Exam 10: Reporting and Interpreting Bond Securities

On January 1, 2016, Mendez Company issued 400 of its $1,000, ten-year, 9% bonds. The bonds were dated January 1, 2016, and interest is paid annually each December 31. The bonds were issued at 99. Required: Part A: Prepare the entry to record the issuance of the bonds on January 1, 2016: Part B: Were the bonds issued at par, at a premium, or at a discount? How did you arrive at your answer?

A company retired $200,000 of bonds, which have an unamortized premium of $8,000, by purchasing them on the open market for $210,000. What is the amount of the gain or loss on the retirement of the bonds?

A convertible bond can be called for early retirement at the option of the issuing company.

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds, the market rate of interest was 11%. Which of the following statements is correct?

A bond issued at a discount will pay more cash for interest over the life of the bond than the total interest expense recognized over the life of the bond.

On November 1, 2015, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2015, and interest is payable each November 1 and May 1. Davis uses the straight-line method of amortization. How much is the book value of the bonds after the November 1, 2016 interest payment was recorded using the straight-line method of amortization?

A company prepared the following journal entry: Which of the following statements is incorrect?

Which of the following statements is correct?

The journal entry for the cash payment of interest on a bond issued at a premium results in an increase in the book value of the bond liability.

Amortization of discount on bonds payable will make the amount of interest expense less than the cash owed for interest for that year.

When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?

Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammell Company uses the straight-line method of amortization. Which of the following statements is incorrect?

Interest expense increases over time when a bond is initially issued at a premium and the effective-interest method is used.

On January 1, 2016, Tonika Company issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Tonika uses the effective-interest amortization method. The interest expense on the income statement for the year ended December 31, 2016 is closest to:

On January 1, 2016, Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually. The following present value factors have been provided: Calculate the issuance price if the market rate of interest was 10%.

When recording bond issuance costs for underwriter fees:

Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

On July 1, 2016, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2016, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. What is the net amount of the bond liability to be reported on the December 31, 2017 balance sheet?

When a bond payable is issued at a premium, subsequent amortization of the premium does which of the following?