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Bond Theory Multiple Choice Chapter 11

When bonds are sold for more than the face amount, this means that the:

  1. Maturity value will be greater than the face amount
  2. Bonds are sold at a discount
  3. Coupon rate of interest is more than the market rate of interest
  4. The company will not have to record interest expense on the bond
  5. The cash interest payment will be less than interest expense each period

Liability Classification Chapter 11

Listed below are selected items from the financial statements of a company for the year ended December 31, Year 1.

Salaries Payable 63,000
Accounts payable 35,000
Current Maturity of Long-Term Debt 25,000
Bonds payable, due December 31, Year 20 2,200,000
Premium on Bonds Payable 14,000
Estimated Warranty Liability 10,000
Note Payable, due Dec. 31, Year 4 75,000
Unearned Revenue 25,000
Note Payable, due June 1, Year 2 8,000
Discount on Note Payable due June 1, Year 2 500
  1. Determine the Total Current Liabilities to be on a classified balance sheet at December 31, Year 1.
  2. Determine the Total Long-Term Liabilities to be reported on a classified balance sheet at December 31, Year 1.
  1. Total Current Liabilities - 165,500
  2. Total Long-Term Liabilities - 2,289,000

Bond Issue Prices Chapter 11

A company issued $300,000, 6%, nine year bonds on January 1. The market rate of interest was 5%. Interest on these bonds is payable annually on December 31.

  1. Was this bond issued at a premium or a discount?
  2. Determine the selling price of the bond.
  1. Premium
  2. 321,320

Note: I used four decimals for my PV factors. If you used three, you'll get a slightly different answer (something like 321,444).
Ask what your professor expects you to use, before the test.

Contingent Liabilities Chapter 11

A company estimates the cost of products warranties to be 3% of sales. The beginning balance in Estimated Warranty Liability account is $15,000. Sales for the period was $795,000. During the period, $32,600 was actually paid for warranty related costs. What is the ending balance in the Warranty Liability account?

  1. $6,250
  2. $23,850
  3. $23,750
  4. $17,600
  5. $38,850

Contingent Liabilities - Warranties Chapter 11

A company provides a warranty on its products that it sells to customers. The warranty liability account had $1,200 balance on April 1. The company had sales of $67,000 in April and estimated warranty repairs at 3% of sales. During the month, the company actually paid out $2,400 for warranty repairs.

Determine the April 30 balance in the estimated warranty liability account.

The ending balance is $810.

Coupon and Market Rates Multiple Choice Chapter 11

If Elonu Corporation issued $1,000,000 of 10-year, 9% bonds payable on January 1 at 95, market interest rates were

  1. less than 9%
  2. greater than 9%
  3. equal to 9%
  4. not enough information to determine

Bond Amortization Chapter 11

A Corporation issued $450,000 face value, 4% 10-year bonds on January 1, Year 1 for $383,063. This price resulted in an effective interest rate of 6% on the bonds. Interest is payable semi-annually on June 30 and December 31.

  1. Prepare the journal entry to record the first payment of interest on June 30, Year 1.
  2. Determine carrying value on December 31, Year 1, after the interest payments has been made
  1. Journal entry:
    Journal Entry 1
    Interest Expense 11,492
    Discount 2,492
    Cash 9,000
  2. The carrying value is 388,122

Bond Retirement Chapter 11

On January 1, a company retired $800,000 face value bonds at a call price of 103. The bonds were originally issued for $848,000. On the retirement date the bonds had an unamortized premium of $28,352. The entry to retire the debt would include a

  1. debit to bonds payable for $828,352
  2. credit to cash for $853,203
  3. credit to gain for $4,352
  4. credit to premium for $28,352
  5. debit to loss for $52,203