TBChap 014

Chapter 14
Long-Term Liabilities
True / False Questions
1. The legal contract between the issuing corporation and the bondholders is called the bond indenture.
True False
2. One of the similarities of bond and equity financing is that both dividends and equity distribution payments
are tax deductible.
True False
3. A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.
True False
4. Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one
date.
True False
5. Debentures always have specific assets of the issuing company pledged as collateral.
True False
6. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to
maturity.
True False
7. Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.
True False
8. A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to
create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.
True False
9. Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.
True False
10. A bond's par value is not necessarily the same as its market value.
True False
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11. An installment note is an obligation of the issuing company that requires a series of periodic payments to
the lender.
True False
12. Payments on an installment note normally include the accrued interest expense plus a portion of the amount
borrowed.
True False
13. Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.
True False
14. The carrying value of a long-term note is computed as the present value of all remaining future payments,
discounted using the market rate at the time of issuance.
True False
15. Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's
assets identified in the mortgage if the borrower fails to make the required payments.
True False
16. Mortgage bonds are backed only by the good faith and credit of the issuing company.
True False
17. A basic present value concept is that cash paid or received in the future has less value now than the same
amount of cash today.
True False
18. A basic present value concept is that cash paid or received in the future has more value now than the same
amount of cash received today.
True False
19. Compounded means that interest during a second period is based on the total amount borrowed plus the
interest accrued in the first period.
True False
20. A company invests $10,000 at 7% compounded annually. At the end of the second year, the company
should have $11,400 in the fund.
True False
21. An annuity is a series of equal payments at equal time intervals.
True False
22. The present value of an annuity can be best or quickly computed as the sum of the individual future values
for each payment.
True False
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23. The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity of
ten $15,000 payments at 8% yields a present value of $2,235.
True False
24. The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an annuity of
six $2,000 payments at 10% would equal $8,710.60.
True False
25. A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the
asset for a period of time in return for cash payment(s) to the lessor.
True False
26. Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the
risks and rewards of ownership to the lessee.
True False
27. An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.
True False
28. A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable
income.
True False
29. A pension plan is a contractual agreement between an employer and its employees to provide benefits to
employees after they retire.
True False
30. A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with
interest.
True False
31. An advantage of bond financing is that issuing bonds does not affect owner control.
True False
32. Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract
rate.
True False
33. The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for
a particular bond and its risk level.
True False
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34. Return on equity increases when the expected rate of return from the acquired assets is higher than the
interest rate on the debt issued to finance the acquired assets.
True False
35. The use of debt financing ensures an increase in return on equity.
True False
36. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the
corporation.
True False
37. Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.
True False
38. A company's ability to issue unsecured debt depends on its credit standing.
True False
39. A lessee has substantially all of the benefits and risks of ownership in an operating lease.
True False
40. A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high
debt-to-equity ratio.
True False
41. The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.
True False
42. The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing
structure.
True False
43. A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.
True False
44. A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7.
Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure
decreased during Year 2.
True False
45. The contract rate on previously issued bonds changes as the market rate of interest changes.
True False
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46. The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of
adverse events occurring over the time period.
True False
47. A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable
semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual
interest payments of $4,000 each.
True False
48. When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a
discount.
True False
49. When the contract rate is above the market rate, a bond sells at a discount.
True False
50. A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.
True False
51. The carrying (book) value of a bond at the time when it is issued is always equal to its par value.
True False
52. The carrying (book) value of a bond payable is the par value of the bonds plus any discount or minus any
premium.
True False
53. On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond over its
eight-year life is $400,000.
True False
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to
amortize the discount. The amount of discount amortized each period is $1,634.69.
True False
amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
True False
56. A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.
True False
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57. A premium reduces the interest expense of a bond over its life.
True False
58. A discount reduces the interest expense of a bond over its life.
True False
59. The market value (issue price) of a bond is equal to the present value of all future cash payments provided
by the bond.
True False
60. Premium on Bonds Payable is an adjunct or accretion liability account.
True False
61. If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting
entry is necessary to recognize bond interest expense accruing since the most recent interest payment.
True False
62. The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at
the market rate of interest.
True False
63. The effective interest method assigns a bond interest expense amount that increases over the life of a
premium bond.
True False
64. Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them
on the open market.
True False
65. When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred
to equity accounts and no gain or loss is recorded.
True False
66. Payments on installment notes normally include accrued interest plus a portion of the principal amount
borrowed.
True False
67. The equal total payments pattern for installment notes consists of changing amounts of interest but constant
amounts of principal over the life of the note.
True False
Multiple Choice Questions
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68. Sinking fund bonds:
A. Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
B. Require equal payments of both principal and interest over the life of the bond issue.
C. Decline in value over time.
D. Are registered bonds.
E. Are bearer bonds.
69. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity
are known as:
A. Convertible bonds.
B. Sinking fund bonds.
C. Callable bonds.
D. Serial bonds.
E. Junk bonds.
70. A bond traded at 102½ means that:
A. The bond pays 2.5% interest.

B. The bond traded at 102.5% of its par value.
C. The market rate of interest is 2.5%.
D. The bonds were retired at $1,025 each.
E. The market rate of interest is 2½% above the contract rate.
71. Secured bonds:
A. Are called debentures.

B. Have specific assets of the issuing company pledged as collateral.
C. Are backed by the issuer's bank.
D. Are subordinated to those of other unsecured liabilities.
E. Are the same as sinking fund bonds.
72. Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or
broker for collection, are called:
A. Coupon bonds.
B. Callable bonds.
C. Serial bonds.
D. Convertible bonds.
E. Registered bonds.
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73. Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which
interest payments are made with checks or cash transfers to the bondholders, are called:
A. Callable bonds.
B. Serial bonds.
C. Registered bonds.
D. Coupon bonds.
E. Bearer bonds.
74. The contract between the bond issuer and the bondholders identifying the rights and obligations of the
parties, is called a(n):
A. Debenture.
B. Bond indenture.
C. Mortgage.
D. Installment note.
E. Mortgage contract.
75. Bonds that mature at more than one date with the result that the principal amount is repaid over a number
of periods are known as:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Sinking fund bonds.
E. Serial bonds.
76. A contract pledging title to assets as security for a note or bond is known as a(an):
A. Sinking fund.
B. Mortgage.
C. Equity.
D. Lease.
E. Indenture.
77. Promissory notes that require the issuer to make a series of payments consisting of both interest and
principal are:
A. Debentures.
B. Discounted notes.
C. Installment notes.
D. Indentures.
E. Investment notes.
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78. The carrying value of a long-term note payable is computed as:
A. The future value of all remaining payments, using the market rate of interest.
B. The face value of the long-term note less the total of all future interest payments.
C. The present value of all remaining payments, discounted using the market rate of interest at the time of
issuance.
D. The present value of all remaining interest payments, discounted using the note's rate of interest.
E. The face value of the long-term note plus the total of all future interest payments.
79. The carrying value of bonds at maturity always equals:
A. the amount of cash originally received in exchange for the bonds.

B. the par value of the bond.
C. the amount of discount or premium.
D. the amount of cash originally received in exchange for the bonds plus any unamortized discount or less
any premium.
E. $0.
80. A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The
loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The
present value of the loan (rounded) is:
A. $15,877.
B. $12,400.
C. $5,592.
D. $9,200.
E. $47,630.
81. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an
annuity factor at 8% for 5 years is 3.9927. Each annual payment equals $75,000. The present value of the
note is:
A. $56,352.84.
B. $93,921,41.
C. $375,000.
D. $299,452.50.
E. $187,842.81.
82. A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The
present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:
A. $10,489.88.
B. $8,391.91.
C. $40,000.00.
D. $52,450.00.
E. $190,660.00.
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83. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual
payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330. The present
value of the loan is:
A. $9,000.
B. $5,033.
C. $63,000.
D. $57,330.
E. $45,297.
84. A pension plan:
A. Is a contractual agreement between an employer and its employees in which the employer provides
benefits to employees after they retire.
B. Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C. Is always funded fully by employers.
D. Can be a defined benefit plan or an undefined benefit plan.
E. Is the same as Other Postretirement Benefits.
85. All of the following statements regarding leases are true except:
A. For a capital lease the lessee records the leased item as its own asset.
B. For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the
lessee does not.
C. Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D. Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E. For an operating lease the lessee reports the lease payments as rental expense.
86. A disadvantage of bond financing is:
A. Bonds do not affect owners' control.

B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. Bonds pay periodic interest and the repayment of par value at maturity.
87. An advantage of bonds is:
A. Bonds do not affect owner control.

B. Bonds require payment of par value at maturity.
C. Bonds can decrease return on equity.
D. Bond payments can be burdensome when income and cash flow are low.
E. Bonds require payment of periodic interest.
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88. Which of the following statements is true?
A. Interest on bonds is tax deductible.

B. Interest on bonds is not tax deductible.
C. Dividends to stockholders are tax deductible.
D. Bonds do not have to be repaid.
E. Bonds always increase return on equity.
89. A bondholder that owns a $1,000, 10%, 10-year bond has:
A. Ownership rights in the issuing company.

B. The right to receive $10 per year until maturity.
C. The right to receive $1,000 at maturity.
D. The right to receive $10,000 at maturity.
E. The right to receive dividends of $1,000 per year.
90. Collateral agreements for a note or bond can:
A. Reduce the risk of loss in comparison with unsecured debt.

B. Increase the risk of loss in comparison with unsecured debt.
C. Have no effect on risk.
D. Reduce the issuer's assets.
E. Increase total cost for the borrower.
91. The party that has the right to exercise a call option on callable bonds is:
A. The bondholder.
B. The bond issuer.
C. The bond indenture.
D. The bond trustee.
E. The bond underwriter.
92. Which of the following accurately describes a debenture?
A. A bond with specific assets pledged as collateral.

B. A type of bond issued in the names and addresses of the bondholders.
C. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified
amounts and dates to repay the bonds.
D. A type of bond which is not collateralized but backed only by the issuer's general credit standing.
E. A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common
stock.
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93. A company's total liabilities divided by its total stockholders' equity is called the:
A. Equity ratio.
B. Return on total assets ratio.
C. Pledged assets to secured liabilities ratio.
D. Debt-to-equity ratio.
E. Times secured liabilities earned ratio.
94. The debt-to-equity ratio:
A. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B. Is a means of assessing the risk of a company's financing structure.
C. Is not relevant to secured creditors.
D. Can always be calculated from information provided in a company's income statement.
E. Must be calculated from the market values of assets and liabilities.
95. 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):
A. 0.56
B. 1.80
C. 0.44
D. 0.80
E. 1.25
96. Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of
$17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity
date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the
company's debt-to-equity ratio?
A. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C. Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
97. Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of
$16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of
excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds
have on the company's debt-to-equity ratio?
A. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
C. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
D. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
E. Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
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98. A bond is issued at par value when:
A. The bond pays no interest.

B. The bond is not between interest payment dates.
C. Straight line amortization is used by the company.
D. The market rate of interest is the same as the contract rate of interest.
E. The bond is callable.
99. When a bond sells at a premium:
A. The contract rate is above the market rate.

B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. It means that the bond is a zero coupon bond.
E. The bond pays no interest.
100. A bond sells at a discount when the:
A. Contract rate is above the market rate.

B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond has a short-term life.
E. Bond pays interest only once a year.
101. Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semi-annually.
The current market rate is 8%. The amount of interest owed to the bondholders for each semiannual
interest payment is:
A. $60,000.
B. $33,750.
C. $67,500.
D. $30,000.
E. $375,000.
102. A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semi-annually. The
current market rate is 8%. The journal entry to record each semiannual interest payment is:
A. Debit Bond Interest Expense $22,000; credit Cash $22,000.

B. Debit Bond Interest Expense $44,000; credit Cash $44,000.
C. Debit Bond Interest Payable $22,000; credit Cash $22,000.
D. Debit Bond Interest Expense $550,000; credit Cash $550,000.
E. No entry is needed, since no interest is paid until the bond is due.
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103. On January 1 of 2015, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000.
The bonds pay interest semi-annually. The market rate of interest is 8% and the bond selling price was
$1,864,097. The bond issuance should be recorded as:
A. Debit Cash $2,000,000; credit Bonds Payable $2,000,000.

B. Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C. Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903.
D. Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.
E. Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
104. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest
semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest
for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six
months. The company's December 31, Year 1 balance sheet should reflect total liabilities associated with
the bond issue in the amount of:
A. $3,220,000.
B. $3,340,063.
C. $3,097,500.
D. $3,780,000.
E. $3,902,500.
months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would
be:
A. $132,500.
B. $225,000.
C. $265,174.
D. $245,000.
E. $224,826.
106. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest
for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at
a rate of $10,087 every six months. The life of these bonds is:
A. 15 years.
B. 30 years.
C. 26.5 years.
D. 32 years
E. 35 years.
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107. Amortizing a bond discount:
A. Allocates a portion of the total discount to interest expense each interest period.
B. Increases the market value of the Bonds Payable.
C. Decreases the Bonds Payable account.
D. Decreases interest expense each period.
E. Increases cash flows from the bond.
108. The Discount on Bonds Payable account is:
A. A
liability.
B. A contra liability.
C. An expense.
D. A contra expense.
E. A contra equity.
109. A discount on bonds payable:
A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.
110. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of
amortize the discount. The journal entry to record the first interest payment is:

C. Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
D. Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.
E. Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.
111. A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the
bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest
period is:
A. $3,326.
B. $3,500.00.
C. $3,673.70.
D. $7,000.00.
E. $7,347.40.
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112. The effective interest amortization method:
A. Allocates bond interest expense over the bond's life using a changing interest rate.
B. Allocates bond interest expense over the bond's life using a constant interest rate.
C. Allocates a decreasing amount of interest over the life of a discounted bond.
D. Allocates bond interest expense using the current market rate for each interest period.
E. Is not allowed by the FASB.
113. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were
issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method,
the amount of interest expense for the first semiannual interest period is:
A. $3,500.00.
B. $3,673.01.
C. $3,705.30.
D. $7,000.00.
E. $7,346.03.
114. The market value (price) of a bond is equal to:
A. The present value of all future cash payments provided by a bond.

B. The present value of all future interest payments provided by a bond.
C. The present value of the principal for an interest-bearing bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.
115. The Premium on Bonds Payable account is a(n):
A. Revenue account.
B. Adjunct or accretion liability account.
C. Contra revenue account.
D. Contra asset account.
E. Equity account.
116. Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually.
The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the
following statements is true?
A. Adidas must pay $200,000 at maturity and no interest payments.

B. Adidas must pay $206,948 at maturity and no interest payments.
C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
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117. A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The
difference between par value and issue price for this bond is recorded as a:
A. Credit to Interest Income.

B. Credit to Premium on Bonds Payable.
C. Credit to Discount on Bonds Payable.
D. Debit to Premium on Bonds Payable.
E. Debit to Discount on Bonds Payable.
118. If an issuer sells bonds at a date other than an interest payment date:
A. This means the bonds sell at a premium.

B. This means the bonds sell at a discount.
C. The issuing company will report a loss on the sale of the bonds.
D. The issuing company will report a gain on the sale of the bonds.
E. The buyers normally pay the issuer the purchase price plus any interest accrued since the prior interest
payment date.
119. A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4 months after the
most recent interest date. The cash received for accrued interest on April 1 by the bond issuer is:
A. $750.
B. $5,250.
C. $1,500.
D. $3,000.
E. $6,000.
120. A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds pay interest semi-
annually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:
A. $1,500.
B. $3,000.
C. $4,500.
D. $6,000.
E. $7,500.
121. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were
issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the
amount of recorded interest expense for the first semiannual interest period is:
A. $3,289.50.
B. $3,500.00.
C. $3,613,70.
D. $6,633.70.
E. $7,000.00.
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122. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were
issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest method,
the amount of recorded interest expense for the first semiannual interest period is:
A. $3,500.00.
B. $7,000.00.
C. $3,318.41.
D. $6,573.90.
E. $1,750.00.
123. A company may retire bonds by all but which of the following means?
A. Exercising a call option.

B. The holders converting them to stock.
C. Purchasing the bonds on the open market.
D. Paying them off at maturity.
E. Paying all future interest and cancelling the debt.
124. Bonds that give the issuer an option of retiring them before they mature are:
A. Debentures.
B. Serial bonds.
C. Sinking fund bonds.
D. Registered bonds.
E. Callable bonds.
125. A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds
is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or
loss on this retirement?
A. $0 gain or loss.
B. $1,500 gain.
C. $1,500 loss.
D. $3,000 gain.
E. $3,000 loss.
126. Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If
the company calls these bonds at a price of $95,000, the gain or loss on retirement is:
A. $5,000 loss.
B. $2,700 gain.
C. $2,700 loss.
D. $2,300 loss.
E. $2,300 gain.
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127. A company has bonds outstanding with a par value of $100,000. The unamortized premium on these bonds
is $2,700. If the company retired these bonds at a call price of 99, the gain or loss on this retirement is:
A. $1,000 gain.
B. $1,000 loss.
C. $2,700 loss.
D. $2,700 gain.
E. $3,700 gain.
128. Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If
the company calls these bonds at a price of $201,000, the gain or loss on retirement is:
A. $1,000 gain.
B. $2,000 loss.
C. $3,000 gain.
D. $1,000 loss.
E. $2,000 gain.
129. A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at the
retirement date is $103,745. The issuer's journal entry to record the retirement will include a:
A. Debit to Premium on Bonds.

B. Credit to Premium on Bonds.
C. Debit to Discount on Bonds.
D. Credit to Gain on Bond Retirement.
E. Credit to Bonds Payable.
130. A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the
interest date 5 years later, after the bond interest was paid and after 40% of the premium had been
amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or
loss on this retirement is:
A. $0.
B. $10,000 gain.
C. $10,000 loss.
D. $22,000 gain.
E. $22,000 loss.
131. On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires
equal payments of principal plus accrued interest be paid each year on July 31. The present value of an
annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be:
A. $10,000.00.
B. $11,223.34.
C. $10,800.00.
D. $10,400.00.
E. $1,223.34.
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132. 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 appropriate journal entry to record the
issuance of the note?
A. Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B. Debit Notes Payable $250,000; credit Cash $250,000.
C. Debit Cash $37,258; credit Notes Payable $37,258.
D. Debit Cash $250,000; credit Notes Payable $250,000.
E. Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.
requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the
first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $17,258
E. $232,742
requiring equal payments each June 30 of $37,258. What amount of principle will be included in the first
annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $232,742
E. $17,258
135. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual
payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?
A. Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B. Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C. Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D. Debit Notes Payable $32,136; credit Cash $32,136.
E. Debit Notes Payable $11,250; credit Cash $11,250.
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136. On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable.
The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10
years. The required general journal entry to record the first payment on the note on December 31, Year 1
is:
B. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
E. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
137. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in
5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The
market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond
is:
A. Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
B. Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
C. Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
D. Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.
E. Debit Cash $312,177; credit Bonds Payable $312,177.
market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest
payment using straight-line amortization is:
A. Debit Interest Payable $13,500; credit Cash $13,500.00.

B. Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash
$13,500.00.
C. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash
$13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash
$13,500.00.
E. Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash
$13,500.00.
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payment using the effective interest method of amortization is:
A. Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash
$13,500.00.
B. Debit Interest Payable $13,500; credit Cash $13,500.00.
C. Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash
$13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash
$13,500.00.
$13,500.00.
140. 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 Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the
Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $1,000,000
B. $789,244
C. $1,341,208
D. $1,085,308
E. $658,792
141. Sharmer Company issues 5%, 5 year bonds with a par value of $1,000,000 and semiannual interest
(selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the
Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $957,355
B. $1,000,000
C. $1,250,000
D. $786,745
E. $1,213,255
market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond
is:
A. Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.
B. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
D. Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
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A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.

B. Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
D. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
E. Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash
$14,000.00.
$14,000.00.
B. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
D. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
$14,000.00.
145. All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS
are true except:
A. Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
B. Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital
leases.
C. The criteria for identifying a lease as a capital lease are more general under IFRS.
D. Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work
and earn them.
E. Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.
146. On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares
of $5 par value common stock. The entry to record the conversion of the bonds includes all of the
following entries except:
A. Debit to Bonds Payable $310,000.

B. Debit to Premium on Bonds Payable $10,000.
C. Credit to Common Stock $250,000.
D. Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E. Debit to Bonds Payable $300,000.
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147. 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 1 due in 10 periods at 3% 0.7441
What is the issue (selling) price of the bond?
A. $420,000
B. $402,362
C. $300,010
D. $308,107
E. $325,592
Matching Questions
148. Match the following terms with the definitions.
1. Bonds that give the issuer an option of retiring them Discount on

at a stated dollar amount prior to maturity. bonds ____
Callable
2. The interest rate specified in the bond indenture. bonds ____
3. The net amount at which bonds are reported on the
balance sheet. Annuity ____
Debt-to-
4. A series of equal payments at equal time intervals. equity ratio ____
5. The amount by which the bond issue (selling) price Sinking fund
exceeds the bond par value. bonds ____
6. The contract between the bond issuer and the
bondholder(s) that identifies the rights and obligations Secured
of the parties. bonds ____
7. Bonds that require the issuer to create a fund of
assets at specified amounts and dates to repay the Carrying
bonds at maturity. value ____
8. The ratio of total liabilities to total stockholders' Premium on
equity. bonds ____
9. The amount by which the bond par value exceeds Bond
the bond issue (selling) price. indenture ____
10. Bonds that have specific assets of the issuer
pledged as collateral. Contract rate ____
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1. The interest rate that borrowers are willing to pay

and lenders are willing to accept for a particular
bond at its risk level. Term bonds ____
2. Bonds that are scheduled for maturity on one
specified date. Coupon bonds ____
3. Bonds that are backed by the issuer's general
credit standing. Market rate ____
4. Bonds with interest coupons attached to their
certificates; the bondholders detach the coupons
when they mature and present them to a bank or
broker for collection. Bond indenture ____
5. An obligation requiring a series of periodic Convertible
payments to the lender. bonds ____
6. Bonds that can be exchanged by the bondholders
for a fixed number shares of the issuing
corporation's common stock. Bearer bonds ____
7. An accounting method that allocates interest
expense over the bonds' life in a way that yields a
constant rate of interest. Installment note ____
8. Bonds that mature at more than one date and are
usually paid over a number of periods. Unsecured bonds ____
bondholders; it identifies the rights and obligations
of the parties. Serial bonds ____
10. Bonds that are payable to whoever holds them; Effective interest
also called unregistered bonds. rate method ____
Short Answer Questions
150. What is a bond? Identify and discuss the different characteristics and features bonds may possess.
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151. Describe installment notes and the nature of the typical payment pattern.
152. On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with
4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest at 9%
equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428. Explain.
153. Explain the present value concept as it applies to long term liabilities.
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154. What is a lease? Explain the difference between an operating lease and a capital lease.
155. Identify the advantages and disadvantages of bond financing.
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156. A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to
raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under Plan
#2, 50,000 additional shares of common stock would be issued at $20 per share. The corporation currently
has 300,000 shares of stock outstanding, and it expects to earn $700,000 per year before bond interest and
income taxes. The net income and return on investment for both plans is shown below:
Plan #1 Plan #2
Earnings before bond interest and taxes $700,000 $700,000
Bond interest expense (60,000)
Income before taxes $640,000 $700,000
Income taxes (224,000) (245,000)
Net income $416,000 $455,000
Equity $8,000,000 $9,000,000

Return on Equity 5.2% 5.06%
Comment on the relative effects of each alternative, including when one form of financing is preferred to
another.
157. Describe the journal entries required to record the issuance of bonds at par and the payment of bond
interest.
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158. Describe the journal entries required to record the issuance of bonds at a premium and the payment of bond
interest, including any applicable amortization.
159. Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond
interest, including any applicable amortization.
160. Explain the amortization of a bond discount. Identify and describe the amortization methods available.
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161. Explain how to record the issuance and sale of a bond between interest payment dates.
162. Explain the accounting procedures when a bond's interest period does not coincide with the issuer's
accounting period.
163. How are bond issue prices determined?
164. Explain the amortization of a bond premium. Identify and describe the amortization methods available.
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165. What are methods that a company may use to retire its bonds?
166. Describe the recording procedures for the issuance, retirement, and paying of interest for installment notes.
167. Zhang Company has a loan agreement that provides it with cash today, and the company must pay $25,000
4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4 periods at 6% is
0.7921. What is the amount of cash that Zhang Company receives today?
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168. Wasp Corporation has a loan agreement that provides it with cash today, and the company must pay
$25,000 one year from today, $15,000 two years from today, and $5,000 three years from today. Wasp
agrees to pay 10% interest. The following are factors from a present value table:
Periods Interest rate 10%

1 0.9091
2 0.8264
3 0.7513
What is the amount of cash that Wasp receives today?
169. A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting one year
from now. The annual interest rate is 6%. The present value of an annuity factor for 5 periods at 6% is
4.2124. What is the present value of these five payments?
170. On January 1, the Rodrigues Corporation leased some equipment on a 2-year lease, paying $15,000 per
year each December 31. The lease is considered to be an operating lease. Prepare the general journal entry
to record the first lease payment on December 31.
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171. On January 1, Haymark Corporation leased a truck, agreeing to pay $15,252 every December 31 for the
six-year life of the lease. The present value of the lease payments, at 6% interest, is $75,000. The lease is
considered a capital lease.
(a) Prepare the general journal entry to record the acquisition of the truck with the capital lease.
(b) Prepare the general journal entry to record the first lease payment on December 31.
(c) Record straight-line depreciation on the truck on December 31, assuming a 6-year life and no salvage
value.
172. Sharma Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000.
Calculate the company's debt-to-equity ratio.
173. On October 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par plus
accrued interest. The bonds were dated July 1 of this year. What amount of bond interest expense should
the company report on its current year income statement?
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174. A company issued 9%, 10-years bonds with a par value of $1,000,000 on September 1, Year 1 when the
market rate was 9%. The bonds were dated June 30, Year 1. The bond issue price included accrued interest.
Interest is paid semiannually on December 31 and June 30.
(a) Prepare the issuer's journal entry to record the issuance of the bonds on September 1.
(b) Prepare the issuer's journal entry to record the semiannual interest payment on December 31, Year 1.
175. On June 1, a company issued $200,000 of 12% bonds at their par value plus accrued interest. The interest
on these bonds is payable semiannually on January 1 and July 1. Prepare the issuer's journal entry to record
the bond issuance of June 1.
176. Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1. Interest is
payable each June 30 and December 31.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1.
(b) Prepare the general journal entry to record the first interest payment on June 30.
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177. A company issued 9%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The
market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. On the
first semiannual interest date, what amount of cash should be paid to the holders of these bonds for
interest?
178. On January 1, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received
$442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay
interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization.
Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.
179. A company issued 10-year, 9% bonds, with a par value of $500,000 when the market rate was 9.5%. The
issuer received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the bond issuance.
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180. A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The
company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal
entry to record the first semiannual interest payment and the amortization of any bond discount or
premium. (Round amounts to the nearest whole dollar)
181. A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual interest payments. On
the issue date, the annual market rate of interest is 8%. Compute the issue (selling) price of the bonds.. The
following information is taken from present value tables:
8.5302
Present value of an annuity for 10 periods at 3%
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182. A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The
annual market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds.
The issuer uses the effective interest method for amortization. On the first semiannual interest date, what
amount of discount should the issuer amortize?
183. A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, at a selling price of
$885,295 when the annual market interest rate was 12%. The company uses the effective interest
amortization method. Interest is paid semiannually each June 30 and December 31.
(1) Prepare an amortization table for the first two payment periods using the format shown below:
Semiannual Cash Interest Bond Discount Unamortized Carrying Value

Interest Period Paid Interest Amortization Discount
Expense
(2) Prepare the journal entry to record the first semiannual interest payment.
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company received $484,087 in cash proceeds. Using the effective interest method, prepare the issuer's
journal entry to record the first semiannual interest payment and the amortization of any bond discount or
premium.
company received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the issuance of
the bond.
186. On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds pay
interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the holders an
annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment, assuming it
uses the straight-line method of amortization.
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187. On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest semiannually each June 30
and December 31. On the issue date, the annual market rate of interest is 6%. Compute the price of the
bonds on their issue date. The following information is taken from present value tables:

and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the
price of the bonds on their issue date. The following information is taken from present value tables:

Present value of 1 for 10 periods at 4% 0.6756
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189. On March 1, a company issues 6%, 10 year $300,000 par value bonds that pay semiannual interest each
June 30 and December 31. The bonds sell at par value plus interest accrued since January 1. Prepare the
general journal entry to record the issuance of the bonds on March 1.
190. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest semiannually each
February 1 and August 1. The bonds sold at $632,000. The company uses the straight-line method of
amortizing bond premiums. The company's year-end is December 31. Prepare the general journal entry to
record the interest accrued at December 31.
191. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest semiannually each
February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method of
amortizing bond discounts. The company's year-end is December 31. Prepare the general journal entry to
record the interest accrued at December 31.
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192. Strider Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, Year 1. Interest
is to be paid semiannually on each June 30 and December 31. The bonds are issued at $5,368,035 cash
when the market rate for this bond is 12%.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1, year 1.
(b) Show how the bonds would be reported on Strider's balance sheet at January 1, Year 1.
(c) Assume that Strider uses the effective interest method of amortization of any discount or premium on
bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, Year 1.
(d) Assume instead that Strider uses the straight-line method of amortization of any discount or premium
on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30,
Year 1.
193. On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The bonds pay interest
each July 1 and January 1. The bonds were sold for $817,860 cash, based on an annual market rate of 8%.
Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective
interest method is used.
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194. A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be paid
semiannually each June 30 and December 31. The bonds were sold at $2,162,290 based on an annual
market rate of 8%. The company uses the effective interest method of amortization.
(1) Prepare an amortization table for the first two semiannual payment periods using the format shown
below.
Semiannual Cash Interest Bond Premium Unamortized Carrying Value

Interest Period Paid Interest Amortization Premium
Expense
195. A company holds $150,000 par value of bonds with a carrying value of $147,950. The company calls the
bonds at $151,000. Prepare the journal entry to record the retirement of the bonds.
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196. A company has 10%, 20-year bonds outstanding with a par value of $500,000. The company calls the
bonds at 96 when the unamortized discount is $24,500. Calculate the gain or loss on the retirement of these
bonds.
197. Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and a carrying value
of $475,000. The company calls the bonds at $482,000. Calculate the gain or loss on the retirement of these
bonds.
198. A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current
year's interest date, after the bond interest was paid and after 40% of the total premium had been
amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare the
journal entry to record the retirement of these bonds.
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199. On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be
repaid with 4 annual year-end payments of $21,607, the first of which is due on December 31, Year 1.
(a) Prepare the company's journal entry to record the note's issuance.
(b) Prepare the journal entries to record the first and second installment payments.
200. On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5
annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the journal
entries to record the first and second installment payments.
201. On January 1, Year 1 Cleaver Company borrowed $85,000 cash by signing a 7% installment note that is to
be repaid with 4 annual year-end payments of $25,094, the first of which is due on December 31, Year 1.
(b) Prepare the journal entries to record the first installment payment.
14-44
202. A company purchased two new delivery vans for a total of $250,000 on January 1, Year 1. The company
paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid
in three annual end-of-year payments of $81,487 each, with the first payment on December 31, Year 1.
Each payment includes interest on the unpaid balance plus principal.
(1) Prepare a note amortization table using the format below:
Period Ending Beginning Debit Interest Debit Notes Credit Cash Ending
Date Balance Expense Payable Balance
12/31/Yr 1
12/31/Yr 2
12/31/Yr 3
(2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the second
annual installment payment on December 31, Year 2.
Fill in the Blank Questions
203. _______________ bonds have specific assets of the issuing company pledged as collateral.
________________________________________
204. ______________ bonds are bonds that are scheduled for maturity on one specified date.
________________________________________
14-45
205. _______________ bonds are bonds that mature at more than one date, often in a series, and thus are
usually repaid over a number of periods.
________________________________________
206. ____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of assets
set aside as specified amounts and dates to repay the bonds.
________________________________________
207. Bonds payable to whoever holds them are called _________________ bonds.
________________________________________
208. _____________________ bonds can be exchanged for a fixed number of shares of the issuing
corporation's common stock.
________________________________________
209. ___________________ bonds have an option exercisable by the issuer to retire them at a stated dollar
amount prior to maturity.
________________________________________
210. The legal document identifying the rights and obligations of both the bondholders and the issuer is called
the ____________________________________.
________________________________________
211. An ________________________________ is an obligation requiring a series of payments to the lender.
________________________________________
212. When applying equal total payments to a note, with each payment the amount applied to the note principal
____________ while the interest expense for the note _____________.
________________________________________
213. The ____________ concept is the idea that cash paid (or received) in the future has less value now than the
same amount of cash paid (or received) today.
________________________________________
214. An _______________ is a series of equal payments at equal time intervals.
________________________________________
215. A _______________________ is a contractual agreement between an employer and its employees for the
employer to provide benefits (payments) to employees after they retire.
________________________________________
216. _________________________ leases are short-term or cancelable leases in which the lessor retains the
risks and rewards of ownership.
________________________________________
14-46
217. ____________________ leases are long-term or noncancelable leases by which the lessor transfers
substantially all risks and rewards of ownership to the lessee.
________________________________________
218. Return on equity increases when the expected rate of return from the acquired assets is
__________________ than the rate of interest on the bonds used to finance the asset acquisition.
________________________________________
219. Bonds issued in the names and addresses of their holders are ________________ bonds.
________________________________________
220. The ______________ ratio is used to assess the risk of a company's financing structure.
________________________________________
221. The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular bond
and its risk level is the ____________________ of interest.
________________________________________
222. The _________________________ method of amortizing a bond discount allocates an equal portion of the
total bond interest expense to each interest period.
________________________________________
14-47
Chapter 14 Long-Term Liabilities Answer Key
True / False Questions
1. The legal contract between the issuing corporation and the bondholders is called the bond indenture.
TRUE
AACSB: Communication
AICPA: BB Legal
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-A1 Compare bond financing with stock financing.
Topic: Bond Financing
2. One of the similarities of bond and equity financing is that both dividends and equity distribution
payments are tax deductible.
FALSE
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
3. A disadvantage of bond financing over equity financing is the burden on the cash flows of the
company.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 2 Medium
4. Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than
one date.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-A2 Assess debt features and their implications.
14-48
Topic: Features of Bonds and Notes
5. Debentures always have specific assets of the issuing company pledged as collateral.
FALSE
AICPA: BB Legal
Blooms: Understand
6. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to
maturity.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
7. Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common
stock.
FALSE
AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
8. A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to
create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.
FALSE
AICPA: BB Legal
Blooms: Understand
9. Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.
TRUE
14-49
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
10. A bond's par value is not necessarily the same as its market value.
TRUE
AICPA: BB Industry
Blooms: Understand
11. An installment note is an obligation of the issuing company that requires a series of periodic payments
to the lender.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-C1 Explain the types of notes and prepare entries to account for notes.
Topic: Installment Notes
12. Payments on an installment note normally include the accrued interest expense plus a portion of the
amount borrowed.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
13. Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.
FALSE
AICPA: BB Industry
Blooms: Understand
Difficulty: 1 Easy
14-50
14. The carrying value of a long-term note is computed as the present value of all remaining future
payments, discounted using the market rate at the time of issuance.
TRUE
AACSB: Analytical Thinking

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
15. Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a
borrower's assets identified in the mortgage if the borrower fails to make the required payments.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
16. Mortgage bonds are backed only by the good faith and credit of the issuing company.
FALSE
AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
17. A basic present value concept is that cash paid or received in the future has less value now than the
same amount of cash today.
TRUE

AICPA: BB Resource Management
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-C2 Appendix 14A-Explain and compute the present value of an amount(s) to be paid at a future date(s).
Topic: Present Value of Bonds and Notes
18. A basic present value concept is that cash paid or received in the future has more value now than the
same amount of cash received today.
FALSE

14-51
Blooms: Understand
Difficulty: 1 Easy
19. Compounded means that interest during a second period is based on the total amount borrowed plus the
interest accrued in the first period.
TRUE

Blooms: Remember
Difficulty: 1 Easy
20. A company invests $10,000 at 7% compounded annually. At the end of the second year, the company
should have $11,400 in the fund.
FALSE
$10,000 + ($10,000 * 7%) + [($10,000 + ($10,000 * 7%)) * 7%] = $11,449 or $10,000 * 1.07 * 1.07 =
$11,449

Blooms: Apply
Difficulty: 3 Hard
21. An annuity is a series of equal payments at equal time intervals.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
22. The present value of an annuity can be best or quickly computed as the sum of the individual future
values for each payment.
FALSE

Blooms: Understand
14-52
23. The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity
of ten $15,000 payments at 8% yields a present value of $2,235.
FALSE
$15,000 * 6.7101 = $100,651.50

Blooms: Apply
24. The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an annuity
of six $2,000 payments at 10% would equal $8,710.60.
TRUE
$2,000 * 4.3553 = $8,711

Blooms: Apply
25. A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the
asset for a period of time in return for cash payment(s) to the lessor.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-C4 Appendix 14D-Describe accounting for leases and pensions.
Topic: Leases and Pensions
26. Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the
risks and rewards of ownership to the lessee.
FALSE
AICPA: BB Legal
14-53
Blooms: Understand
Difficulty: 1 Easy
27. An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
28. A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable
income.
FALSE
AICPA: BB Legal
Blooms: Understand
Difficulty: 1 Easy
29. A pension plan is a contractual agreement between an employer and its employees to provide benefits to
employees after they retire.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
30. A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with
interest.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
14-54
31. An advantage of bond financing is that issuing bonds does not affect owner control.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
32. Interest payments on bonds are determined by multiplying the par value of the bond by the stated
contract rate.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-P1 Prepare entries to record bond issuance and interest expense.
Topic: Issuing Bonds at Par
33. The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept
for a particular bond and its risk level.
FALSE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
34. Return on equity increases when the expected rate of return from the acquired assets is higher than the
interest rate on the debt issued to finance the acquired assets.
TRUE

AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
35. The use of debt financing ensures an increase in return on equity.
FALSE

AICPA: BB Industry
14-55
Blooms: Understand
Difficulty: 1 Easy
36. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the
corporation.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
37. Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.
FALSE
AICPA: BB Industry
Blooms: Understand
38. A company's ability to issue unsecured debt depends on its credit standing.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
39. A lessee has substantially all of the benefits and risks of ownership in an operating lease.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-56
40. A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high
debt-to-equity ratio.
FALSE

AICPA: BB Industry
Blooms: Understand
Learning Objective: 14-A3 Compute the debt-to-equity ratio and explain its use.
Topic: Debt-to-Equity Ratio
41. The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.
FALSE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
42. The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing
structure.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
43. A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.
FALSE
If total assets and total liabilities are $350,000 and $200,000, respectively, stockholders' equity must be
$150,000. Thus, the debt-to-equity ratio is $200,000/$150,000 or 1.3.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-57
44. A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to
1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure
decreased during Year 2.
FALSE

AICPA: BB Industry
Blooms: Understand
45. The contract rate on previously issued bonds changes as the market rate of interest changes.
FALSE

AICPA: BB Industry
Blooms: Understand
46. The market rate for bonds is generally higher when the time period to maturity is longer due to the risk
of adverse events occurring over the time period.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
47. A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable
semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual
interest payments of $4,000 each.
TRUE

AICPA: BB Industry
Blooms: Understand
14-58
48. When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a
discount.
TRUE

AICPA: BB Industry
Blooms: Understand
49. When the contract rate is above the market rate, a bond sells at a discount.
FALSE

AICPA: BB Industry
Blooms: Understand
Difficulty: 1 Easy
50. A discount on bonds payable occurs when a company issues bonds with an issue price less than par
value.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
51. The carrying (book) value of a bond at the time when it is issued is always equal to its par value.
FALSE

AICPA: BB Industry
Blooms: Understand
52. The carrying (book) value of a bond payable is the par value of the bonds plus any discount or minus
any premium.
FALSE

AICPA: BB Industry
14-59
Blooms: Understand
$473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond
over its eight-year life is $400,000.
FALSE
Total interest expense recognized is ($500,000 * 10% * 8 years) + discount ($26,155) = $426,155.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line
method to amortize the discount. The amount of discount amortized each period is $1,634.69.
TRUE
($500,000 - $473,845)/16 = $1,634.69

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 14-P2 Compute and record amortization of bond discount using straight-line method.
Topic: Issuing Bonds at a Discount
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line
method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
FALSE
Interest Expense = Cash Paid + Discount Amortization

Interest Expense = ($500,000 * 10% * 6/12) + ($26,155/16) = $26,634.69

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-60
56. A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
57. A premium reduces the interest expense of a bond over its life.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
58. A discount reduces the interest expense of a bond over its life.
FALSE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
59. The market value (issue price) of a bond is equal to the present value of all future cash payments
provided by the bond.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
60. Premium on Bonds Payable is an adjunct or accretion liability account.
TRUE

AICPA: BB Industry
AICPA: FN Reporting
14-61
Blooms: Remember
Difficulty: 1 Easy
61. If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting
entry is necessary to recognize bond interest expense accruing since the most recent interest payment.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-C3 Appendix 14C-Describe interest accrual when bond payment periods differ from accounting periods.
Topic: Issuing Bonds between Interest Dates
62. The issue price of bonds is found by computing the future value of the bond's cash payments,
discounted at the market rate of interest.
FALSE

AICPA: BB Industry
Blooms: Understand
63. The effective interest method assigns a bond interest expense amount that increases over the life of a
premium bond.
FALSE

AICPA: BB Industry
Blooms: Understand
Learning Objective: 14-P6 Appendix 14B-Compute and record amortization of bond premium using effective interest method.
Topic: Effective Interest Amortization of a Premium Bond
64. Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase
them on the open market.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-P4 Record the retirement of bonds.
Topic: Bond Retirement
14-62
65. When convertible bonds are converted to a company's stock, the carrying value of the bonds is
transferred to equity accounts and no gain or loss is recorded.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
66. Payments on installment notes normally include accrued interest plus a portion of the principal amount
borrowed.
TRUE

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
67. The equal total payments pattern for installment notes consists of changing amounts of interest but
constant amounts of principal over the life of the note.
FALSE

AICPA: BB Industry
Blooms: Understand
Multiple Choice Questions
68. Sinking fund bonds:
A. Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
B. Require equal payments of both principal and interest over the life of the bond issue.
C. Decline in value over time.
D. Are registered bonds.
E. Are bearer bonds.
AICPA: BB Legal
14-63
Blooms: Remember
Difficulty: 1 Easy
69. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to
maturity are known as:
A. Convertible bonds.
B. Sinking fund bonds.
C. Callable bonds.
D. Serial bonds.
E. Junk bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
70. A bond traded at 102½ means that:
A. The bond pays 2.5% interest.

B. The bond traded at 102.5% of its par value.
C. The market rate of interest is 2.5%.
D. The bonds were retired at $1,025 each.
E. The market rate of interest is 2½% above the contract rate.

AICPA: BB Industry
Blooms: Understand
71. Secured bonds:
A. Are called debentures.

B. Have specific assets of the issuing company pledged as collateral.
C. Are backed by the issuer's bank.
D. Are subordinated to those of other unsecured liabilities.
E. Are the same as sinking fund bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-64
72. Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank
or broker for collection, are called:
A. Coupon bonds.
B. Callable bonds.
C. Serial bonds.
D. Convertible bonds.
E. Registered bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Topic: Assessing Features of Bonds and Notes
73. Bonds owned by investors whose names and addresses are recorded by the issuing company, and for
which interest payments are made with checks or cash transfers to the bondholders, are called:
A. Callable bonds.
B. Serial bonds.
C. Registered bonds.
D. Coupon bonds.
E. Bearer bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
74. The contract between the bond issuer and the bondholders identifying the rights and obligations of the
parties, is called a(n):
A. Debenture.
B. Bond indenture.
C. Mortgage.
D. Installment note.
E. Mortgage contract.
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
14-65
75. Bonds that mature at more than one date with the result that the principal amount is repaid over a
number of periods are known as:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Sinking fund bonds.
E. Serial bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
76. A contract pledging title to assets as security for a note or bond is known as a(an):
A. Sinking fund.
B. Mortgage.
C. Equity.
D. Lease.
E. Indenture.
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
77. Promissory notes that require the issuer to make a series of payments consisting of both interest and
principal are:
A. Debentures.
B. Discounted notes.
C. Installment notes.
D. Indentures.
E. Investment notes.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-66
78. The carrying value of a long-term note payable is computed as:
A. The future value of all remaining payments, using the market rate of interest.
B. The face value of the long-term note less the total of all future interest payments.
C. The present value of all remaining payments, discounted using the market rate of interest at the time
of issuance.
D. The present value of all remaining interest payments, discounted using the note's rate of interest.
E. The face value of the long-term note plus the total of all future interest payments.

AICPA: BB Industry
Blooms: Remember
79. The carrying value of bonds at maturity always equals:
A. the amount of cash originally received in exchange for the bonds.

B. the par value of the bond.
C. the amount of discount or premium.
D. the amount of cash originally received in exchange for the bonds plus any unamortized discount or
less any premium.
E. $0.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
80. A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into.
The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938.
The present value of the loan (rounded) is:
A. $15,877.
B. $12,400.
C. $5,592.
D. $9,200.
E. $47,630.
$20,000 * 0.7938 = $15,877

AICPA: BB Industry
Blooms: Apply
14-67
81. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of
an annuity factor at 8% for 5 years is 3.9927. Each annual payment equals $75,000. The present value
of the note is:
A. $56,352.84.
B. $93,921,41.
C. $375,000.
D. $299,452.50.
E. $187,842.81.
$75,000 * 3.9927 = $299,452.50

AICPA: BB Industry
Blooms: Apply
82. A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The
present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:
A. $10,489.88.
B. $8,391.91.
C. $40,000.00.
D. $52,450.00.
E. $190,660.00.
$40,000/4.7665 = $8,391.91

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-68
83. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual
payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330. The present
value of the loan is:
A. $9,000.
B. $5,033.
C. $63,000.
D. $57,330.
E. $45,297.
$9,000 * 5.0330 = $45,297

AICPA: BB Industry
Blooms: Apply
84. A pension plan:
A. Is a contractual agreement between an employer and its employees in which the employer provides
benefits to employees after they retire.
B. Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C. Is always funded fully by employers.
D. Can be a defined benefit plan or an undefined benefit plan.
E. Is the same as Other Postretirement Benefits.
AICPA: BB Industry
Blooms: Understand
85. All of the following statements regarding leases are true except:
A. For a capital lease the lessee records the leased item as its own asset.
B. For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating
lease the lessee does not.
C. Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D. Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E. For an operating lease the lessee reports the lease payments as rental expense.
AICPA: BB Industry
Blooms: Understand
14-69
86. A disadvantage of bond financing is:
A. Bonds do not affect owners' control.

B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. Bonds pay periodic interest and the repayment of par value at maturity.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
87. An advantage of bonds is:
A. Bonds do not affect owner control.

B. Bonds require payment of par value at maturity.
C. Bonds can decrease return on equity.
D. Bond payments can be burdensome when income and cash flow are low.
E. Bonds require payment of periodic interest.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
88. Which of the following statements is true?
A. Interest on bonds is tax deductible.

B. Interest on bonds is not tax deductible.
C. Dividends to stockholders are tax deductible.
D. Bonds do not have to be repaid.
E. Bonds always increase return on equity.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-70
89. A bondholder that owns a $1,000, 10%, 10-year bond has:
A. Ownership rights in the issuing company.

B. The right to receive $10 per year until maturity.
C. The right to receive $1,000 at maturity.
D. The right to receive $10,000 at maturity.
E. The right to receive dividends of $1,000 per year.

AICPA: BB Industry
Blooms: Understand
90. Collateral agreements for a note or bond can:
A. Reduce the risk of loss in comparison with unsecured debt.

B. Increase the risk of loss in comparison with unsecured debt.
C. Have no effect on risk.
D. Reduce the issuer's assets.
E. Increase total cost for the borrower.
AICPA: BB Industry
Blooms: Understand
91. The party that has the right to exercise a call option on callable bonds is:
A. The bondholder.
B. The bond issuer.
C. The bond indenture.
D. The bond trustee.
E. The bond underwriter.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-71
92. Which of the following accurately describes a debenture?
A. A bond with specific assets pledged as collateral.

B. A type of bond issued in the names and addresses of the bondholders.
C. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified
amounts and dates to repay the bonds.
D. A type of bond which is not collateralized but backed only by the issuer's general credit standing.
E. A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's
common stock.
AICPA: BB Industry
Blooms: Understand
93. A company's total liabilities divided by its total stockholders' equity is called the:
A. Equity ratio.
B. Return on total assets ratio.
C. Pledged assets to secured liabilities ratio.
D. Debt-to-equity ratio.
E. Times secured liabilities earned ratio.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
94. The debt-to-equity ratio:
A. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B. Is a means of assessing the risk of a company's financing structure.
C. Is not relevant to secured creditors.
D. Can always be calculated from information provided in a company's income statement.
E. Must be calculated from the market values of assets and liabilities.

AICPA: BB Industry
Blooms: Understand
14-72
95. 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):
A. 0.56
B. 1.80
C. 0.44
D. 0.80
E. 1.25

AICPA: BB Industry
Blooms: Analyze
96. Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of
$17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity
date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the
company's debt-to-equity ratio?
A. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C. Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
Current Situation: Total Assets = Total Liabilities + Stockholders' Equity

35,000,000 = 17,500,000 + 17,500,000
Debt-to-equity ratio = 17.5/17.5 or 1.0.
If debt is issued: Total Assets = Total Liabilities + Stockholders' Equity
40,000,000 = 22,500,000 + 17,500,000
Debt-to-equity ratio = 22.5/17.5 or 1.3.

AICPA: BB Industry
Blooms: Analyze
Difficulty: 3 Hard
14-73
97. Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of
$16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of
excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds
have on the company's debt-to-equity ratio?
A. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
C. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
D. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
E. Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
Current Situation: Total Assets = Total Liabilities + Stockholders' Equity

42,000,000 = 16,000,000 + 26,000,000
Debt-to-equity ratio = 16/26 or .62.
If debt is repaid: Total Assets = Total Liabilities + Stockholders' Equity
39,000,000 = 13,000,000 + 26,000,000
Debt-to-equity ratio = 13/26 or .50.

AICPA: BB Industry
Blooms: Analyze
Difficulty: 3 Hard
98. A bond is issued at par value when:
A. The bond pays no interest.

B. The bond is not between interest payment dates.
C. Straight line amortization is used by the company.
D. The market rate of interest is the same as the contract rate of interest.
E. The bond is callable.
AICPA: BB Industry
Blooms: Understand
14-74
99. When a bond sells at a premium:
A. The contract rate is above the market rate.

B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. It means that the bond is a zero coupon bond.
E. The bond pays no interest.
AICPA: BB Industry
Blooms: Remember
Learning Objective: 14-P3 Compute and record amortization of bond premium using straight-line method.
Topic: Issuing Bonds at a Premium
100. A bond sells at a discount when the:
A. Contract rate is above the market rate.

B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond has a short-term life.
E. Bond pays interest only once a year.
AICPA: BB Industry
Blooms: Remember
101. Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semi-
annually. The current market rate is 8%. The amount of interest owed to the bondholders for each
semiannual interest payment is:
A. $60,000.
B. $33,750.
C. $67,500.
D. $30,000.
E. $375,000.
$750,000 * .09 * ½ year = $33,750

AICPA: BB Industry
Blooms: Apply
14-75
102. A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semi-annually. The
current market rate is 8%. The journal entry to record each semiannual interest payment is:

C. Debit Bond Interest Payable $22,000; credit Cash $22,000.
D. Debit Bond Interest Expense $550,000; credit Cash $550,000.
E. No entry is needed, since no interest is paid until the bond is due.
$550,000 * .08 * ½ year = $22,000

AICPA: BB Industry
Blooms: Apply
103. On January 1 of 2015, Parson Freight Company issues 7%, 10-year bonds with a par value of
$2,000,000. The bonds pay interest semi-annually. The market rate of interest is 8% and the bond
selling price was $1,864,097. The bond issuance should be recorded as:
A. Debit Cash $2,000,000; credit Bonds Payable $2,000,000.

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

AICPA: BB Industry
Blooms: Apply
14-76
months. The company's December 31, Year 1 balance sheet should reflect total liabilities associated
with the bond issue in the amount of:
A. $3,220,000.
B. $3,340,063.
C. $3,097,500.
D. $3,780,000.
E. $3,902,500.
Discount on Bonds Payable, Begin $302,611
Less Year 1 amortization 20,174 (10,087 * 2) = 20,174
Unamortized Discount, Ending $282,437
Par Value of the bonds $3,500,000
- Unamortized discount 282,437
Carrying Value of bonds $3,217,563
+ Interest accrual on Dec. 31 122,500 ($3,500,000 * 7% * 6/12)
$3,340,063

AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
14-77
months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1
would be:
A. $132,500.
B. $225,000.
C. $265,174.
D. $245,000.
E. $224,826.
Cash paid every six months = $3,500,000 * 7% * 6/12 = $122,500.

Discount amortization every six months = $10,087;
Interest Expense ($122,500 + $10,087) * 2 = $265,174.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Topic: Amortization of Bond Discount Using Straight-line Method
106. On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest
for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line
method at a rate of $10,087 every six months. The life of these bonds is:
A. 15 years.
B. 30 years.
C. 26.5 years.
D. 32 years
E. 35 years.
Annual discount amortization = $20,174 ($10,087 * 2)

Bond discount = $3,500,000 - $3,197,389 = $302,611
Discount/Amortization = Life of bonds ($302,611/$20,174 = 15 years)

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-78
107. Amortizing a bond discount:
A. Allocates a portion of the total discount to interest expense each interest period.
B. Increases the market value of the Bonds Payable.
C. Decreases the Bonds Payable account.
D. Decreases interest expense each period.
E. Increases cash flows from the bond.

AICPA: BB Industry
Blooms: Understand
108. The Discount on Bonds Payable account is:
A. A
liability.
B. A contra liability.
C. An expense.
D. A contra expense.
E. A contra equity.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
109. A discount on bonds payable:
A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.

AICPA: BB Industry
Blooms: Understand
14-79
110. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds
of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line
method to amortize the discount. The journal entry to record the first interest payment is:

C. Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
D. Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.
E. Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.
Cash = $400,000 * .07 * ½ = $14,000

Discount amortized = ($400,000 - $396,000)/20 = $200
Interest expense = $14,000 + $200 = $14,200

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
111. A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for
the bonds. Using the straight-line method, the amount of interest expense for the first semiannual
interest period is:
A. $3,326.
B. $3,500.00.
C. $3,673.70.
D. $7,000.00.
E. $7,347.40.
Cash interest paid: $100,000 * .07 * ½ year = $3,500

Discount amortization: ($100,000 - $96,526)/20 periods = $173.70
Interest expense = $3,500 + $173.70 = $3,673.70

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-80
112. The effective interest amortization method:
A. Allocates bond interest expense over the bond's life using a changing interest rate.
B. Allocates bond interest expense over the bond's life using a constant interest rate.
C. Allocates a decreasing amount of interest over the life of a discounted bond.
D. Allocates bond interest expense using the current market rate for each interest period.
E. Is not allowed by the FASB.

AICPA: BB Industry
Blooms: Understand
Learning Objective: 14-P5 Appendix 14B-Compute and record amortization of bond discount using effective interest method.
Topic: Effective Interest Amortization of a Discount Bond
113. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds
were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest
method, the amount of interest expense for the first semiannual interest period is:
A. $3,500.00.
B. $3,673.01.
C. $3,705.30.
D. $7,000.00.
E. $7,346.03.
$97,947 * .075 * ½ year = $3,673.01

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
114. The market value (price) of a bond is equal to:
A. The present value of all future cash payments provided by a bond.

B. The present value of all future interest payments provided by a bond.
C. The present value of the principal for an interest-bearing bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.

AICPA: BB Industry
Blooms: Understand
14-81
115. The Premium on Bonds Payable account is a(n):
A. Revenue account.
B. Adjunct or accretion liability account.
C. Contra revenue account.
D. Contra asset account.
E. Equity account.

AICPA: BB Industry
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
116. Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid
semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds.
Which of the following statements is true?
A. Adidas must pay $200,000 at maturity and no interest payments.

B. Adidas must pay $206,948 at maturity and no interest payments.
C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

AICPA: BB Industry
Blooms: Understand
117. A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The
difference between par value and issue price for this bond is recorded as a:
A. Credit to Interest Income.

B. Credit to Premium on Bonds Payable.
C. Credit to Discount on Bonds Payable.
D. Debit to Premium on Bonds Payable.
E. Debit to Discount on Bonds Payable.

AICPA: BB Industry
Blooms: Apply
14-82
118. If an issuer sells bonds at a date other than an interest payment date:
A. This means the bonds sell at a premium.

B. This means the bonds sell at a discount.
C. The issuing company will report a loss on the sale of the bonds.
D. The issuing company will report a gain on the sale of the bonds.
E. The buyers normally pay the issuer the purchase price plus any interest accrued since the prior
interest payment date.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
119. A company issues 9% bonds with a par value of $100,000 at par on April 1, which is 4 months after the
most recent interest date. The cash received for accrued interest on April 1 by the bond issuer is:
A. $750.
B. $5,250.
C. $1,500.
D. $3,000.
E. $6,000.
$100,000 * .09 * 4/12 year = $3,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
120. A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds pay interest
semi-annually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:
A. $1,500.
B. $3,000.
C. $4,500.
D. $6,000.
E. $7,500.
$100,000 * .09 * ½ year = $4,500
14-83
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
121. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds
were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line
method, the amount of recorded interest expense for the first semiannual interest period is:
A. $3,289.50.
B. $3,500.00.
C. $3,613,70.
D. $6,633.70.
E. $7,000.00.
Cash interest paid: $100,000 * .07 * ½ year = $3,500

Premium amortized: ($102,105 - $100,000)/10 = $210.50
Interest expense: $3,500 - $210.50 = $3,289.50

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
122. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds
were issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest
method, the amount of recorded interest expense for the first semiannual interest period is:
A. $3,500.00.
B. $7,000.00.
C. $3,318.41.
D. $6,573.90.
E. $1,750.00.
$102,105 * 0.065 * ½ = $3,318.41

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-84
123. A company may retire bonds by all but which of the following means?
A. Exercising a call option.

B. The holders converting them to stock.
C. Purchasing the bonds on the open market.
D. Paying them off at maturity.
E. Paying all future interest and cancelling the debt.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
124. Bonds that give the issuer an option of retiring them before they mature are:
A. Debentures.
B. Serial bonds.
C. Sinking fund bonds.
D. Registered bonds.
E. Callable bonds.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-85
125. A company has bonds outstanding with a par value of $100,000. The unamortized discount on these
bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the
gain or loss on this retirement?
A. $0 gain or loss.
B. $1,500 gain.
C. $1,500 loss.
D. $3,000 gain.
E. $3,000 loss.
Par value $100,000
Minus Unamortized discount 4,500
Carrying value of bonds $95,500
Retirement price 97,000
Loss on retirement $1,500

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
126. Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300.
If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:
A. $5,000 loss.
B. $2,700 gain.
C. $2,700 loss.
D. $2,300 loss.
E. $2,300 gain.

AICPA: BB Industry
Blooms: Apply
Topic: Bond Retirement before Maturity
14-86
127. A company has bonds outstanding with a par value of $100,000. The unamortized premium on these
bonds is $2,700. If the company retired these bonds at a call price of 99, the gain or loss on this
retirement is:
A. $1,000 gain.
B. $1,000 loss.
C. $2,700 loss.
D. $2,700 gain.
E. $3,700 gain.
Par value $100,000
Plus Unamortized premium 2,700
Gain on retirement $3,700

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Topic: Record the Retirement of Bonds
128. Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000.
If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:
A. $1,000 gain.
B. $2,000 loss.
C. $3,000 gain.
D. $1,000 loss.
E. $2,000 gain.

AICPA: BB Industry
Blooms: Apply
14-87
129. A company retires its bonds at 105. The face value is $100,000 and the carrying value of the bonds at
the retirement date is $103,745. The issuer's journal entry to record the retirement will include a:
A. Debit to Premium on Bonds.

B. Credit to Premium on Bonds.
C. Debit to Discount on Bonds.
D. Credit to Gain on Bond Retirement.
E. Credit to Bonds Payable.

Journal Entry:
Debit Bonds Payable $100,000
Debit Premium on Bonds Payable $3,745
Debit Loss on Retirement $1,255
Credit Cash $105,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-88
130. A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the
interest date 5 years later, after the bond interest was paid and after 40% of the premium had been
amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or
loss on this retirement is:
A. $0.
B. $10,000 gain.
C. $10,000 loss.
D. $22,000 gain.
E. $22,000 loss.
Par value $1,000,000
Unamortized premium (20,000 * 60%) 12,000
Carrying value of bonds $1,012,000
Gain on retirement $22,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
131. On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires
equal payments of principal plus accrued interest be paid each year on July 31. The present value of an
annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be:
A. $10,000.00.
B. $11,223.34.
C. $10,800.00.
D. $10,400.00.
E. $1,223.34.
$30,000/2.6730 = $11,223.34

AICPA: BB Industry
14-89
Blooms: Apply
Difficulty: 3 Hard
requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the
issuance of the note?
A. Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B. Debit Notes Payable $250,000; credit Cash $250,000.
C. Debit Cash $37,258; credit Notes Payable $37,258.
D. Debit Cash $250,000; credit Notes Payable $250,000.
E. Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.

AICPA: BB Industry
Blooms: Apply
requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in
the first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $17,258
E. $232,742
$250,000 principle * 8% = $20,000 interest

AICPA: BB Industry
Blooms: Apply
14-90
requiring equal payments each June 30 of $37,258. What amount of principle will be included in the
first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $232,742
E. $17,258
$250,000 principle * 8% = $20,000 interest

$37,528 payment - 20,000 interest = $17,258 principle payment

AICPA: BB Industry
Blooms: Apply
135. A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual
payments each December 31 of $32,136. What journal entry would the issuer record for the first
payment?
B. Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C. Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
E. Debit Notes Payable $11,250; credit Cash $11,250.
Interest expense = $125,000 * 9% = $11,250

Principal reduction = $32,136 - $11,250 = $20,886

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-91
136. On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable.
The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10
years. The required general journal entry to record the first payment on the note on December 31, Year
1 is:
B. Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C. Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
E. Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
Interest expense = $100,000 * 7% = $7,000

Principal payment = $14,238 - $7,000 = $7,238

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
137. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature
in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The
market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the
bond is:
A. Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
B. Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
D. Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.
Premium = $312,177 - $300,000 = $12,177

The issued bond is always recorded at par (face) value in the Bonds Payable account, with the
difference between par value and issue price recorded as a discount or premium, depending on whether
the issue price is greater than par (premium) or less than par (discount).

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-92
A. Debit Interest Payable $13,500; credit Cash $13,500.00.

B. Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash
$13,500.00.
C. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash
$13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash
$13,500.00.
$13,500.00.
Cash payment = $300,000 * .09 * ½ = $13,500

Premium Amortization = $312,177 - $300,000 = $12,177/10 = $1,217.70
Interest Expense = $300,000 * .09 * ½ = $13,500 - $1,217.70 = $12,282.30

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
$13,500.00.
B. Debit Interest Payable $13,500; credit Cash $13,500.00.
C. Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash
$13,500.00.
D. Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash
$13,500.00.
$13,500.00.
Cash payment = $300,000 * .09 * ½ = $13,500

Interest Expense = $312,177 * .08 * ½ = $12,487.08
Premium Amortization = $13,500 - $12,487.08 = $1,012.92

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-93
140. Marwick Corporation issues 8%, 5 year bonds with a par value of $1,000,000 and semiannual interest
(selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and
the Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $1,000,000
B. $789,244
C. $1,341,208
D. $1,085,308
E. $658,792
Interest Exp. = $1,000,000 par * .08 stated interest rate * ½ = 40,000 (this is an annuity)
($1,000,000 * .7441) + (40,000 * 8.5302) = $1,085,308

AICPA: BB Industry
Blooms: Apply
141. Sharmer Company issues 5%, 5 year bonds with a par value of $1,000,000 and semiannual interest
(selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and
the Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $957,355
B. $1,000,000
C. $1,250,000
D. $786,745
E. $1,213,255
Interest Exp. = $1,000,000 par * .05 stated interest rate * ½ = 25,000 (this is an annuity)
($1,000,000 * .7441) + (25,000 * 8.5302) = $957,355

AICPA: BB Industry
Blooms: Apply
14-94
market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the
bond is:
A. Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.
B. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
D. Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
Discount = $400,000 - $383,793 = $16,207

The issued bond is always recorded at par (face) value in the Bonds Payable account, with the
difference between par value and issue price recorded as a discount or premium, depending on whether
the issue price is greater than par (premium) or less than par (discount).

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.

B. Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
D. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
$14,000.00.
Cash payment of interest = $400,000 * .07 * ½ = $14,000

Discount Amortization = $400,000 - $383,793 = $16,207/10 = $1,620.70
Interest Expense = $14,000 + $1,620.70 = $15,620.70

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-95
$14,000.00.
B. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
D. Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
$14,000.00.
Interest Expense = $383,793 * .08 * ½ = $15,351.72

Cash payment of interest = $400,000 * .07 * ½ = $14,000
Discount Amortization = $15,351.72 - $14,000 = $1,351.72
The effective interest method determines interest expense by multiplying the carrying value of the bond
by the market rate of interest.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
145. All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and
IFRS are true except:
A. Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
B. Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital
leases.
C. The criteria for identifying a lease as a capital lease are more general under IFRS.
D. Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees
work and earn them.
E. Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or
IFRS.

AICPA: BB Global
AICPA: FN Reporting
Blooms: Understand
14-96
146. On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000
shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the
following entries except:
A. Debit to Bonds Payable $310,000.

B. Debit to Premium on Bonds Payable $10,000.
C. Credit to Common Stock $250,000.
D. Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E. Debit to Bonds Payable $300,000.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Topic: Bond Retirement by Conversion
147. 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:

What is the issue (selling) price of the bond?
A. $420,000
B. $402,362
C. $300,010
D. $308,107
E. $325,592
Market interest rate is used to determine issue price. The 6% annual rate/2 = 3%, so PV factors at 3%
should be used.
Par value $300,000 * PV of $1 factor 0.7441 = $223,230
Interest payment (300,000 * .08 * 1/2) * PV of an Annuity factor 8.5302 = $102,362
Bond Issue Price = 223,230 + 102,362 = 325,592

AICPA: BB Industry
Blooms: Apply
14-97
Matching Questions
1. Bonds that give the issuer an option of retiring them Discount on

at a stated dollar amount prior to maturity. bonds 9
Callable
2. The interest rate specified in the bond indenture. bonds 1
3. The net amount at which bonds are reported on the
balance sheet. Annuity 4
Debt-to-
4. A series of equal payments at equal time intervals. equity ratio 8
5. The amount by which the bond issue (selling) price Sinking fund
exceeds the bond par value. bonds 7
bondholder(s) that identifies the rights and obligations Secured
of the parties. bonds 10
7. Bonds that require the issuer to create a fund of
assets at specified amounts and dates to repay the Carrying
bonds at maturity. value 3
8. The ratio of total liabilities to total stockholders' Premium on
equity. bonds 5
9. The amount by which the bond par value exceeds Bond
the bond issue (selling) price. indenture 6
10. Bonds that have specific assets of the issuer
pledged as collateral. Contract rate 2
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-98
1. The interest rate that borrowers are willing to pay

and lenders are willing to accept for a particular
bond at its risk level. Term bonds 2
2. Bonds that are scheduled for maturity on one
specified date. Coupon bonds 4
3. Bonds that are backed by the issuer's general
credit standing. Market rate 1
4. Bonds with interest coupons attached to their
certificates; the bondholders detach the coupons
when they mature and present them to a bank or
broker for collection. Bond indenture 9
5. An obligation requiring a series of periodic Convertible
payments to the lender. bonds 6
6. Bonds that can be exchanged by the bondholders
for a fixed number shares of the issuing
corporation's common stock. Bearer bonds 10
7. An accounting method that allocates interest
expense over the bonds' life in a way that yields a
constant rate of interest. Installment note 5
8. Bonds that mature at more than one date and are
usually paid over a number of periods. Unsecured bonds 3
bondholders; it identifies the rights and obligations
of the parties. Serial bonds 8
10. Bonds that are payable to whoever holds them; Effective interest
also called unregistered bonds. rate method 7
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Short Answer Questions
14-99
150. What is a bond? Identify and discuss the different characteristics and features bonds may possess.
A bond is a written promise to pay an amount identified as the par value of the bond along with interest
at a stated contract rate. Bonds can be issued by companies or governments. Bonds are usually issued in
denominations of $1,000 or $5,000. Bonds can be secured or unsecured. Secured bonds are backed by
collateral or assets of the issuer. Bonds can mature in different ways. Serial bonds mature at different
points in time, while term bonds mature at a single date. Registered bonds are payable to a specific
bondholder, while bearer or coupon bonds are payable to whoever holds the bonds. Convertible bonds
may be exchanged by bondholders for shares of the issuing company's stock. Callable bonds can be
retired prior to the maturity date by the issuer.
AICPA: BB Industry
Blooms: Understand
151. Describe installment notes and the nature of the typical payment pattern.
Installment notes are agreements to repay borrowed amounts over several periods through a series of
payments. The most common type of note requires an equal payment which is allocated between
principal and interest. With equal total payments, the cash payment remains constant over the life of the
note while the amount applied to principal increases over time and the amount of interest expense
decreases over time.

AICPA: BB Industry
Blooms: Understand
152. On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid
with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4 years of interest at
9% equals $25,200, for a total of $95,200, yet the total payments on the note amount to only $86,428.
Explain.
Payments on an installment note include payments toward the amount borrowed (principal) as well as
accrued interest on the loan. Because part of the principle is paid each year, the carrying value declines
and the amount of interest decreases accordingly with the decreasing principle amount outstanding each
year.

AICPA: BB Industry
14-100
Blooms: Understand
153. Explain the present value concept as it applies to long term liabilities.
The basic present value concept is that cash paid or received in the future has less value now than the
same amount of cash paid or received today. If a company plans to borrow money repayable in the
future, the amount of cash received today equals the present value of the future payment, discounted at
the loan's interest rate.

AICPA: BB Industry
Blooms: Understand
154. What is a lease? Explain the difference between an operating lease and a capital lease.
A lease is a contractual agreement between a lessor (asset owner) and a lessee (asset renter or tenant)
that grants the lessee the right to use the asset for a period of time in return for cash rent payments.
Operating leases are short-term or cancelable leases in which the lessor retains the risks and rewards of
ownership. The lessee in an operating lease does not report the leased item as an asset or a liability. The
cash payments are recorded as rent expense. Capital leases are long-term or noncancelable leases by
which the lessor transfers substantially all risks and rewards of ownership to the lessee. The lessee
records the leased item as its own asset along with a lease liability at the start of the lease term. Each
payment includes interest expense plus a payment on the lease liability. The lessee records depreciation
expense on the leased asset.
AICPA: BB Industry
Blooms: Understand
155. Identify the advantages and disadvantages of bond financing.
The advantages of bond financing include tax deductible interest, no effect on owner control, and
potentially increased return on equity due to financial leverage. Disadvantages include required
repayment of principal, interest payments, and the risk of decreased return on equity when the company
earns a lower return on the borrowed funds than it pays in interest.
14-101
AICPA: BB Industry
Blooms: Understand
156. A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to
raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under
Plan #2, 50,000 additional shares of common stock would be issued at $20 per share. The corporation
currently has 300,000 shares of stock outstanding, and it expects to earn $700,000 per year before bond
interest and income taxes. The net income and return on investment for both plans is shown below:
Plan #1 Plan #2
Earnings before bond interest and taxes $700,000 $700,000
Bond interest expense (60,000)
Income before taxes $640,000 $700,000
Income taxes (224,000) (245,000)
Net income $416,000 $455,000
Equity $8,000,000 $9,000,000

Return on Equity 5.2% 5.06%
Comment on the relative effects of each alternative, including when one form of financing is preferred
to another.
Plan #1 provides a slightly higher return on equity, but it creates additional risk. If the corporation has a
bad year and does not earn sufficient net income, it will still be obligated to pay out the $60,000 interest
cost under Plan #1. On the other hand, Plan #2 does not require any periodic cash outflows. However,
Plan #2 does dilute ownership through the issuance of additional shares. In summary, if the issuer
expects to earn high returns with the funds, then bond financing is preferred. If the issuer expects
marginal and/or risky returns, then stock financing is preferred.

AICPA: BB Critical Thinking
Blooms: Analyze
Difficulty: 3 Hard
14-102
157. Describe the journal entries required to record the issuance of bonds at par and the payment of bond
interest.
The journal entry to record a bond issuance at par includes a debit to Cash for the amount of the
proceeds and a credit to Bonds Payable for the amount of the par value of the bonds. At the time of each
interest payment, the Interest Expense account is debited and the Cash account is credited for the
amount of the stated interest.

AICPA: BB Industry
Blooms: Understand
158. Describe the journal entries required to record the issuance of bonds at a premium and the payment of
bond interest, including any applicable amortization.
The journal entry to record a bond issuance at a premium includes a debit to Cash for the amount of the
proceeds, a credit to Bonds Payable for the amount of the par value of the bonds, and a credit to the
Premium on Bonds Payable for the difference between the issue price and the par value. At the time of
each interest payment, the Interest Expense account is debited, Premium on Bonds payable for the
amount of amortization calculated, and the Cash account is credited for the amount of the stated interest.

AICPA: BB Industry
Blooms: Understand
159. Describe the journal entries required to record the issuance of bonds at a discount and the payment of
bond interest, including any applicable amortization.
The journal entry to record a bond issuance at a discount includes a debit to Cash for the amount of the
proceeds, a debit to Discount on Bonds Payable for the difference between the issue price and the par
value, and a credit to the Bonds Payable account for the par value. At the time of each interest payment,
the Interest Expense account is debited, Discount on Bonds Payable is credited for the amount of
amortization calculated, and the Cash account is credited for the amount of the stated interest.

AICPA: BB Industry
Blooms: Understand
14-103
160. Explain the amortization of a bond discount. Identify and describe the amortization methods available.
A bond discount occurs when bonds are sold for less than their par value. The discount represents
additional interest over the life of the bond (the full par value must be paid to bondholders at maturity).
The amount of the bond discount is amortized over the life of the bond. One method of amortizing the
bond discount is the straight-line method. The amount of discount amortized each period is the original
discount divided by the number of interest periods. Bond interest expense each period is the cash
interest payment plus the discount amortized. Another method is the effective interest method. In this
case the bond interest expense is calculated by multiplying the bonds' beginning-of-the-period carrying
value by the market interest rate for the bond at issuance.

AICPA: BB Industry
Blooms: Understand
161. Explain how to record the issuance and sale of a bond between interest payment dates.
If a bond is issued at a date other than an interest payment date, the buyers normally pay the issuer the
purchase price plus any interest accrued since the prior interest payment date. The amount debited to
cash is the bond selling price plus interest accrued since the prior interest date. Bonds Payable is
credited for the par value of the bond and Interest Payable is credited for the amount of the accrued
interest. If there is a premium on the bond, it is credited. A discount on the bond is debited. The accrued
interest is repaid to the buyers on the next interest payment date.

AICPA: BB Industry
Blooms: Understand
14-104
162. Explain the accounting procedures when a bond's interest period does not coincide with the issuer's
accounting period.
If the bond's interest period does not coincide with the issuer's accounting period, an adjusting entry is
needed to recognize bond interest expense accrued since the most recent interest payment. Bond Interest
Expense is debited, Interest Payable is credited. If there is a bond premium or discount, it must be
amortized at the time of the interest's accrual. If there is a premium on the bond, Premium on Bonds
Payable must be debited. If there is a discount on the bond, Discount on Bonds Payable is credited.

AICPA: BB Industry
Blooms: Understand
Topic: Accruing Bond Interest Expense
163. How are bond issue prices determined?
The issue price of bonds is found by computing the present value of the bonds' cash payments,
discounted at the bond's market rate. If the bond's market rate is greater than the bond's coupon rate, the
bond will sell at a discount. If the bond's market rate is less than the bond's coupon rate, the bond will
sell at a premium.

AICPA: BB Industry
Blooms: Understand
164. Explain the amortization of a bond premium. Identify and describe the amortization methods available.
A bond premium occurs when bonds are sold for more than their par value. The bond premium
represents a reduction in the amount of interest owed over the life of the bond. A bond premium is
amortized over the life of the bond. One method of amortizing the bond premium is the straight-line
method. The premium amortized each period is the original premium divided by the number of interest
periods. Bond interest expense each period is the cash interest payment less the premium amortized.
Another method is the effective interest method. In this case the bond interest expense is calculated by
multiplying the bonds' beginning-of-the-period carrying value by the market interest rate for the bonds
at issuance.
AICPA: BB Industry
Blooms: Understand
14-105
165. What are methods that a company may use to retire its bonds?
The company can retire the bonds at their scheduled maturity date. They can also retire the bonds before
maturity by either exercising a call option or by purchasing them in the open market at the current
market price. Sometimes the bond indenture will give the issuer an option to call the bonds before their
maturity date by paying the par value plus a call premium to the bondholder. If the call price or the
market price paid is above the carrying value of the bonds, the issuer will record a loss on the early
retirement. If the call price or the market price paid is below the carrying value of the bonds, the issuer
will record a gain on the early retirement. Another way the bonds can be retired is to convert them to
stock. In this method, the bonds' carrying value is transferred to equity and there is no gain or loss on
the conversion.

AICPA: BB Industry
Blooms: Understand
166. Describe the recording procedures for the issuance, retirement, and paying of interest for installment
notes.
At issuance, the proceeds from a note must be recognized in the appropriate asset account and the debt
must be recognized as a note payable. Each payment includes accrued interest expense plus a portion of
the principle amount borrowed. Interest payments are recorded with a debit to Interest Expense, a debit
to Notes Payable for the principle paid, and a credit to Cash for the amount of the total payment. The
retirement of a note is recognized with a debit to Notes Payable and a credit to Cash (or other asset).

AICPA: BB Industry
Blooms: Understand
14-106
167. Zhang Company has a loan agreement that provides it with cash today, and the company must pay
$25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4 periods at
6% is 0.7921. What is the amount of cash that Zhang Company receives today?
$25,000 * 0.7921 = $19,802.50

AICPA: BB Industry
Blooms: Apply
168. Wasp Corporation has a loan agreement that provides it with cash today, and the company must pay
$25,000 one year from today, $15,000 two years from today, and $5,000 three years from today. Wasp
agrees to pay 10% interest. The following are factors from a present value table:
Periods Interest rate 10%

1 0.9091
2 0.8264
3 0.7513
What is the amount of cash that Wasp receives today?
Periods Payments Present value of 1 at 10% Present value of payments

1 $25,000 0.9091 $22,727.50
2 15,000 0.8264 12,396.00
3 5,000 0.7513 3,756.50
Total cash received $38,880.00

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
169. A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting one
year from now. The annual interest rate is 6%. The present value of an annuity factor for 5 periods at
6% is 4.2124. What is the present value of these five payments?
$3,000 * 4.2124 = $12,637.20
14-107
AICPA: BB Industry
Blooms: Apply
170. On January 1, the Rodrigues Corporation leased some equipment on a 2-year lease, paying $15,000 per
year each December 31. The lease is considered to be an operating lease. Prepare the general journal
entry to record the first lease payment on December 31.
12/31 Rent expense 15,000

Cash 15,000

AICPA: BB Industry
Blooms: Apply
171. On January 1, Haymark Corporation leased a truck, agreeing to pay $15,252 every December 31 for the
six-year life of the lease. The present value of the lease payments, at 6% interest, is $75,000. The lease
is considered a capital lease.
(a) Prepare the general journal entry to record the acquisition of the truck with the capital lease.
(b) Prepare the general journal entry to record the first lease payment on December 31.
(c) Record straight-line depreciation on the truck on December 31, assuming a 6-year life and no
salvage value.
(a) 1/1 Leased Asset—Truck 75,000

Lease Liability 75,000
(b) 12/31 Interest Expense 4,500

Lease Liability 10,752
Cash 15,252
Calculation: Interest expense = $75,000 * .06 = $4,500
(c) 12/31 Depreciation Expense—Truck 12,500

Accumulated Depreciation—Truck 12,500
Calculation: $75,000/6 years = $12,500/year

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-108
172. Sharma Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000.
Calculate the company's debt-to-equity ratio.
$150,000/$100,000 = 1.5

AICPA: BB Industry
Blooms: Apply
173. On October 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par plus
accrued interest. The bonds were dated July 1 of this year. What amount of bond interest expense should
the company report on its current year income statement?
$1,000,000 * 12% * 3/12 = $30,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
174. A company issued 9%, 10-years bonds with a par value of $1,000,000 on September 1, Year 1 when the
market rate was 9%. The bonds were dated June 30, Year 1. The bond issue price included accrued
interest. Interest is paid semiannually on December 31 and June 30.
(a) Prepare the issuer's journal entry to record the issuance of the bonds on September 1.
(b) Prepare the issuer's journal entry to record the semiannual interest payment on December 31, Year
1.
(a) 9/01 Cash 1,015,000

Interest Payable ($1,000,000 * 9% *2/12) 15,000
Bonds Payable 1,000,000
(b)12/31 Interest Payable 15,000

Bond Interest Expense ($1,000,000 * 9% * 4/12) 30,000
Cash ($1,000,000 * 9% * 6/12) 45,000

AICPA: BB Industry
14-109
Blooms: Apply
Difficulty: 3 Hard
175. On June 1, a company issued $200,000 of 12% bonds at their par value plus accrued interest. The
interest on these bonds is payable semiannually on January 1 and July 1. Prepare the issuer's journal
entry to record the bond issuance of June 1.
June 1 Cash 210,000

Interest Payable (200,000 * .12 * 5/12) 10,000
Bonds Payable 200,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
176. Johanna Corporation issued $3,000,000 of 8%, 20-year bonds payable at par value on January 1.
Interest is payable each June 30 and December 31.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1.
(b) Prepare the general journal entry to record the first interest payment on June 30.
(a) Cash 3,000,000

(b) Bond Interest Expense 120,000
Cash 120,000

AICPA: BB Industry
Blooms: Apply
14-110
177. A company issued 9%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The
market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the bonds. On
the first semiannual interest date, what amount of cash should be paid to the holders of these bonds for
interest?
$100,000 * .09 * ½ year = $4,500

AICPA: BB Industry
Blooms: Apply
178. On January 1, a company issued 10-year, 10% bonds payable with a par value of $500,000, and
received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The
bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for
amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.
July 1 Bond Interest Expense 27,867.65

Discount on Bonds Payable 2,867.65
Cash 25,000.00
Cash payment: $500,000 * 10% * ½ year = $25,000.00

Discount amortized: ($500,000 - $442,647)/20 semiannual periods = $2,867.65
Interest expense: $25,000.00 + $2,867.65 = $27,867.65

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-111
179. A company issued 10-year, 9% bonds, with a par value of $500,000 when the market rate was 9.5%.
The issuer received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the bond
issuance.
Cash 484,087
Discount on Bonds Payable 15,913

AICPA: BB Industry
Blooms: Apply
company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's
journal entry to record the first semiannual interest payment and the amortization of any bond discount
or premium. (Round amounts to the nearest whole dollar)
Bond Interest Expense 23,296

Discount on Bonds Payable 796
Cash 22,500
Cash payment: $500,000 * 9% * ½ year = $22,500

Discount amortized: ($500,000 - $484,087)/20 semiannual periods = $795.65
Interest expense: $22,500 + $795.65 = $23,295.65

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-112
181. A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual interest payments. On
the issue date, the annual market rate of interest is 8%. Compute the issue (selling) price of the bonds..
The following information is taken from present value tables:
8.5302
Present value of an annuity for 10 periods at 3%
Present value of principle $800,000 * 0.6756 = $540,480

Present value of interest ($800,000 * .06 * ½) * 8.1109 = 194,662
Issue (selling) price of bonds $735,142

AICPA: BB Industry
Blooms: Apply
182. A company issued 9.2%, 10-year bonds with a par value of $100,000. Interest is paid semiannually. The
annual market interest rate on the issue date was 10%, and the issuer received $95,016 cash for the
bonds. The issuer uses the effective interest method for amortization. On the first semiannual interest
date, what amount of discount should the issuer amortize?
Interest expense $95,016 * 10% * ½ year = $4,750.80
Cash payment $100,000 * 9.2% * ½ year = 4,600.00
Discount amortized $150.80

AICPA: BB Industry
14-113
Blooms: Apply
Difficulty: 3 Hard
14-114
183. A company issued 10%, 10-year bonds with a par value of $1,000,000 on January 1, at a selling price of
$885,295 when the annual market interest rate was 12%. The company uses the effective interest
amortization method. Interest is paid semiannually each June 30 and December 31.
(1) Prepare an amortization table for the first two payment periods using the format shown below:
Semiannual Cash Interest Bond Discount Unamortized Carrying Value

Interest Period Paid Interest Amortization Discount
Expense
(1)
Semiannual Cash Interest Bond Interest Discount Unamortized Carrying Value

Interest Period Paid Expense Amortization Discount
6/30 $50,000.00 $53,117.70 $3,117.70 $111,587.30 $888,412.70
12/31 50,000.00 53,304.76 3,304.76 108,282.54 891,717.46
6/30/:
Cash payment: $1,000,000 * 10% * ½ year = $50,000.00
Interest expense: $885,295 * 12% * ½ year = $53,117.70
Discount amortized: $53,117.70 - $50,000.00 = $3,117.70
Unamortized discount: ($1,000,000 - $885,295) - $3,117.70 = $111,587.30
Carrying value: $1,000,000 - $111,587.30 = $888,412.70
12/31/:
Interest expense: $888,412.70 * 12% * ½ year = $53,304.76
Discount amortized: $53,304.76 - $50,000.00 = $3,304.76
Unamortized discount: $111,587.30 - $3,304.76 = $108,282.54
14-115
Carrying value: $1,000,000 - $108,282.54 = $891,717.46
(2)
6/30 Bond Interest Expense 53,117.70
Discount on Bonds Payable 3,117.70
Cash 50,000.00

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
company received $484,087 in cash proceeds. Using the effective interest method, prepare the issuer's
journal entry to record the first semiannual interest payment and the amortization of any bond discount
or premium.
Bond Interest Expense 22,994

Cash 22,500
Cash payment: $500,000 * 9% * ½ year = $22,500; Interest expense: $484,087 * 9.5% * ½ year =
$22,994; Discount amortized: $22,994 - $22,500 = $494

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-116
company received $484,087 in cash proceeds. Prepare the issuer's journal entry to record the issuance of
the bond.
Cash 484,087

AICPA: BB Industry
Blooms: Apply
186. On January 1, a company issued 10%, 10-year bonds payable with a par value of $720,000. The bonds
pay interest on July 1 and January 1. The bonds were issued for $817,860 cash, which provided the
holders an annual yield of 8%. Prepare the journal entry to record the first semiannual interest payment,
assuming it uses the straight-line method of amortization.
7/1 Bond Interest Expense 31,107

Premium on Bonds 4,893
Cash 36,000
Cash payment: $720,000 * 10% * ½ year = $36,000

Premium amortized: ($817,860 - $720,000)/20 semiannual periods = $4,893
Interest expense: $36,000 - $4,893 = $31,107

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-117
and December 31. On the issue date, the annual market rate of interest is 6%. Compute the price of the
bonds on their issue date. The following information is taken from present value tables:


Present value of interest $300,000 * .04 * 8.5302 = 102,362
Price of bonds $325,592

AICPA: BB Industry
Blooms: Apply
Topic: Present Value Concepts
188.On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest semiannually each June 30
and December 31. On the issue date, the annual market rate of interest for the bonds is 10%. Compute the
price of the bonds on their issue date. The following information is taken from present value tables:

Present value of interest $300,000 * 0.04 * 7.7217 = 92,660
Selling price of the bond $276,830

AICPA: BB Industry
Blooms: Apply
14-118
Topic: Present Value Concepts
189. On March 1, a company issues 6%, 10 year $300,000 par value bonds that pay semiannual interest each
June 30 and December 31. The bonds sell at par value plus interest accrued since January 1. Prepare the
general journal entry to record the issuance of the bonds on March 1.
3/1 Cash 303,000
Interest Payable 3,000
Interest payable = $300,000 * 6% * 2/12 = $3,000

AICPA: BB Industry
Blooms: Apply
14-119
190. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest semiannually
each February 1 and August 1. The bonds sold at $632,000. The company uses the straight-line method
of amortizing bond premiums. The company's year-end is December 31. Prepare the general journal
entry to record the interest accrued at December 31.
Premium on Bonds Payable 1,333

Premium on Bonds Payable = ($632,000 - $600,000)/20 = $1,600
Amount amortized = $1,600 * 5/6 = $1,333
Interest expense = $15,000 - $1,333 = $13,667

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-120
191. On August 1, a company issues 6%, 10 year, $600,000 par value bonds that pay interest semiannually
each February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method
of amortizing bond discounts. The company's year-end is December 31. Prepare the general journal
entry to record the interest accrued at December 31.

Discount on Bonds Payable = ($600,000 - $592,000)/20 = $400
Amount amortized = $400 * 5/6 = $333
Interest expense = $15,000 + $333 = $15,333

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-121
192. Strider Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, Year 1.
Interest is to be paid semiannually on each June 30 and December 31. The bonds are issued at
$5,368,035 cash when the market rate for this bond is 12%.
(a) Prepare the general journal entry to record the issuance of the bonds on January 1, year 1.
(b) Show how the bonds would be reported on Strider's balance sheet at January 1, Year 1.
(c) Assume that Strider uses the effective interest method of amortization of any discount or premium
on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30,
Year 1.
(d) Assume instead that Strider uses the straight-line method of amortization of any discount or
premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on
June 30, Year 1.
(a) 1/1 Cash 5,368,035

Premium on Bonds Payable 368,035
(b) Long-term liabilities:

Bonds Payable $5,000,000
Premium on Bonds
Payable 368,035 $5,368,035
(c) 6/30 Bond Interest Expense ($5,368,035 * 0.12 * ½) 322,082

Premium on Bonds Payable ($350,000 - $322,082) 27,918
Cash ($5,000,000 * 0.14 * ½) 350,000
(d) 6/30 Bond Interest Expense 313,196.50

Premium on Bonds Payable ($368,035/10) 36,803.50
Cash ($5,000,000 * 0.14 * ½) 350,000.00

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-122
193. On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The bonds pay
interest each July 1 and January 1. The bonds were sold for $817,860 cash, based on an annual market
rate of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming
the effective interest method is used.
Premium on Bonds 3,285.60
Cash 36,000.00
Cash payment: $720,000 * 10% * ½ year = $36,000.00

Interest expense: $817,860 * 8% * ½ year = $32,714.40
Premium amortized: $36,000.00 - $32,714.40 = $3,285.60

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-123
194. A company issued 10%, 5-year bonds with a par value of $2,000,000, on January 1. Interest is to be
paid semiannually each June 30 and December 31. The bonds were sold at $2,162,290 based on an
annual market rate of 8%. The company uses the effective interest method of amortization.
(1) Prepare an amortization table for the first two semiannual payment periods using the format shown
below.
Semiannual Cash Interest Bond Premium Unamortized Carrying Value

Interest Period Paid Interest Amortization Premium
Expense
(1)
Semiannual Cash Interest Bond Interest Premium Unamortized Carrying Value

Interest Period Paid Expense Amortization Premium
06/30 $100,000.00 $86,491.60 $13,508.40 $148,781.60 $2,148,781.60
12/31 100,000.00 85,951.26 14,048.74 134,732.86 2,134,732.86
6/30
Interest expense: $2,162,290 * 8% * ½ year = $86,491.60
Premium amortized: $100,000 - $86,491.60 = $13,508.40
Unamortized premium: ($2,162,290 - $2,000,000) - $13,508.40 = $148,781.60
Carrying value: $2,000,000 + $148,781.60 = $2,148,781.60
12/31
Interest expense: $2,148,781.60 * 8% * ½ year = $85,951.26
Premium amortized: $100,000 - $85,951.26 = $14,048.74
14-124
Unamortized premium: $148,781.60 - $14,048.74 = $134,732.86
Carrying value: $2,000,000 + $134,732.86 = $2,134,732.86
(2)
Premium on Bonds Payable 13,508.40
Cash 100,000.00

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
195. A company holds $150,000 par value of bonds with a carrying value of $147,950. The company calls
the bonds at $151,000. Prepare the journal entry to record the retirement of the bonds.
Loss on Retirement of Bonds 3,050
Cash 151,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-125
196. A company has 10%, 20-year bonds outstanding with a par value of $500,000. The company calls the
bonds at 96 when the unamortized discount is $24,500. Calculate the gain or loss on the retirement of
these bonds.
Par value of bonds $500,000
Less discount (24,500)
Cash payment ($500,000 * .96) 480,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
197. Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and a carrying
value of $475,000. The company calls the bonds at $482,000. Calculate the gain or loss on the retirement
of these bonds.
Cash payment 482,000

AICPA: BB Industry
Blooms: Apply
14-126
198. A company previously issued $2,000,000, 10% bonds, receiving a $120,000 premium. On the current
year's interest date, after the bond interest was paid and after 40% of the total premium had been
amortized, the company purchased the entire bond issue on the open market at 98 and retired it. Prepare
the journal entry to record the retirement of these bonds.
Jan 1 Bonds Payable 2,000,000
Premium on Bonds Payable* 72,000
Cash** 1,960,000
Gain on Retirement of Bonds 112,000
Par value of bonds $2,000,000
Unamortized premium 72,000 *
Carrying value of bonds $2,072,000
Cash paid 1,960,000 **
Gain on retirement. $112,000
* $120,000 * 60% = $72,000

** $2,000,000 * .98 = $1,960,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-127
199. On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be
repaid with 4 annual year-end payments of $21,607, the first of which is due on December 31, Year 1.
(b) Prepare the journal entries to record the first and second installment payments.
a)
Year 1
Jan. 1 Cash 70,000
Notes Payable 70,000
b)
Year 1
Dec. 31 Notes Payable 15,307
Interest Expense ($70,000 * 0.09) 6,300
Cash 21,607
Year 2
Cash 21,607
Second year Note Payable Carrying Value = 70,000 - 15,307 = 54,693

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-128
200. On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in
5 annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the
journal entries to record the first and second installment payments.
Year 1
Cash 12,195
Year 2
Interest Expense* 2,891
Cash 12,195
*[($50,000 - $8,695) * 0.07] = $2,891

AICPA: BB Industry
Blooms: Apply
14-129
201. On January 1, Year 1 Cleaver Company borrowed $85,000 cash by signing a 7% installment note that is
to be repaid with 4 annual year-end payments of $25,094, the first of which is due on December 31,
Year 1.
(b) Prepare the journal entries to record the first installment payment.
a)
Year 1
Jan. 1 Cash 85,000
b)
Year 1
Cash 25,094

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-130
202. A company purchased two new delivery vans for a total of $250,000 on January 1, Year 1. The
company paid $40,000 cash and signed a $210,000, 3-year, 8% note for the remaining balance. The note
is to be paid in three annual end-of-year payments of $81,487 each, with the first payment on December
31, Year 1. Each payment includes interest on the unpaid balance plus principal.
(1) Prepare a note amortization table using the format below:
12/31/Yr 1
12/31/Yr 2
12/31/Yr 3
(2) Prepare the journal entries to record the purchase of the vans on January 1, Year 1 and the second
annual installment payment on December 31, Year 2.
(1)
12/31/Yr 1 $210,000 $16,800 $64,687 $81,487 $145,313
12/31/Yr 2 145,313 11,625 69,862 81,487 75,451
12/31/Yr 3 75,451 6,036 75,451 81,487 0
12/31/Yr 1:
Interest expense: $210,000 * 8% = $16,800
Notes payable debit: $81,487 - $16,800 = $64,687
Ending balance: $210,000 - $64,687 = $145,313
12/31/Yr 2:
14-131
Ending balance: $145,313 - $69,862 = $75,451
12/31/Yr 3:
Ending balance: $75,451 - $75,451 = $0
(2)
01/01/Yr 1: Delivery Vans 250,000
Cash 40,000
12/31/Yr 1: Interest Expense 16,800
Cash 81,487
12/31/Yr 2: Interest Expense 11,625
Cash 81,487

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
14-132
Fill in the Blank Questions
203. _______________ bonds have specific assets of the issuing company pledged as collateral.
Secured
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
204. ______________ bonds are bonds that are scheduled for maturity on one specified date.
Term
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
205. _______________ bonds are bonds that mature at more than one date, often in a series, and thus are
usually repaid over a number of periods.
Serial
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
206. ____________________ bonds reduce a bondholder's risk by requiring the issuer to create a fund of
assets set aside as specified amounts and dates to repay the bonds.
Sinking Fund
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
207. Bonds payable to whoever holds them are called _________________ bonds.
bearer
AICPA: BB Legal
14-133
Blooms: Remember
Difficulty: 1 Easy
208. _____________________ bonds can be exchanged for a fixed number of shares of the issuing
corporation's common stock.
Convertible
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
209. ___________________ bonds have an option exercisable by the issuer to retire them at a stated dollar
amount prior to maturity.
Callable
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
210. The legal document identifying the rights and obligations of both the bondholders and the issuer is
called the ____________________________________.
bond indenture
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
211. An ________________________________ is an obligation requiring a series of payments to the

lender.
installment note
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-134
212. When applying equal total payments to a note, with each payment the amount applied to the note
principal ____________ while the interest expense for the note _____________.
increases; decreases
Answers must appear in this order.

AICPA: BB Industry
Blooms: Understand
213. The ____________ concept is the idea that cash paid (or received) in the future has less value now than
the same amount of cash paid (or received) today.
present value
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
214. An _______________ is a series of equal payments at equal time intervals.
annuity
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
215. A _______________________ is a contractual agreement between an employer and its employees for
the employer to provide benefits (payments) to employees after they retire.
pension plan
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
216. _________________________ leases are short-term or cancelable leases in which the lessor retains the
risks and rewards of ownership.
Operating
AICPA: BB Industry
14-135
Blooms: Remember
Difficulty: 1 Easy
217. ____________________ leases are long-term or noncancelable leases by which the lessor transfers
substantially all risks and rewards of ownership to the lessee.
Capital
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
218. Return on equity increases when the expected rate of return from the acquired assets is
__________________ than the rate of interest on the bonds used to finance the asset acquisition.
greater

AICPA: BB Industry
Blooms: Understand
219. Bonds issued in the names and addresses of their holders are ________________ bonds.
registered
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
220. The ______________ ratio is used to assess the risk of a company's financing structure.
debt-to-equity

AICPA: BB Industry
Blooms: Understand
221. The rate of interest that borrowers are willing to pay and lenders are willing to accept for a particular
bond and its risk level is the ____________________ of interest.
market rate
14-136
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
222. The _________________________ method of amortizing a bond discount allocates an equal portion of
the total bond interest expense to each interest period.
straight-line

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
14-137

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Chapter 14

True / False Questions

21. An annuity is a series of equal payments at equal time intervals.

35. The use of debt financing ensures an increase in return on equity.

60. Premium on Bonds Payable is an adjunct or accretion liability account.

Multiple Choice Questions

70. A bond traded at 102½ means that:

A. The bond pays 2.5% interest.

71. Secured bonds:

A. Are called debentures.

79. The carrying value of bonds at maturity always equals:

A. the amount of cash originally received in exchange for the bonds.

84. A pension plan:

86. A disadvantage of bond financing is:

A. Bonds do not affect owners' control.

87. An advantage of bonds is:

A. Bonds do not affect owner control.

A. Interest on bonds is tax deductible.

89. A bondholder that owns a $1,000, 10%, 10-year bond has:

A. Ownership rights in the issuing company.

90. Collateral agreements for a note or bond can:

A. Reduce the risk of loss in comparison with unsecured debt.

92. Which of the following accurately describes a debenture?

A. A bond with specific assets pledged as collateral.

94. The debt-to-equity ratio:

A. The bond pays no interest.

99. When a bond sells at a premium:

A. The contract rate is above the market rate.

100. A bond sells at a discount when the:

A. Contract rate is above the market rate.

A. Debit Bond Interest Expense $22,000; credit Cash $22,000.

A. Debit Cash $2,000,000; credit Bonds Payable $2,000,000.

108. The Discount on Bonds Payable account is:

109. A discount on bonds payable:

A. Debit Bond Interest Expense $14,000; credit Cash $14,000.

114. The market value (price) of a bond is equal to:

A. The present value of all future cash payments provided by a bond.

115. The Premium on Bonds Payable account is a(n):

A. Adidas must pay $200,000 at maturity and no interest payments.

A. Credit to Interest Income.

A. This means the bonds sell at a premium.

A. Exercising a call option.

A. Debit to Premium on Bonds.

A. Debit Interest Payable $13,500; credit Cash $13,500.00.

A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.

A. Debit to Bonds Payable $310,000.

Present value of an annuity for 10 periods at 3% 8.5302

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

148. Match the following terms with the definitions.

1. Bonds that give the issuer an option of retiring them Discount on

1. The interest rate that borrowers are willing to pay

Short Answer Questions

155. Identify the advantages and disadvantages of bond financing.

Equity $8,000,000 $9,000,000

163. How are bond issue prices determined?

Periods Interest rate 10%

What is the amount of cash that Wasp receives today?

Present value of an annuity for 10 periods at 4% 8.1109