 10% x 3/12]5,604.50

Dr. Premium on Bonds Payable (6,000 – 5,604.50) 395.50

Cr. Bond Interest Payable (200,000 x .12 x 3/12) 6,000.00

Formatted: Indent: Left: 0.5″, Numbered + Level: 1 +

Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +

Aligned at: 0.75″ + Indent at: 1″

Formatted: Indent: Left: 0.88″, First line: 0″

Commented [CS2]: Small rounding variation

Formatted: Not Highlight

January 1 (Reversing Entry):

Dr. Bond Interest Payable 6,000.00

Cr. Premium on Bonds Payable 395.50

Cr .Bond Interest Expense 5,604.50

Teaching Tips/Strategy: For the lecture, use a step-by step process to record all necessary entries. Utilize the “Try

It!” Learning Unit 20-3 and the Accounting Success Coach LU 20-3.

To review the basic concepts, explain Concept Check #6. As a group-based activity, students can work together on

Problems 20A-3 or 20A-4. The activity can be timed, and points can be awarded based on accuracy and proper

completion of the problem. The groups that were not able to complete the problem get paired with students that

were able to finish the problem (Pair and Share). Then assign Problems 20B-3 or 20B-4 as an individual activity.

Use the “Ten-Minute Quiz” questions #6 #7, #8, and #9 to reinforce the learning concepts.

Learning Unit 20-4: Journalizing Bond Sinking Fund Transactions

Summary: Often a corporation will agree to establish a fund that will accumulate assets over the life of the bond

so as to pay off the bondholders at maturity. The Sinking Fund accumulates cash to pay off bonds when they are

retired. A sinking fund is often a requirement stated in the bond indentures. The sinking fund interest earned is a

revenue account used to record earnings on the sinking fund balance. The interest is earned on the balance in the

sinking fund, and the account is credited with the interest amount. (Figure 20.21)

Key Concepts: Sinking fund, bond sinking fund interest earned.

Lecture Outline:

For callable bonds, companies retire them and issue new bonds at a lower rate of interest. This is called bond

refunding. If bonds are not callable, companies can repurchase its bonds in the open market and retire them.

1. When bonds are retired before they reach maturity, the following points need to be recognized:

a. Amortization of discount or premium needs to be up-to-date.

b. The premium or discount as well as the bond liability account must be removed.

c. Any gain or loss is recognized on the retirement of the bonds as an extraordinary itemother

income or other expense that will be shown up on the income statement.

Example: On June 30, the corporation retired a $500,000, 10% bond issue that had an unamortized

premium of $19,000. The bonds were called in at 105 (105% of face value).

The entry to record the retirement is:

Dr. Bonds Payable 500,000

Dr. Premium on Bonds Payable 19,000

Dr. Loss on Bond Retirement 6,000

Cr. Cash ($500,000 x 1.0105) 525,000

2. The Bond Sinking Fund is a fund that will accumulate cash to pay off bonds when they are retired.

a. Sinking fund tables are available to make the payments easy to calculate.

For example, a company issued 8%, 15– year bonds for $80,000.

(a) The sinking fund table for 8% and 15 periods has a factor of 0.0368295

(b) $80,000 x 0.0368295 = $2,946.4036

The Journal Entry to record the establishment of a sinking fund (See Figure 20.20)

Dr. Bond Sinking Fund ($80,000 X 0.0368295= $2,946.40.36) 2,946.40 36

Cr. Cash 2,946.4036

b. Interest is earned on the sinking fund, and the book example has interest earned of

$235.71. The entry is:

Dr. Bond Sinking Fund 235.71

Cr. Bond Sinking Fund Interest Earned 235.71

c. When the bonds are paid off, the entry (assuming $50 extra in the sinking fund) is:

Dr. Cash 50

Dr. Bonds Payable 80,000

Cr. Bond Sinking Fund 80,050

Teaching Tips/Strategy: Discussion Question #12 is useful to review the concept of a sinking fund and its uses.

As a pre-lecture use the Accounting Success Coach LU 20-3 4 to start working on the basic topic of the sinking

fund.

Formatted: Highlight

Name Date Section

CHAPTER 20

TEN-MINUTE QUIZ

Circle the letter of the best response.

1. A company is issuing a $100,000 bond that can be repurchased by the company in at least five years for a

price of $105,000. This is a

a. convertible bond b. callable bond

c. series bond d secured bond

2. Bonds payable should be shown on the balance sheet

a. at their maturity value

b. at their face value

c. at their face value plus any unamortized discount.

d. at their face value less any unamortized discount.

3. When the market interest rate is higher than the stated interest rate on a bond

a. the bond will be issued at face value b. the bond will be issued at a discount

c. the bond will be issued at a premium d. the bond will be issued at its maturity value

4. On April 1, the market rate of interest was 10% and a company issued $100,000 of 8%, 10– year bonds for

$87,538. The entry to record the bond issuance is

a. Bonds Payable 87,538

Cash 87,538

b. Bonds Payable 100,000

Discount on Bonds Payable 12,462

Cash 87,538

c. Cash 87,538

Discount on Bonds Payable 12,462

Bonds Payable 100,000

d. Cash 87,538

Bonds Payable 87,538

5. On April 1, the market rate of interest was 8.5% and a company issued $100,000 of 8%, 10– year bonds at

99. If the company uses the straight-line method to amortize the bond discount, the semiannual

amortization amount is

a. $50 b. $207.50

c. $1,000 d. $4,207.50

6. On April 1, the market rate of interest was 8.5% and a company issued $100,000 of 8%, 10– year bonds at

99. If the company uses the effective interest method to amortize the bond discount, the semiannual

amortization for the first six months is

a. $50 b. $207.50

c. $1,000 d. $4,207.50

7. On April 1, the market rate of interest was 8.5% and a company issued $100,000 of 8%, 10– year bonds at

99. If the company uses the effective interest method to amortize the bond discount, the total interest

expense for the year ended December 31 is

a. $$4,050 000 b. $4,207.50

c. $8,1006,000 d. $8,4156,315.66

Commented [CS3]: From April 1 through December 31 is 9

months or ¾ of full year.

8. On April 1, the market rate of interest was 8.5% and a company issued $100,000 of 8%, 10– year bonds at

99. If the company uses the straight-line method to amortize the bond discount, the total interest expense

for the year is

a. $4,050 b. $4,207.50

c. $8,100 d. $8,415

9. When a bond is sold on April 1 and interest payments are Jan. 1 and July 1, the amount of cash received

when the bond is issued will be

a. decreased by interest accrued from April 1 to July 1

b. decreased by interest accrued from Jan. 1 to April 1

c. increased by interest accrued from April 1 to July 1

d. increased by interest accrued from Jan. 1 to April 1

10. A bond may be retired by all below except

a. purchasing the bonds on the stock market and then retiring them

b. converting the bonds into common stock if the bonds are convertible

c. calling the bonds into the company at a price based upon a percentage of for face value

d. declaring the bonds retired

Answer Key to Chapter 20 Quiz

1. b

2. d

3. b

4. c

5. a

6. b

7. d

8. c

9. d

10. bd