Q: Which formula correctly calculates the interest expense for a bond issued at a discount using the effective interest method?

$\text{Interest expense} = \text{Carrying value} \times \text{Market rate}$

Q: Which formula is used to calculate the premium amortization using the straight-line method?

$\text{Premium amortization} = \frac{\text{Total premium}}{\text{Number of periods}}$

Question 1

Which of the following best describes the relationship between the stated (coupon) rate and the market rate when a bond is issued at a discount?

Accepted Answer

The stated rate is lower than the market rate.

Question 2

A company issues $100,000 of 5-year, 8% bonds at 97. What is the cash received from the bond issuance?

Accepted Answer

$97,000

Question 3

Which formula correctly calculates the interest expense for a bond issued at a discount using the effective interest method?

Accepted Answer

$	ext{Interest expense} = 	ext{Carrying value} 	imes 	ext{Market rate}$

Question 4

If a $1,000 bond is quoted at 102, what is its market price?

Accepted Answer

$1,020

Question 5

Which of the following statements about the amortization of bond discounts is TRUE?

Accepted Answer

Amortizing a discount increases the carrying value of the bond over time.

Question 6

A company retires $50,000 of bonds before maturity at a call price of 102. The carrying value of the bonds at the time of retirement is $49,000. What is the gain or loss on retirement?

Accepted Answer

Loss of $2,000

Question 7

Which of the following is NOT a feature of bonds payable?

Accepted Answer

They are always secured by collateral.

Question 8

When bonds are issued at a premium, which of the following is TRUE regarding interest expense and interest payments?

Accepted Answer

Interest expense is less than the interest payment.

Question 9

Which journal entry is correct for recording the issuance of $200,000 face value bonds at 98?

Accepted Answer

Debit Cash $196,000; Debit Discount on Bonds Payable $4,000; Credit Bonds Payable $200,000

Question 10

A $10,000, 6% bond is issued when the market rate is 8%. Which of the following is TRUE?

Accepted Answer

The bond will be issued at a discount.

Question 11

Which of the following best describes the carrying value of a bond issued at a premium after several periods of amortization?

Accepted Answer

It decreases over time.

Question 12

Which formula is used to calculate the premium amortization using the straight-line method?

Accepted Answer

$	ext{Premium amortization} = \frac{	ext{Total premium}}{	ext{Number of periods}}$

Question 13

Which of the following is a reason a company might choose to retire bonds before maturity?

Accepted Answer

To take advantage of lower market interest rates.

Question 14

If a bond is issued at 105, which of the following is TRUE?

Accepted Answer

The bond is issued at a premium.

Question 15

Which of the following best describes the market rate of a bond?

Accepted Answer

It is the rate investors demand for loaning funds to the company.

Question 16

A $50,000 bond with a coupon rate of 7% and a market rate of 6% is issued. What is the annual interest payment?

Accepted Answer

$3,500$ (i.e., $50,000 	imes 7\%)$

Question 17

Which of the following is TRUE regarding the effective interest method for bonds issued at a discount?

Accepted Answer

Interest expense increases each period.

Question 18

Which of the following is the correct formula for discount amortization using the effective interest method?

Accepted Answer

$	ext{Discount amortization} = 	ext{Interest expense} - 	ext{Interest payment}$

Question 19

Which of the following is a correct statement about the journal entry for interest payments on bonds issued at face value?

Accepted Answer

Interest expense is debited and cash is credited for the same amount.

Liabilities: Accounting for Bonds Payable (Chapter 7 Study Notes)

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