Bonds Payable Multiple Choice Identify the choice that best best completes completes the statement statement or answers the question.
On January 1, 2010, Romeo Co. issued eight-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present Present Present Present Present Present Present Present
value value value value value value value value
of 1 for 8 periods at 6% of 1 for 8 periods at 8% of 1 for 16 periods at 3% of 1 for 16 periods at 4% of annuity for 8 periods at 6% of annuity for 8 periods at 8% of annuity for 16 periods at 3% of annuity for 16 periods at 4%
.627 .540 .623 .534 6.210 5.747 12.561 11.652
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1. The present value value of the principal is a. 534,000 b. 540,000 c. 623,000 d. 627,000
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2. The present value value of the interest is a. 344,820 b. 349,560 c. 372,600 d. 376,830
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3. The issue price of of the bonds is a. 883,560 b. 884,820 c. 889,560 d. 999,600
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4. Jodee Company issues issues $5,000,000, 6%, 5-year bonds bonds dated January 1, 2010 on January January 1, 2010. The bonds bonds pay interest semiannually semiannually on June 30 and December December 31. The bonds are issued to yield 5%. 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods Present value of a single sum for 10 periods periods Present value of an annuity for 5 periods Present value of an annuity for 10 periods a. b. c. d.
5,000,000 5,216,494 5,218,809 5,217,308
2.5% .88385 .78120 4.64583 8.75206
3.0% .86261 .74409 4.57971 8.53020
5.0% .78353 .61391 4.32948 7.72173
6.0% .74726 .55839 4.21236 7.36009
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5. Everhart Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? Present value of a single sum for 5 periods Present value of a single sum for 10 periods Present value of an annuity for 5 periods Present value of an annuity for 10 periods a. b. c. d.
2.5% .88385 .78120 4.64583 8.75206
3.0% .86261 .74409 4.57971 8.53020
5.0% .78353 .61391 4.32948 7.72173
6.0% .74726 .55839 4.21236 7.36009
10,000,000 10,432,988 10,437,618 10,434,616
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6. Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest. The bonds are dated January 1, 2010, and pay interest on June 30 and December 31. What is the total cash received on the issue date? a. 19,400,000 b. 20,450,000 c. 19,700,000 d. 19,100,000
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7. On April 1, 2011, Lorna Company issued at 99 plus accrued interest, 2,000 of its 8% P1,000 face value bonds. The bonds are dated January 1, 2011, and mature on January 1, 2021, and pay interest on January 1 and July 1. Lorna paid bond issue cost of P70,000. From the bond issue, Lorna received net cash of a. 2,020,000 b. 1,980,000 c. 1,950,000 d. 1,910,000
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8. During the current year, Arvin Company incurred the following costs in connection with the issuance of bonds: Printing and engraving Legal fees Fees paid to independent accountants for registration Commissions paid to underwriter
150,000 800,000 100,000 1,500,000
What amount should be recorded as bond issue costs to be amortized over the term of the bonds? a. 2,550,000 b. 2,400,000 c. 1,500,000 d. 1,050,000 ____
9. On June 30, 2011, JP Company issued at 99, 5,000 of its 8%, P1,000 face value bonds. The bonds were issued through an underwriter to whom JP paid bond issue cost of P425,000. On June 30, 2011, JP should report the bond liability at a. 4,525,000 b. 4,950,000 c. 5,000,000 d. 4,575,000
____ 10. Oliver Company issued P2,000,000 face value of 10 year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10%. If the market price of interest at the time the bonds are sold is 8%. What will be the issuance price of the bonds? Round off present value factor to two decimal places a. 2,262,000 b. 2,113,000 c. 2,159,000 d. 2,279,000 ____ 11. On January 1, 2011, Jhester Company issued 10 year bonds with a face amount of P5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: Present value of 1 for 10 periods at 10% Present value of an ordinary annuity of 1 for 10 periods at 10%
0.3855 6.145
The total issue price of the bonds was a. 5,000,000 b. 1,927,500 c. 5,614,500 d. 4,385,500 ____ 12. On January 1, 2011, Aldrine Company issued 3 year bonds with face value of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December 31. Additionally, Aldrine Company paid bond issue cost of P150,000. The PV of 1 at 11% for 3 periods is .7312 and the PV of an ordinary annuity of 1 at 11% for 3 periods is 2.4437. The present value of the bonds using 11% is: PV of principal (5,000,000 x .7312) PV of annual interest payments (500,000 x 2.4437) Total present value of bonds
3,656,000 1,221,850 4,877,850
The PV of 1 at 12% for 3 periods is .7118, and the PV of an ordinary annuity of 1 at 12% for 3 periods is 2.4018. The present value of the bonds using 12% is: PV of principal (5,000,000 x .7118) PV of annual interest payments (500,000 x 2.4018) Total present value of bonds
3,559,000 1,200,900 4,759,900
What is the interest expense for 2011 using the effective interest method? a. 550,000 b. 528,000 c. 576,000 d. 559,680 ____ 13. On July 1, 2011, Roger Company issued 4,000 of its 8 %, P1,000 face value bonds payable for P3,504,000. The bonds were issued to yield 10%. The bonds are dated July 1, 2011 and mature on July 1, 2021, Interest is payable semiannually on January 1 and July 1. Using the effective interest method, how much of the bond discount should be amortized for the 6 months ended December 31, 2011? a. 30,400
b. 24,800 c. 19,840 d. 15,200 ____ 14. On January 1, 2011, Kenny Company issued 9% bonds in the face amount of P5,000,000, which mature on January 1, 2021. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. Kenny uses the interest method of amortizing bond discount. In its December 31, 2011 balance sheet, what amount should Kenny report as bonds payable? a. 4,695,000 b. 4,714,500 c. 4,704,750 d. 5,000,000 ____ 15. On January 1, 2012, Kenneth Company issued its 9% bonds in face amount of P4,000,000, which mature on January 1, 202. The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000. Kenneth uses the interest method of amortizing discount. Interest is payable annually on December 31. At December 31, 2011, Kenneth’s unamortized bond discount should be a. 228,400 b. 208,000 c. 206,440 d. 204,000 ____ 16. Jeff Company is authorzied to issue P5,000,000 of 6% 10 year bonds dated July 1, 2011 with interest payments on June 30 and December 31. When the bonds are issued on November 1, 2011, Jeff Company received cash of P5,150,000 including accrued interest. The journal entry to record the issuance of the bonds would include a. 150,000 bond premium b. 50,000 bond premium c. 150,000 bond discount d. no bond premium and discount ____ 17. On February 1, 2006, John Company issued 12%, P2,000,000 face amount, 10 year bonds for P2,234,000 plus accrued interest. The bonds are dated November 1, 2005 and interest is payable on May 1 and November 1. The entity uses the straight line method of amortization. John reacquired all of these bonds at 102 on May 1, 2009 and retired t hem. Ignoring income tax, what was John’s gain on the bond retirement? a. 116,000 b. 194,000 c. 234,000 d. 237,000 ____ 18. On January 1, 3022, Kareen Company issued its 10% bonds in the face amount of P1,000,000 that mature on January 1, 2021. The bonds were issued for P886,000 to yield 12% resulting in bond discount of P114,000. Kareen Company uses the interest method of amortizing bond discount. Interest is payable on January 1 and July 1.For the year ended December 31, 2011, Kareen should report bond interest expense at a. 106,510 b. 100,000 c. 53,160 d. 50,000 ____ 19. Bonds for which the owners' names are not registered with the issuing corporation are called a. bearer bonds b. term bonds
c. debenture bonds d. secured bonds ____ 20. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used b. greater than the amount of the interest payments. c. the same as if the straight-line method were used. d. less than if the straight-line method were used ____ 21. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue. b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. ____ 22. When bonds are sold between interest dates, any accrued interest is credited to a. Interest payable b. Interest revenue c. Interest receivable d. Bonds payable ____ 23. If bonds are initially sold at a discount and the straight line method of amortization is used, interest expense in the earlier years a. Will exceed what it would have been had the scientific method of amortization been used b. Will be less than what it would have been had the scientific method of amortization been used c. Will be the same as what it would have been had the scientific method of amortization been used d. Will be less than the coupon rate of interest. ____ 24. Which of the following is true of a premium on bonds payable? a. The premium or bonds payable is a contra stockholders’ equity account b. The premium on bonds payable is an account that appears only on the books of the investor c. The premium on bonds payable increases when amortization entries are made until it reaches its maturity value d. The premium on bonds payable decreases when amortization entries are made until its balance reaches zero at the maturity date. ____ 25. The net amount of a bond liability that appears in the balance sheet is the a. Call price of the bond plus bond discount or minus bond premium b. Face value of the bond plus related premium or minus related discount c. Face value of the bond plus related discount or minus related premium d. Maturity value of the bond plus related discount or minus related premium ____ 26. The market price of a bond issued at a discount is the present value of its principal amount at the market rate of interest a. Less the present value of all future interest payments at the market rate of interest
b. Less the present value of all future interest payments at the rate of interest stated on the bond c. Plus the present value of all future interest payments at the market rate of interest d. Plus the present value of all future interest payments at the rate of interest stated on the bond
Bonds Payable Answer Section MULTIPLE CHOICE
1. A 1,000,000 × .534 = 534,000 2. B (1,000,000 × .03) × 11.652 = 349,560. 3. A 534,000 + 349,560 = 883,560 4. C (5,000,000 × .78120) + (150,000 × 8.75206) = 5,218,809 5. C (10,000,000 × .78120) + (300,000 × 8.75206) = 10,437,618 6. C (20,000,000 × .97) + (1,800,000 × 2/12) = 19,700,000 7. C Issue price (2,000,000 x 99%) 1,980,000 Accrued interest from January 1 to April 1, 2011 40,000 (2,000,000 x 8% x 3/12) Total 2,020,000 Bond issue cost 70,000 Net cash received from the bond issue 1,950,000 8. A 9. A Issue price (5,000,000 x 99%) 4,950,000 Bonds payable 5,000,000 Discount on bonds payable (50,000) Bond issue cost (425,000) Book value of liability 4,525,000 10. D PV of 1 at 4% for 20 periods .46 PV of an ordinary annuity of 1 at 4% for 20 periods 13.59 PV of principal (2,000,000 x .46) 920,000 PV of semiannual interest payments (100,000 x 13.59) 1,359,000 Issue price of bonds 2,279,000 11. D PV of principal (5,000,000 x .3855) 1,927,500 PV of annual interest payments (400,000 x 6.145) 2,458,000 Total present value or issue price of bonds 4,385,500 12. D Carrying value of bonds (5,000,000 x 99%-150,000) 4,800,000 Interest expense (4,800,000 x 11.66% 559,680 Let x= x= 11% 12%
the effective rate 4,800,000 4,877,850 4,759,900
This means that the effective rate is higher than 11% but lower than 12%. This, by interpolation, the interest differential is determined as follows: (x-11%)/(12%-11%)=(4,800,000-4,877,850)/(4,759,900-4,877,850) 77,850/117,950=.66 13. D Interest expense (3,504,000 x 10% x 6/12) 175,200 Interest paid (4,000,000 x 8% x 6/12) 160,000 Discount amortization for 6 months 15,200 14. B Interest expense (4,695,000 x 10% ) 469,500 Interest paid (4,000,000 x 8% x 6/12) 450,000 Amortization of discount for 2011 19,500 Bonds payable Discount on bonds payable (305,000-19,500) Book value , December 31, 2011 15. A Interest expense (3,756,000 x 10% ) Interest paid (4,000,000 x 9% ) Discount amortization for 2011 Discount on bonds payable Less: Discount amortization for 2011 Discount on bonds payable, December 31, 2011 16. B Cash received Accrued interest from June 30 to November 1, 2011 (5,000,000 x 6% x 4/12) Issue price of bonds payable Face value Premium on bonds payable 17. A Life of bonds (10 years x 12)
Monthly amortization of premium (234,000/117) Premium on bonds payable Less: Amortization from Feb 1, 2006-May 1, 2009 (2,000 x 39) Premium on bonds payable, May 1, 2009 Face value Book value Less: Retirement price (2,000,000 x 102) Gain on bond retirement 18. A Date Interest paid Interest expense Jan 1, 2011
5,000,000 (285,500) 4,714,500 375,600 360,000 15,600 244,000 (15,600) 228,400 5,150,000 (100,000) 5,050,000 5,000,000 50,000 120 mos. 3 117 mos 2,000 2340,000 78,000 156,000 2,000,000 2,156,000 2,040,000 116,000 Discount Amort
Book value 886,000
July 1, 2011 Jan 1, 2012
50,000 50,000 100,000
Interest paid (1,000,000 x 10% x 6/12) Interest expense 886,000 x 12% x 6/12 889,160 x 12% x 6/12 19. 20. 21. 22. 23. 24. 25. 26.
A A D A A D B C
53,160 53,350 106,510 50,000
53,160 53,350 106,510
3,160 3,350 6,510
889,160 892,510
