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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 81

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On January 1, 2011, Citrus Retail Co. issued a $500,000, 5 year, 8% installment note payable with payments of $100,000 principal plus interest due on January 1 of each year for the next 5 years. 1. Prepare the adjusting journal entry at December 31, 2011 to accrue interest for the year. 2. Show the account(s) and amount(s) and where it will appear on a multi-step income statement prepared on December 31, 2011. 3. Show the account(s) and amount(s) and where they will appear on a classified balance sheet prepared on December 31, 2011.

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Question 82

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There are two methods of amortizing a bond discount or premium: the straight-line method and the double-declining-balance method.

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Question 83

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The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should be classified on the balance sheet as

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Present entries to record the following transactions for the current fiscal year:

On January 1, 2014, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the issuance of the installment note for cash on January 1, 2014 would include:

If $1,000,000 of 8% bonds are issued at 105, the amount of cash received from the sale is

On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable semiannually, were sold for $1,225,000. Present entries to record the following transactions for the current fiscal year:

A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000. Journalize the redemption of the bonds.

A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Prepare an amortization schedule for the 1st 2 years (effective method) using the following data: 1. On January 1, 2010, ABC Co. issued $2,000,000, 5%, 10 year bonds, interest payable on June 30th and December 31st to yield 6%. Use the following format and round to nearest dollar (may have small rounding error). The bonds were issued for $1,851,234. 2. Show how this bond would be reported on the balance sheet at 12/31/11.

On January 1, 2011, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, 2011. The December 31, 2013 carrying amount in the amortization table for this installment note will be equal to:

Use the following tables to calculate the present value of a $25,000 7%, 5 year bond that pays $1,750 ($25,000 × 7%) interest annually, if the market rate of interest is 7% Present Value of $1 at Compound Interest Present Value of Annuity of $1 at Compound Interest

Debenture bonds are

On the first day of the fiscal year, Hawthorne Company obtained a $ 88,000, seven-year, 5% installment note from Sea Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal entry Hawthorne would record to make the first annual payment due on the note would include:

Bonds payable would be listed at their carrying value on the balance sheet.

The effective-interest method of amortizing a bond discount or premium is the preferred method.

Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do materially differ from the results obtained by use of the interest method.

Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every 6 months.

The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.