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Assume you win a $1,000,000 contest, and the prize will be paid in equal 10 equal installments over 10 years. The payments will be made on June 30 of each year beginning with June 30 this year. If the current rate of interest is 7 percent, what is the present value of your winnings? Use the information in the table to determine your answer. Present value of an annuity of $1 at compound interest:  Periods4.0%4.5%5.0%5.5%6.0%6.5%7.0%10.%11.0%12.0%13.0%0.9610.9560.9520.9470.9430.9380.9340.9090.9000.8920.884154943887409758099086961.8861.8721.8591.8461.8331.8201.8081.7351.7121.6901.668209674132396302545205102.7752.7482.7232.6972.6732.6482.6242.4862.4432.4012.361309962593014832857183153.6293.5873.5453.5053.4653.4253.3873.1693.1023.0372.974490539515118021874535474.4514.3894.3294.2704.2124.1554.1003.7903.6953.6043.517582984828366820799078235.2425.1575.0754.9954.9174.8414.7664.3554.2304.1113.997614876953320154265441556.0025.8925.7865.6825.5825.4845.3894.8684.7124.5634.422705703797385229422076616.7326.5956.4636.3346.2096.0885.9715.3345.1464.9674.798874892157797530931264777.4357.2687.1076.9526.8016.6566.5155.7595.5375.3285.131933798220691023020525668.1107.9127.7217.5377.3607.1887.0236.1445.8895.6505.426109072736309835857232224\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\&0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1&54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\&1.886 & 1.872 & 1.859 & 1.846 & 1.833 & 1.820 & 1.808 & 1.735 & 1.712 & 1.690 & 1.668 \\2&09 & 67 & 41 & 32 & 39 & 63 & 02 & 54 & 52 & 05 & 10\\&2.775 & 2.748 & 2.723 & 2.697 & 2.673 & 2.648 & 2.624 & 2.486 & 2.443 & 2.401 & 2.361 \\3&09 & 96 & 25 & 93 & 01 & 48 & 32 & 85 & 71 & 83 & 15\\&3.629 & 3.587 & 3.545 & 3.505 & 3.465 & 3.425 & 3.387 & 3.169 & 3.102 & 3.037 & 2.974 \\4&90 & 53 & 95 & 15 & 11 & 80 & 21 & 87 & 45 & 35 & 47\\&4.451 & 4.389 & 4.329 & 4.270 & 4.212 & 4.155 & 4.100 & 3.790 & 3.695 & 3.604 & 3.517 \\5&82 & 98 & 48 & 28 & 36 & 68 & 20 & 79 & 90 & 78 & 23\\&5.242 & 5.157 & 5.075 & 4.995 & 4.917 & 4.841 & 4.766 & 4.355 & 4.230 & 4.111 & 3.997 \\6&14 & 87 & 69 & 53 & 32 & 01 & 54 & 26 & 54 & 41 & 55\\&6.002 & 5.892 & 5.786 & 5.682 & 5.582 & 5.484 & 5.389 & 4.868 & 4.712 & 4.563 & 4.422 \\7&05 & 70 & 37 & 97 & 38 & 52 & 29 & 42 & 20 & 76 & 61\\&6.732 & 6.595 & 6.463 & 6.334 & 6.209 & 6.088 & 5.971 & 5.334 & 5.146 & 4.967 & 4.798 \\8&74 & 89 & 21 & 57 & 79 & 75 & 30 & 93 & 12 & 64 & 77\\&7.435 & 7.268 & 7.107 & 6.952 & 6.801 & 6.656 & 6.515 & 5.759 & 5.537 & 5.328 & 5.131 \\9&33 & 79 & 82 & 20 & 69 & 10 & 23 & 02 & 05 & 25 & 66\\&8.110 & 7.912 & 7.721 & 7.537 & 7.360 & 7.188 & 7.023 & 6.144 & 5.889 & 5.650 & 5.426 \\10&90 & 72 & 73 & 63 & 09 & 83 & 58 & 57 & 23 & 22 & 24\end{array}


A) $253,785
B) $210,618
C) $173,256
D) $207,784

E) All of the above
F) C) and D)

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Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1, at 97. Glover's year-end is December 31. ​ (a) Were the bonds issued at a premium, a discount, or at par? (b) Was the market rate of interest higher, lower, or the same as the contract rate of interest? (c) If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? (d) What is the carrying value of the bonds on December 31?

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(a) The bonds were issued at a discount....

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Balance sheet and income statement data indicate the following:  Company A  Company B  Bonds payable, 8%,24-year bonds $1,200,000$900,000 Income before income tax for year 495,000130,000 Income tax for year 75,00012,000 Interest payable 50,0000 Interest receivable 21,00028,000\begin{array}{lrr}&\text { Company A } & \text { Company B } \\\text { Bonds payable, } 8 \%, 24 \text {-year bonds } & \$ 1,200,000 & \$ 900,000 \\\text { Income before income tax for year } & 495,000 & 130,000 \\\text { Income tax for year } & 75,000 & 12,000 \\\text { Interest payable } & 50,000 & 0 \\\text { Interest receivable } & 21,000 & 28,000\end{array} ​ (a) For each company, what is the times interest earned ratio? (Round to one decimal place) (b) Which company gives potential creditors more protection?

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The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.

A) True
B) False

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There is a loss on redemption of bonds when bonds are redeemed above the carrying amount.

A) True
B) False

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If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

A) True
B) False

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If bonds are issued at a premium, the stated interest rate is


A) higher than the market rate of interest
B) lower than the market rate of interest
C) too low to attract investors
D) adjusted to a higher rate of interest

E) None of the above
F) B) and C)

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On January 1 of the current year, the Barton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, five years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 is


A) $10,900
B) $18,200
C) $21,800
D) $29,000

E) B) and D)
F) A) and B)

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A bond is usually divided into a number of individual bonds of $500 each.

A) True
B) False

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A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received for the bonds will be


A) present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years
B) present value of 30 annual interest payments of $720,000
C) present value of 30 annual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years
D) present value of $9,000,000 to be repaid in 30 years, less present value of 60 semiannual interest payments of $360,000

E) B) and C)
F) A) and C)

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The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

A) True
B) False

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The journal entry a company records for the interest payment and amortization of bond discount is


A) debit Interest Expense, credit Cash and Discount on Bonds Payable
B) debit Interest Expense, credit Cash
C) debit Interest Expense and Discount on Bonds Payable, credit Cash
D) debit Interest Expense, credit Interest Payable and Discount on Bonds Payable

E) A) and C)
F) B) and C)

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A bond is simply a form of an interest-bearing note.

A) True
B) False

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When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that pay interest annually. The selling price of this bond issue was _____. Use the following table, if needed.  Present value of $1 at Compound Interest  Periods 5%6%7%10%12%10.952380.943400.934580.909090.8928620.907030.890000.873440.826450.7971930.863840.839620.816300.751320.7117840.822700.792090.762900.683010.6355250.783530.747260.712990.620920.5674360.746220.704960.666340.564470.5066370.710680.665060.622750.513160.4523580.676840.627410.582010.466510.4038890.644610.591900.543930.424100.36061100.613910.558400.508350.385540.32197\begin{array}{l}\text { Present value of } \$ 1 \text { at Compound Interest }\\\begin{array} { l c c c c c } \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% & 12 \% \\1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 & 0.89286 \\2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 & 0.79719 \\3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 & 0.71178 \\4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 & 0.63552 \\5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 & 0.56743 \\6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 & 0.50663 \\7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 & 0.45235 \\8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 & 0.40388 \\9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 & 0.36061 \\10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 & 0.32197\end{array}\end{array}


A) $321,970
B) $1,000,000
C) $943,494
D) $621,524

E) A) and B)
F) C) and D)

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The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period.

A) True
B) False

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On January 1, $2,000,000, 5-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is


A) $8,000
B) $2,000
C) $4,000
D) $10,000

E) A) and B)
F) B) and D)

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The present value of $40,000 to be received in two years, at 12% compounded annually, is _____ (rounded to nearest dollar) . Use the following table, if needed.  Present value of $1 at Compound Interest  Periods 5%6%7%10%12%10.952380.943400.934580.909090.8928620.907030.890000.873440.826450.7971930.863840.839620.816300.751320.7117840.822700.792090.762900.683010.6355250.783530.747260.712990.620920.5674360.746220.704960.666340.564470.5066370.710680.665060.622750.513160.4523580.676840.627410.582010.466510.4038890.644610.591900.543930.424100.36061100.613910.558400.508350.385540.32197\begin{array}{l}\text { Present value of } \$ 1 \text { at Compound Interest }\\\begin{array} { l l l l l l } \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% & 12 \% \\1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 & 0.89286 \\2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 & 0.79719 \\3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 & 0.71178 \\4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 & 0.63552 \\5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 & 0.56743 \\6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 & 0.50663 \\7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 & 0.45235 \\8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 & 0.40388 \\9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 & 0.36061 \\10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 & 0.32197\end{array}\end{array}


A) $31,888
B) $48,112
C) $8,112
D) $40,000

E) A) and B)
F) B) and D)

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Allows the bond holder to exchange bond for shares of stock


A) carrying amount
B) face value
C) callable bond
D) indenture
E) term bond
F) convertible bond
G) serial bond

H) B) and G)
I) E) and G)

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Marmalice Co. issued $4,000,000 of five-year, 10 percent bonds, with interest payable semiannually, at a market (effective) interest rate of 11 percent. Determine the present value of the bonds payable using the present value tables. Round to the nearest dollar. Present value of an annuity of $1 at compound interest:  Periods4.0%4.5%5.0%5.5%6.0%6.5%7.0%10.%11.0%12.0%13.0%0.9610.9560.9520.9470.9430.9380.9340.9090.9000.8920.884154943887409758099086961.8861.8721.8591.8461.8331.8201.8081.7351.7121.6901.668209674132396302545205102.7752.7482.7232.6972.6732.6482.6242.4862.4432.4012.361309962593014832857183153.6293.5873.5453.5053.4653.4253.3873.1693.1023.0372.974490539515118021874535474.4514.3894.3294.2704.2124.1554.1003.7903.6953.6043.517582984828366820799078235.2425.1575.0754.9954.9174.8414.7664.3554.2304.1113.997614876953320154265441556.0025.8925.7865.6825.5825.4845.3894.8684.7124.5634.422705703797385229422076616.7326.5956.4636.3346.2096.0885.9715.3345.1464.9674.798874892157797530931264777.4357.2687.1076.9526.8016.6566.5155.7595.5375.3285.131933798220691023020525668.1107.9127.7217.5377.3607.1887.0236.1445.8895.6505.426109072736309835857232224\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\&0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1&54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\&1.886 & 1.872 & 1.859 & 1.846 & 1.833 & 1.820 & 1.808 & 1.735 & 1.712 & 1.690 & 1.668 \\2&09 & 67 & 41 & 32 & 39 & 63 & 02 & 54 & 52 & 05 & 10\\&2.775 & 2.748 & 2.723 & 2.697 & 2.673 & 2.648 & 2.624 & 2.486 & 2.443 & 2.401 & 2.361 \\3&09 & 96 & 25 & 93 & 01 & 48 & 32 & 85 & 71 & 83 & 15\\&3.629 & 3.587 & 3.545 & 3.505 & 3.465 & 3.425 & 3.387 & 3.169 & 3.102 & 3.037 & 2.974 \\4&90 & 53 & 95 & 15 & 11 & 80 & 21 & 87 & 45 & 35 & 47\\&4.451 & 4.389 & 4.329 & 4.270 & 4.212 & 4.155 & 4.100 & 3.790 & 3.695 & 3.604 & 3.517 \\5&82 & 98 & 48 & 28 & 36 & 68 & 20 & 79 & 90 & 78 & 23\\&5.242 & 5.157 & 5.075 & 4.995 & 4.917 & 4.841 & 4.766 & 4.355 & 4.230 & 4.111 & 3.997 \\6&14 & 87 & 69 & 53 & 32 & 01 & 54 & 26 & 54 & 41 & 55\\&6.002 & 5.892 & 5.786 & 5.682 & 5.582 & 5.484 & 5.389 & 4.868 & 4.712 & 4.563 & 4.422 \\7&05 & 70 & 37 & 97 & 38 & 52 & 29 & 42 & 20 & 76 & 61\\&6.732 & 6.595 & 6.463 & 6.334 & 6.209 & 6.088 & 5.971 & 5.334 & 5.146 & 4.967 & 4.798 \\8&74 & 89 & 21 & 57 & 79 & 75 & 30 & 93 & 12 & 64 & 77\\&7.435 & 7.268 & 7.107 & 6.952 & 6.801 & 6.656 & 6.515 & 5.759 & 5.537 & 5.328 & 5.131 \\9&33 & 79 & 82 & 20 & 69 & 10 & 23 & 02 & 05 & 25 & 66\\&8.110 & 7.912 & 7.721 & 7.537 & 7.360 & 7.188 & 7.023 & 6.144 & 5.889 & 5.650 & 5.426 \\10&90 & 72 & 73 & 63 & 09 & 83 & 58 & 57 & 23 & 22 & 24\end{array} Present value of a $1 at compound interest:  Periods4.0%4.5%5.0%5.5%6.0%6.5%7.0%10.%11.0%12.0%13.0%0.9610.9560.9520.9470.9430.9380.9340.9090.9000.8920.884154943887409758099086960.9240.9150.9070.8980.8900.8810.8730.8260.8110.7970.783256730345006644456219150.8890.8760.8630.8510.8390.8270.8160.7510.7310.7110.693300308461628530311978050.8540.8380.8220.8070.7920.7770.7620.6830.6580.6350.613480567022093290017352320.8210.8020.7830.7650.7470.7290.7120.6200.5930.5670.542593455313268899924543760.7900.7670.7460.7250.7040.6850.6660.5640.5340.5060.480631902225963334476463320.7590.7340.7100.6870.6650.6430.6220.5130.4810.4520.425792836844065175166635060.7300.7030.6760.6510.6270.6040.5820.4660.4330.4030.376869198460412301519388160.7020.6720.6440.6170.5910.5670.5430.4240.3900.3600.332959906163903593109261880.6750.6430.6130.5850.5580.5320.5080.3850.3520.3210.294105693914339733554189759\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\& 0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1 & 54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\& 0.924 & 0.915 & 0.907 & 0.898 & 0.890 & 0.881 & 0.873 & 0.826 & 0.811 & 0.797 & 0.783 \\2 & 56 & 73 & 03 & 45 & 00 & 66 & 44 & 45 & 62 & 19 & 15\\& 0.889 & 0.876 & 0.863 & 0.851 & 0.839 & 0.827 & 0.816 & 0.751 & 0.731 & 0.711 & 0.693 \\3 & 00 & 30 & 84 & 61 & 62 & 85 & 30 & 31 & 19 & 78 & 05\\& 0.854 & 0.838 & 0.822 & 0.807 & 0.792 & 0.777 & 0.762 & 0.683 & 0.658 & 0.635 & 0.613 \\4 & 80 & 56 & 70 & 22 & 09 & 32 & 90 & 01 & 73 & 52 & 32\\& 0.821 & 0.802 & 0.783 & 0.765 & 0.747 & 0.729 & 0.712 & 0.620 & 0.593 & 0.567 & 0.542 \\5 & 93 & 45 & 53 & 13 & 26 & 88 & 99 & 92 & 45 & 43 & 76\\& 0.790 & 0.767 & 0.746 & 0.725 & 0.704 & 0.685 & 0.666 & 0.564 & 0.534 & 0.506 & 0.480 \\6 & 31 & 90 & 22 & 25 & 96 & 33 & 34 & 47 & 64 & 63 & 32\\& 0.759 & 0.734 & 0.710 & 0.687 & 0.665 & 0.643 & 0.622 & 0.513 & 0.481 & 0.452 & 0.425 \\7 & 92 & 83 & 68 & 44 & 06 & 51 & 75 & 16 & 66 & 35 & 06\\& 0.730 & 0.703 & 0.676 & 0.651 & 0.627 & 0.604 & 0.582 & 0.466 & 0.433 & 0.403 & 0.376 \\8 & 69 & 19 & 84 & 60 & 41 & 23 & 01 & 51 & 93 & 88 & 16\\& 0.702 & 0.672 & 0.644 & 0.617 & 0.591 & 0.567 & 0.543 & 0.424 & 0.390 & 0.360 & 0.332 \\9 & 59 & 90 & 61 & 63 & 90 & 35 & 93 & 10 & 92 & 61 & 88\\& 0.675 & 0.643 & 0.613 & 0.585 & 0.558 & 0.532 & 0.508 & 0.385 & 0.352 & 0.321 & 0.294 \\10 & 56 & 93 & 91 & 43 & 39 & 73 & 35 & 54 & 18 & 97 & 59\end{array}

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When callable bonds are redeemed below the carrying amount


A) gain on redemption of bonds is credited
B) loss on redemption of bonds is debited
C) retained earnings is credited
D) retained earnings is debited

E) A) and D)
F) A) and C)

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