Connect Financial Accounting Chapter 10

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Connect Financial Accounting Chapter 10

Q1. On January 1, 2017, Boston Enterprises issues bonds that have a $1,450,000 par value, mature in 20 years, and pay 9% interest semiannually on June 30 and December 31. The bonds are sold at par.

1. How much interest will Boston pay (in cash) to the bondholders every six months?

connect financial accounting exam 9
2. Prepare journal entries to record (a) the issuance of bonds on January 1, 2017; (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017.

connect financial accounting chapter 10
3. Prepare the journal entry for issuance assuming the bonds are issued at (a) 95 and (b) 105.

connect financial accounting chapter 10

Q2. Tano issues bonds with a par value of $94,000 on January 1, 2017. The bonds’ annual contract rate is 6%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $89,071.

1. What is the amount of the discount on these bonds at issuance?

connect financial accounting chapter 10
2. How much total bond interest expense will be recognized over the life of these bonds?

connect financial accounting chapter 10
3. Prepare an amortization table using the straight-line method to amortize the discount for these bonds.

connect financial accounting chapter 10

Q3. Bringham Company issues bonds with a par value of $620,000 on their stated issue date. The bonds mature in 8 years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 12%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

1. What is the amount of each semiannual interest payment for these bonds?

2. How many semiannual interest payments will be made on these bonds over their life?

3. Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.

connect financial accounting chapter 10

4. Compute the price of the bonds as of their issue date.

connect financial accounting chapter 10

5. Prepare the journal entry to record the bonds’ issuance.

connect financial accounting chapter 10

Q4. On January 1, 2017, Eagle borrows $26,000 cash by signing a four-year, 8% installment note. The note requires four equal payments of $7,850, consisting of accrued interest and principal on December 31 of each year from 2017 through 2020. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

Prepare an amortization table for this installment note.

connect financial accounting chapter 10

Connect Financial Accounting Chapter 10 Quiz

Q1. Charger Company’s most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):

  • 0.56
  • 1.80
  • 0.44
  • 0.80
  • 1.25

Q2. A bond sells at a discount when the:

  • Contract rate is above the market rate.
  • Contract rate is equal to the market rate.
  • Contract rate is below the market rate.
  • Bond has a short-term life.
  • Bond pays interest only once a year.

Q3. On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables:

Present value of an annuity for 10 periods at 3% 8.5302
Present value of an annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756

What is the issue (selling) price of the bond?

  • $420,000
  • $402,362
  • $300,010
  • $308,107
  • $325,592

Q4. All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are true except:

  • Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
  • Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital leases.
  • The criteria for identifying a lease as a capital lease are more general under IFRS.
  • Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
  • Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.

Q5. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?

  • $20,000
  • $37,258
  • $25,000
  • $17,258
  • $232,742

Q6. Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond’s issue (selling) price, assuming the following Present Value factors:

n= i= Present Value of an Annuity Present value of $1
5 8 % 3.9927 0.6806
10 4 % 8.1109 0.6756
5 6 % 4.2124 0.7473
10 3 % 8.5302 0.7441
  • $1,000,000
  • $789,244
  • $1,341,208
  • $1,085,308
  • $658,792

Q7. On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

  • Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
  • Debit Interest Expense $37,258; credit Cash $37,258.
  • Debit Interest Expense $20,000; credit Cash $20,000.
  • Debit Interest Expense $20,000; debit Interest Payable $17,258; credit Cash $37,258.
  • Debit Interest Expense $20,000; debit Notes Payable $17,258; credit Cash $37,258.

Q8. When a bond sells at a premium:

  • The contract rate is above the market rate.
  • The contract rate is equal to the market rate.
  • The contract rate is below the market rate.
  • It means that the bond is a zero coupon bond.
  • The bond pays no interest.

Q9. A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

  • Debit Bond Interest Expense $22,000; credit Cash $22,000.
  • Debit Bond Interest Expense $44,000; credit Cash $44,000.
  • Debit Bond Interest Payable $22,000; credit Cash $22,000.
  • Debit Bond Interest Expense $550,000; credit Cash $550,000.
  • No entry is needed, since no interest is paid until the bond is due.

Q10. On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

  • Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
  • Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
  • Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903.
  • Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.
  • Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.