# 13.7: Practice Questions

## Multiple Choice

1.

LO 13.1An amortization table ________.

1. breaks each payment into the amount that goes toward interest and the amount that goes toward the principal
2. is a special table used in a break room to make people feel equitable
3. separates time value of money tables into present value and future value
4. separates time value of money tables into single amounts and streams of cash
2.

LO 13.1A debenture is ________.

1. the interest paid on a bond
2. a type of bond that can be sold back to the issuing company whenever the bondholder wishes
3. a bond with only the company’s word that they will pay it back
4. a bond with assets such as land to back their word that they will pay it back
3.

LO 13.1The principal of a bond is ________.

1. the person who sold the bond for the company
2. the person who bought the bond
3. the interest rate printed on the front of the bond
4. the face amount of the bond that will be paid back at maturity
4.

LO 13.1A convertible bond can be converted into ________.

1. preferred stock
2. common stock and then converted into preferred stock
3. common stock of a different company
4. common stock of the company
5.

LO 13.1On January 1, a company issued a 5-year $100,000 bond at 6%. Interest payments on the bond of$6,000 are to be made annually. If the company received proceeds of $112,300, how would the bond’s issuance be quoted? 1. 1.123 2. 112.30 3. 0.890 4. 89.05 6. LO 13.1On July 1, a company sells 8-year$250,000 bonds with a stated interest rate of 6%. If interest payments are paid annually, each interest payment will be ________.

1. $120,000 2.$60,000
3. $7,500 4.$15,000
7.

LO 13.1On January 1 a company issues a $75,000 bond that pays interest semi-annually. The first interest payment of$1,875 is paid on July 1. What is the stated annual interest rate on the bond?

1. 5.00%
2. 2.50%
3. 1.25%
4. 10.00%
8.

LO 13.1On October 1 a company sells a 3-year, $2,500,000 bond with an 8% stated interest rate. Interest is paid quarterly and the bond is sold at 89.35. On October 1 the company would collect ________. 1.$200,000
2. $558,438 3.$2,233,750
4. $6,701,250 9. LO 13.1On April 1 a company sells a 5-year,$60,000 bond with a 7% stated interest rate. The market interest on that day was also 7%. If interest is paid quarterly, the company makes interest payments of ________.

1. $1,050 2.$3,150
3. $4,200 4.$5,250
10.

LO 13.2The effective-interest method of bond amortization finds the difference between the ________ times the ________ and the ________ times the ________.

1. stated interest rate, principal, stated interest rate, carrying value
2. stated interest rate, principal, market interest rate, carrying value
3. stated interest rate, carrying value, market interest rate, principal
4. market interest rate, carrying value, market interest rate, principal
11.

LO 13.2When a bond sells at a discount, the carrying value ________ after each amortization entry.

1. increases
2. decreases
3. stays the same
4. cannot be determined
12.

LO 13.2The International Financial Reporting Standards require the use of ________.

1. any method of amortization of bond premiums
2. the straight-line method of amortization of bond discounts
3. the effective-interest method of amortization of bond premiums and discounts
4. any method approved by US GAAP
13.

LO 13.2The cash interest payment a corporation makes to its bondholders is based on ________.

1. the market rate times the carrying value
2. the stated rate times the principal
3. the stated rate times the carrying value
4. the market rate times the principal
14.

LO 13.2Whirlie Inc. issued $300,000 face value, 10% paid annually, 10-year bonds for$319,251 when the market of interest was 9%. The company uses the effective-interest method of amortization. At the end of the year, the company will record ________.

1. a credit to cash for $28,733 2. a debit to interest expense for$31,267
3. a debit to Discount on Bonds Payable for $1,267 4. a debit to Premium on Bonds Payable for$1.267
15.

LO 13.3Naval Inc. issued $200,000 face value bonds at a discount and received$190,000. At the end of 2018, the balance in the Discount on Bonds Payable account is $5,000. This year’s balance sheet will show a net liability of ________. 1.$200,000
2. $180,000 3.$195,000
4. $205,000 16. LO 13.3Keys Inc. issued 100 bonds with a face value of$1,000 and a rate of 8% at $1,025 each. The journal entry to record this transaction includes ________. 1. a credit to Bonds Payable for$102,500
2. a credit to cash for $102,500 3. a debit to cash for$100,000
4. a credit to Premium on Bonds Payable for $2,500 17. LO 13.3Huang Inc. issued 100 bonds with a face value of$1,000 and a 5-year term at $960 each. The journal entry to record this transaction includes ________. 1. a debit to Bonds Payable for$100,000
2. a debit to Discount on Bonds Payable for $4,000 3. a credit to cash for$96,000
4. a credit to Discount on Bonds Payable for $4,000 18. LO 13.3O’Shea Inc. issued bonds at a face value of$100,000, a rate of 6%, and a 5-year term for $98,000. From this information, we know that the market rate of interest was ________. 1. more than 6% 2. less than 6% 3. equal to 6% 4. cannot be determined from the information given. 19. LO 13.3Gingko Inc. issued bonds with a face value of$100,000, a rate of 7%, and a 10-yearterm for $103,000. From this information, we know that the market rate of interest was ________. 1. more than 7% 2. less than 7% 3. equal to 7% 4. equal to 1.3% 20. LO 13.4The difference between equity financing and debt financing is that 1. equity financing involves borrowing money. 2. equity financing involves selling part of the company. 3. debt financing involves selling part of the company. 4. debt financing means the company has no debt. ## Questions 1. LO 13.1What is the difference between callable and putable bonds? 2. LO 13.1What is the difference between serial bonds and term bonds? 3. LO 13.1What is a junk bond? 4. LO 13.1How are savings bonds different from a corporate bond? 5. LO 13.1What do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly? 6. LO 13.2An amortization table/schedule is created to compute the amount to be amortized each year. What are the four columns needed to prepare the table? 7. LO 13.2In the amortization table, how is the amortization of discount of premium computed? 8. LO 13.2Does issuing a bond at a discount increase or decrease interest expense over the life of the bond? 9. LO 13.2What kind of account is the Discount on Bonds Payable? What kind of account is the Premium on Bonds Payable? 10. LO 13.2Why is the effective-interest method of amortization required under the International Financial Reporting Standards? 11. LO 13.3If there is neither a premium nor discount present, the journal entry to record bond interest payments is _______. 12. LO 13.3When do you use the Bond Discount Account? 13. LO 13.3A company issued bonds with a$100,000 face value, a 5-year term, a stated rate of 6%, and a market rate of 7%. Interest is paid annually. What is the amount of interest the bondholders will receive at the end of the year?

14.

LO 13.3A company issued $100,000, 5-year bonds, receiving$97,000. What is the balance sheet presentation immediately after the sale?

15.

LO 13.3Does interest expense increase or decrease when a bond premium is amortized?

## Exercise Set A

EA1.

LO 13.1Halep Inc. borrowed $30,000 from Davis Bank and signed a 4-year note payable stating the interest rate was 4% compounded annually. Halep Inc. will make payments of$8,264.70 at the end of each year. Prepare an amortization table showing the principal and interest in each payment.

EA2.

LO 13.1Beluga Inc. issued 10-year bonds with a face value of $100,000 and a stated rate of 3% when the market rate was 4%. Interest was paid annually. The bonds were sold at 87.5. What was the sales price of the bonds? Were they issued at a discount, a premium, or at par? EA3. LO 13.1Krystian Inc. issued 10-year bonds with a face value of$100,000 and a stated rate of 4% when the market rate was 6%. Interest was paid semi-annually. Calculate and explain the timing of the cash flows the purchaser of the bonds (the investor) will receive throughout the bond term. Would an investor be willing to pay more or less than face value for this bond?

EA4.

LO 13.1On January 1, 2018, Wawatosa Inc. issued 5-year bonds with a face value of $200,000 and a stated interest rate of 12% payable semi-annually on July 1 and January 1. The bonds were sold to yield 10%. Assuming the bonds were sold at 107.732, what is the selling price of the bonds? Were they issued at a discount or a premium? EA5. LO 13.2Diana Inc. issued$100,000 of its 9%, 5-year bonds for $96,149 when the market rate was 10%. The bonds pay interest semi-annually. Prepare an amortization table for the first three payments. EA6. LO 13.2Oak Branch Inc. issued$700,000 of 5%, 10-year bonds when the market rate was 4%. They received $757,243. Interest was paid semi-annually. Prepare an amortization table for the first three years of the bonds. EA7. LO 13.3On Jan. 1, Year 1, Foxcroft Inc. issued 100 bonds with a face value of$1,000 for $104,000. The bonds had a stated rate of 6% and paid interest semiannually. What is the journal entry to record the issuance of the bonds? EA8. LO 13.3Medhurst Corporation issued$90,000 in bonds for $87,000. The bonds had a stated rate of 8% and pay interest quarterly. What is the journal entry to record the sale of the bonds? EA9. LO 13.3On Jan. 1, Year 1, Foxcroft Inc. issued 100 bonds with a face value of$1,000 for $104,000. The bonds had a stated rate of 6% and paid interest semi-annually. What is the journal entry to record the first payment to the bondholders? EA10. LO 13.3Pinetop Corporation issued$150,000 10-year bonds at par. The bonds have a stated rate of 6% and pay interest annually. What is the journal entry to record the sale of the bonds?

EA11.

LO 13.3Medhurst Corporation issued $90,000 in bonds for$87,000. The bonds had a stated rate of 8% and pay interest quarterly. What is the journal entry to record the first interest payment?

## Exercise Set B

EB1.

LO 13.1Sharapovich Inc. borrowed $50,000 from Kerber Bank and signed a 5-year note payable stating the interest rate was 5% compounded annually. Sharapovich Inc. will make payments of$11,548.74 at the end of each year. Prepare an amortization table showing the principal and interest in each payment.

EB2.

LO 13.1Waylan Sisters Inc. issued 3-year bonds with a par value of $100,000 and a 6% annual coupon when the market rate of interest was 5%. If the bonds sold at 102.438, how much cash did Williams Sisters Inc. receive from issuing the bonds? EB3. LO 13.1Smashing Cantaloupes Inc. issued 5-year bonds with a par value of$35,000 and an 8% semi-annual coupon (payable June 30 and December 31) on January 1, 2018, when the market rate of interest was 10%. Were the bonds issued at a discount or premium? Assuming the bonds sold at 92.288, what was the sales price of the bonds?

EB4.

LO 13.1Chung Inc. issued $50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate? EB5. LO 13.2Haiku Inc. issued$600,000 of 10-year bonds with a stated rate of 11% when the market rate was 12%. The bonds pay interest semi-annually. Prepare the first three years of an amortization schedule. Assume that the bonds were issued for $565,710. EB6. LO 13.2Waldron Inc. issued$400,000 bonds with a stated rate of 7% when the market rate was 5%. They are 3-year bonds with interest to be paid annually. Prepare a table to amortize the premium of the bonds. Assume that the bonds were issued for $421,844. EB7. LO 13.3Willoughby Inc. issued 100 bonds with a face value of$1,000 and a stated rate of 4% and received $105,000. What is the journal entry to record the sale of the bonds? EB8. LO 13.3Allante Corporate issued 50 bonds with a face value of$1,000 and a stated rate of 4% and received $45,000. What is the journal entry to record the sale of the bonds? EB9. LO 13.3Roo Incorporated issued 50 bonds with a face value of$1,000 and a stated rate of 6% when the market rate was 6%. What is the journal entry to record the sale of the bonds?

EB10.

LO 13.3Piedmont Corporation issued $200,000 of 10-year bonds at par. The bonds have a stated rate of 6% and pay interest annually. What is the journal entry to record the first interest payment to the bondholders? EB11. LO 13.3Lunar Corporation issued$80,000 in bonds for $87,000 on Jan. 1. The bonds had a stated rate of 8% and pay interest quarterly. What is the journal entry to record the first interest payment? ## Problem Set A PA1. LO 13.3On January 1, 2018, King Inc. borrowed$150,000 and signed a 5-year, note payable with a 10% interest rate. Each annual payment is in the amount of $39,569 and payment is due each Dec. 31. What is the journal entry on Jan. 1 to record the cash received and on Dec. 31 to record the annual payment? (You will need to prepare the first row in the amortization table to determine the amounts.) PA2. LO 13.1On July 1, Somerset Inc. issued$200,000 of 10%, 10-year bonds when the market rate was 12%. The bonds paid interest semi-annually. Assuming the bonds sold at 58.55, what was the selling price of the bonds? Explain why the cash received from selling this bond is different from the $200,000 face value of the bond. PA3. LO 13.2Eli Inc. issued$100,000 of 8% annual, 5-year bonds for $103,000. What is the total amount of interest expense over the life of the bonds? PA4. LO 13.2Evie Inc. issued 50 bonds with a$1,000 face value, a five-year life, and a stated annual coupon of 6% for $980 each. What is the total amount of interest expense over the life of the bonds? PA5. LO 13.3Volunteer Inc. issued bonds with a$500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received $540,000. Interest is payable annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. 1. July 1, 2018: entry to record issuing the bonds 2. June 30, 2019: entry to record payment of interest to bondholders 3. June 30, 2019: entry to record amortization of premium 4. June 30, 2020: entry to record payment of interest to bondholders 5. June 30, 2020: entry to record amortization of premium PA6. LO 13.3Aggies Inc. issued bonds with a$500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018, and received $540,000. Interest is payable semi-annually. The premium is amortized using the straight-line method. Prepare journal entries for the following transactions. 1. July 1, 2018: entry to record issuing the bonds 2. Dec. 31, 2018: entry to record payment of interest to bondholders 3. Dec. 31, 2018: entry to record amortization of premium ## Problem Set B PB1. LO 13.3Sub-Cinema Inc. borrowed$10,000 on Jan. 1 and will repay the loan with 12 equal payments made at the end of the month for 12 months. The interest rate is 12% annually. If the monthly payments are $888.49, what is the journal entry to record the cash received on Jan. 1 and the first payment made on Jan. 31? PB2. LO 13.1Charleston Inc. issued$200,000 bonds with a stated rate of 10%. The bonds had a 10-year maturity date. Interest is to be paid semi-annually and the market rate of interest is 8%. If the bonds sold at 113.55, what amount was received upon issuance?

PB3.

LO 13.2Starmount Inc. sold bonds with a $50,000 face value, 12% interest, and 10-year term at$48,000. What is the total amount of interest expense over the life of the bonds?

PB4.

LO 13.2Irving Inc. sold bonds with a $50,000, 10% interest, and 10-year term at$52,000. What is the total amount of interest expense over the life of the bonds?

PB5.

LO 13.3Dixon Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received$480,000. Interest is payable annually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions.

1. July 1, 2018: entry to record issuing the bonds
2. June 30, 2019: entry to record payment of interest to bondholders
3. June 30, 2019: entry to record amortization of discount
4. June 30, 2020: entry to record payment of interest to bondholders
5. June 30, 2020: entry to record amortization of discount
PB6.

LO 13.3Edward Inc. issued bonds with a $500,000 face value, 10% interest rate, and a 4-year term on July 1, 2018 and received$480,000. Interest is payable semiannually. The discount is amortized using the straight-line method. Prepare journal entries for the following transactions.

1. July 1, 2018: entry to record issuing the bonds
2. Dec. 31, 2018: entry to record payment of interest to bondholders
3. Dec. 31, 2018: entry to record amortization of discount

## Thought Provokers

TP1.

LO 13.1It is somewhat difficult to find current quotes on corporate bonds, but one source is the Financial Industry Regulatory Authority. Using the link http://finra-markets.morningstar.com...er/Default.jsp, click on the “Search” tab. Make sure “Bond Type” is set to “Corporate” and enter “Nike” in the “Issuer Name” field and hit enter.

Write a brief summary explaining the results, including an explanation of each of the fields. Assume that an investor purchases a $1,000 bond and interest payments are made semi-annually. Be sure to include the price the investor would pay for the bond. TP2. LO 13.2Below is select information from two, independent companies. Additional information includes: • On January 1, Company A issued a 5-year$1,500,000 bond with at 6% stated rate. Interest is paid semiannually and the bond was sold at 105.5055 to yield a market rate of 4.75%.
• On January 1, Company B sold $1,500,000 of common stock and paid dividends of$75,000.
1. Prepare an income statement for each company (ignore taxes)
2. Explain why the net income amounts are different, paying particular attention to the operational performance and financing performance of each company. (Hint: it may be helpful for you to create an amortization table).
TP3.

LO 13.3Assume you are a newly hired accountant for a local manufacturing firm. You have enjoyed working for the company and are looking forward to your first experience participating in the preparation of the company’s financial statements for the year-ending December 31, the end of the company’s fiscal year.

As you are preparing your assigned journal entries, your supervisor approaches you and asks to speak with you. Your supervisor is concerned because, based on her preliminary estimates, the company will fall just shy of its financial targets for the year. If the estimates are true, this means that all 176 employees of the company will not receive year-end bonuses, which represent a significant portion of their pay.

One of the entries that you will prepare involves the upcoming bond interest payment that will be paid on January 15 of the next year. Your supervisor has calculated that, if the journal entry is dated on January 1 of the following year rather than on December 31 of the current year, the company will likely meet its financial goals thereby allowing all employees to receive year-end bonuses. Your supervisor asks you if you will consider dating the journal entry on January 1 instead of December 31 of the current year. Assess the implications of the various stakeholders and explain what your answer will be.