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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 1

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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:

A) Interest Expense for $2,500
B) Premium on Bonds Payable for $2,500
C) Interest Expense for $5,000
D) Premium on Bonds Payable for $5,000

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

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Question 2

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When the bonds are sold for more than their face value,the carrying value of the bonds is equal to

A) face value
B) face value plus the unamortized discount
C) face value minus the unamortized premium
D) face value plus the unamortized premium

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

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Question 3

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A corporation often issues callable bonds to protect itself against significant declines in future interest rates.

On the first day of the fiscal year,a company issues a $500,000,8%,10 year bond that pays semi-annual interest of $20,000 ($500,000 ´ 8% ´ 1/2),receiving cash of $520,000.Journalize the entry to record the first interest payment and amortization of premium using the straight-line method.

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

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

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

Two companies are financed as follows: Income tax is estimated at 40% of income. Determine for each company the earnings per share of common stock,assuming that the income before bond interest and income taxes is $2,280,000 each.

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 31,2012 carrying amount in the amortization table for this installment note will be equal to:

Given the following data,prepare an amortization table (use the effective method) 1/1/10 - issue $800,000,9%,3 year bonds,interest paid annually on 12/31,to yield 8% Use the following format (round to nearest dollar - may have a slight rounding difference);

A corporation issues $100,000,10%,5-year bonds on January 1,2011,for $104,200.Interest is paid semiannually on January 1 and July 1.If the corporation uses the straight-line method of amortization of bond premium,the amount of bond interest expense to be recognized on July 1,2011,is

If bonds are sold for a discount,the carrying value of the bonds is equal to the face value less the unamortized discount.

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:

The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period.

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization,the effective interest method should be used.

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

A corporation issues for cash $2,000,000 of 8%,15-year bonds,interest payable annually,at a time when the market rate of interest is 7%.The straight-line method is adopted for the amortization of bond discount or premium.Which of the following statements is true?

An unsecured bond is the same as a

On the first day of the current fiscal year,$2,000,000 of 10-year,7% bonds,with interest payable annually,were sold for $2,125,000.Present entries to record the following transactions for the current fiscal year:

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: