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Exam 10: Reporting and Interpreting Bonds

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Question 21

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Which of the following statements regarding the effective-interest method of amortization is incorrect?

A) The amount of interest expense is different each period.
B) The amount of discount or premium that is amortized increases each period.
C) It is one of the options according to generally accepted accounting principles.
D) The total interest expense over the life of a bond is the same as that reported under the straight-line method of amortization.

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

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Question 22

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On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% effective (market) interest rate.Assuming the effective-interest method of amortization is used,what is the book value of the bond liability on December 31,2010 (to the nearest dollar) ?

A) $400,000
B) $413,320
C) $406,302
D) $407,432

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

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Question 23

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A company prepared the following journal entry: Cash Discount on bonds payable $\quad$$\quad$ Bonds payable Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

Assuming no adjusting journal entries have been made,the journal entry to record the cash interest payment on the due date for bonds issued at their par value results in which of the following?

A bond issued at a premium will pay cash interest in excess of the amount of interest expense recognized for accounting purposes.

On November 1,2009,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2009,and interest is payable each November 1 and May 1.Which of the following is incorrect assuming the straight-line method of amortization is utilized?

A company has a December 31 fiscal year-end.If the interest is paid annually on December 31,the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

Which of the following statements incorrectly describes the accounting for bonds that were issued at a premium?

Assuming no adjusting journal entries have been made,the journal entry to record the cash interest payment on the due date for bonds issued at a discount results in which of the following?

Which of the following bonds does not have specific assets pledged to guarantee repayment?

A bond will sell at its par value when the market rate of interest equals the stated rate of interest.

On January 1,2009,Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually.The following present value factors have been provided: $\begin{array}{ll }\begin{array} { ll } \text { Time Period } & \text { Interest } \\10 & 10 \% \\10 & 8 \% \\10 & 12 \%\end{array}\begin{array} { l l } \text { PV of } \$ & \text { PV of an } \text { Annuity } \\.386 & 6.145 \\.463 & 6.710 \\.322 & 5.650\end{array}\end{array}$ Calculate the issuance price if the market rate of interest is 12%.

The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

On January 1,2009,Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually.The following present value factors have been provided: $\begin{array}{lccl }\begin{array} { lccl } \text { Time Period } & \text { Interest } \\10 & 10 \% \\10 & 8 \% \\10 & 12 \%\end{array}\begin{array} { lcc l } \text { PV of } \$ & \text { PV of an } \text { Annuity } \\.386 & 6.145 \\.463 & 6.710 \\.322 & 5.650\end{array}\end{array}$ Calculate the issuance price if the market rate of interest was 10%.

On July 1,2011,immediately after recording interest payments,Salsa,Inc.retired one fifth of its $500,000 of bonds payable for $97,500.The bonds were originally issued at par value in 2006.Which of the following statements is correct?

During 2010,Patty's Pizza reported net income of $4,212 million,interest expense of $167 million and income tax expense of $1,372 million.During 2009,they reported net income of $3,568 million,interest expense of $163 million and income tax expense of $1,424 million.What was the times interest earned ratio for 2010 and 2009 respectively?

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.How much is the semi-annual interest expense?

Which of the following statements is incorrect?

On January 1,2010,Broker Corp.issued $3,000,000 par value 12%,10 year bonds which pay interest each December 31.If the market rate of interest was 14%,what was the issue price of the bonds? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697.The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)