To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by
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Mortgages
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The carrying value of a long term note payable
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Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance
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A company purchased equipment and signed a 7 year installment loan at 9% annual interest. The annual payments equal $9,000. The present value factor for an annuity for seven years at 9% is 5.0330. What value for this equipment should be recorded on the company's books on the day the contract is signed?
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$9000 * 5.0330 = $45297
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If an issuer sells a bond at any other date than the interest payment date:
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The buyer normally pays the issuer the purchase price plus any interest accrued since the last interest payment date.
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Which of the following statements is true? For the issuer:
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Interest paid on bonds is tax deductible.
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A bondholder that owns a $1,000, 10%, 10-year bond has:
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The right to receive $1,000 at maturity.
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A bond traded at 102½ means that:
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The bond traded at $1,025 per $1,000 bond.
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A bond sells at a discount when the:
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Contract rate is below the market rate.
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A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 9%. The amount of interest owed to the bondholders for each semiannual interest payment is.
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$750,000 × 0.09 × ½ year = $33,750
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A company issued 8%, 15-year bonds with a par value of $550,000. The current market rate is 8%. The journal entry to record each semiannual interest payment is:
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Bond interest expense 22,000
cash 22,000
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Amortizing a bond discount:
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Allocates a part of the total discount to each interest period.
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A discount on bonds payable:
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Occurs when a company issues bonds with a contract rate less than the market rate.
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Which of the following is true regarding the effective interest amortization method?
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Allocates bond interest expense using a constant interest rate.
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Adidas issued 10-year, 8% bonds with a par value of $200,000, where interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is true?
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Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
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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:
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Credit to Premium on Bonds Payable.
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On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. What is the journal entry to record the issuance of these bonds?
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cash 615000
bonds payable 600000
premium on 15000
bonds payable
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On January 1, 2013, Lane issues $700,000 of 7%, 15-year bonds at a price of 106¾. The interest payments are made on June 30 and December 31. Lane elects a fiscal year ending September 30. What is the amount that would be recorded as cash paid in the December 31, 2013, journal entry?
answer
(700,000 × 0.07 × 6/12) = 24,500
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