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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 1

Multiple Choice

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

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

E) All of the above
F) A) and B)

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Question 2

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The amortization of a premium on bonds payable decreases bond interest expense.

A) True
B) False

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Question 3

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On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5 year bond that pays semi-annual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answer to the nearest dollar.

Dennis Corp. issued $2,500,000 of 20-year, 9% callable bonds on July 1, 2007, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

Only callable bonds can be purchased by the issuing corporation before maturity.

An equal stream of periodic payments is called an annuity.

The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the same is

The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar)

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

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416.

Sinking Fund Cash would be classified on the balance sheet as

If sinking fund cash is used to purchase investments, those investments are reported on the balance sheet as marketable securities.

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

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. The journal entry to record the amortization of the premium (by the straight line method) for the year by Lisbon Co. includes a debit to:

Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.

The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded to nearest dollar)

A company issued $2,000,000 of 30-year, 8% callable bonds on April 1, 2011, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year:

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

The balance in Discount on Bonds Payable