Question : 138.On January 1, a company issues bonds dated January 1 : 1258331

 

 

138.On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using straight-line amortization is:   

A.Debit Interest Payable $13,500; credit Cash $13,500.00.

 

B.Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.

 

C.Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

 

D.Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.

 

E.Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

Cash payment = $300,000 * .09 * ½ = $13,500Premium Amortization = $312,177 – $300,000 = $12,177/10 = $1,217.70Interest Expense = $300,000 * .09 * ½ = $13,500 – $1,217.70 = $12,282.30

 

 

 

139.On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:   

A.Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash $13,500.00.

 

B.Debit Interest Payable $13,500; credit Cash $13,500.00.

 

C.Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00.

 

D.Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

 

E.Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

Cash payment = $300,000 * .09 * ½ = $13,500Interest Expense = $312,177 * .08 * ½ = $12,487.08Premium Amortization = $13,500 – $12,487.08 = $1,012.92

 

 

 

140.Marwick Corporation issues 8%, 5 year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond’s issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?   

A.$1,000,000

 

B.$789,244

 

C.$1,341,208

 

D.$1,085,308

 

E.$658,792

Interest Exp. = $1,000,000 par * .08 stated interest rate * ½ = 40,000 (this is an annuity)($1,000,000 * .7441) + (40,000 * 8.5302) = $1,085,308

 

 

 

141.Sharmer Company issues 5%, 5 year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond’s issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?    

A.$957,355

 

B.$1,000,000

 

C.$1,250,000

 

D.$786,745

 

E.$1,213,255

Interest Exp. = $1,000,000 par * .05 stated interest rate * ½ = 25,000 (this is an annuity) ($1,000,000 * .7441) + (25,000 * 8.5302) = $957,355

 

 

 

142.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 Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.

 

B.Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.

 

C.Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.

 

D.Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.

 

E.Debit Cash $383,793; credit Bonds Payable $383,793.

Discount = $400,000 – $383,793 = $16,207The issued bond is always recorded at par (face) value in the Bonds Payable account, with the difference between par value and issue price recorded as a discount or premium, depending on whether the issue price is greater than par (premium) or less than par (discount).

 

 

 

143.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 Payable $14,000.00; credit Cash $14,000.00.

 

B.Debit Interest Expense $14,000.00; credit Cash $14,000.00.

 

C.Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.

 

D.Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.

 

E.Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.

Cash payment of interest = $400,000 * .07 * ½ = $14,000Discount Amortization = $400,000 – $383,793 = $16,207/10 = $1,620.70Interest Expense = $14,000 + $1,620.70 = $15,620.70

 

 

 

144.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 Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.

 

B.Debit Interest Payable $14,000.00; 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 $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.

Interest Expense = $383,793 * .08 * ½ = $15,351.72Cash payment of interest = $400,000 * .07 * ½ = $14,000Discount Amortization = $15,351.72 – $14,000 = $1,351.72The effective interest method determines interest expense by multiplying the carrying value of the bond by the market rate of interest.

 

 

 

145.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 distinguish between operating leases and capital leases.

 

C.The criteria for identifying a lease as a capital lease are more general under IFRS.

 

D.Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.

 

E.Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.

 

 

 

 

146.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.Debit to Bonds Payable $310,000.

 

B.Debit to Premium on Bonds Payable $10,000.

 

C.Credit to Common Stock $250,000.

 

D.Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.

 

E.Debit to Bonds Payable $300,000.

 

 

 

 

147.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.$420,000

 

B.$402,362

 

C.$300,010

 

D.$308,107

 

E.$325,592

Market interest rate is used to determine issue price. The 6% annual rate/2 = 3%, so PV factors at 3% should be used.Par value $300,000 * PV of $1 factor 0.7441 = $223,230Interest payment (300,000 * .08 * 1/2) * PV of an Annuity factor 8.5302 = $102,362Bond Issue Price = 223,230 + 102,362 = 325,592