Bonds Payable

Multiple Choice
Identify the choice that best completes the statement or answers the question.

On January 1, 2010, Romeo Co. issued eight-year bonds with a face value of $1,000,000 and a stated interest
rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table
values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

1. The present value of the principal is

a. 534,000
b. 540,000
c. 623,000
d. 627,000

2. The present value of the interest is

a. 344,820
b. 349,560
c. 372,600
d. 376,830

3. The issue price of the bonds is

a. 883,560
b. 884,820
c. 889,560
d. 999,600

4. Jodee Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The bonds
pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the
proceeds from the bond issue?

2.5% 3.0% 5.0% 6.0%

Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. 5,000,000
b. 5,216,494
c. 5,218,809
d. 5,217,308
 5. Everhart Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The
bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are
the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. 10,000,000
b. 10,432,988
c. 10,437,618
d. 10,434,616

6. Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest. The
bonds are dated January 1, 2010, and pay interest on June 30 and December 31. What is the total cash
received on the issue date?
a. 19,400,000
b. 20,450,000
c. 19,700,000
d. 19,100,000

7. On April 1, 2011, Lorna Company issued at 99 plus accrued interest, 2,000 of its 8% P1,000 face value
bonds. The bonds are dated January 1, 2011, and mature on January 1, 2021, and pay interest on January 1
and July 1. Lorna paid bond issue cost of P70,000. From the bond issue, Lorna received net cash of
a. 2,020,000
b. 1,980,000
c. 1,950,000
d. 1,910,000

8. During the current year, Arvin Company incurred the following costs in connection with the issuance of
bonds:

Printing and engraving 150,000

Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 1,500,000

What amount should be recorded as bond issue costs to be amortized over the term of the bonds?
a. 2,550,000
b. 2,400,000
c. 1,500,000
d. 1,050,000

9. On June 30, 2011, JP Company issued at 99, 5,000 of its 8%, P1,000 face value bonds. The bonds were issued
through an underwriter to whom JP paid bond issue cost of P425,000. On June 30, 2011, JP should report the
bond liability at
a. 4,525,000
b. 4,950,000
c. 5,000,000
d. 4,575,000
10. Oliver Company issued P2,000,000 face value of 10 year bonds on January 1. The bonds pay interest on
January 1 and July 1 and have a stated rate of 10%. If the market price of interest at the time the bonds are
sold is 8%. What will be the issuance price of the bonds? Round off present value factor to two decimal
places
a. 2,262,000
b. 2,113,000
c. 2,159,000
d. 2,279,000

11. On January 1, 2011, Jhester Company issued 10 year bonds with a face amount of P5,000,000 and a stated
interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors
are as follows:

Present value of 1 for 10 periods at 10% 0.3855

Present value of an ordinary annuity of 1 for 10 periods at 10% 6.145

The total issue price of the bonds was

a. 5,000,000
b. 1,927,500
c. 5,614,500
d. 4,385,500

12. On January 1, 2011, Aldrine Company issued 3 year bonds with face value of P5,000,000 at 99. The nominal
rate is 10% and the interest is payable annually on December 31. Additionally, Aldrine Company paid bond
issue cost of P150,000.

The PV of 1 at 11% for 3 periods is .7312 and the PV of an ordinary annuity of 1 at 11% for 3 periods is
2.4437. The present value of the bonds using 11% is:

PV of principal (5,000,000 x .7312) 3,656,000

PV of annual interest payments (500,000 x 2.4437) 1,221,850
Total present value of bonds 4,877,850

The PV of 1 at 12% for 3 periods is .7118, and the PV of an ordinary annuity of 1 at 12% for 3 periods is
2.4018. The present value of the bonds using 12% is:

PV of principal (5,000,000 x .7118) 3,559,000

PV of annual interest payments (500,000 x 1,200,900
2.4018)
Total present value of bonds 4,759,900

What is the interest expense for 2011 using the effective interest method?
a. 550,000
b. 528,000
c. 576,000
d. 559,680

13. On July 1, 2011, Roger Company issued 4,000 of its 8 %, P1,000 face value bonds payable for P3,504,000.
The bonds were issued to yield 10%. The bonds are dated July 1, 2011 and mature on July 1, 2021, Interest
is payable semiannually on January 1 and July 1. Using the effective interest method, how much of the bond
discount should be amortized for the 6 months ended December 31, 2011?
a. 30,400
 b. 24,800
c. 19,840
d. 15,200

14. On January 1, 2011, Kenny Company issued 9% bonds in the face amount of P5,000,000, which mature on
January 1, 2021. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on
December 31. Kenny uses the interest method of amortizing bond discount. In its December 31, 2011 balance
sheet, what amount should Kenny report as bonds payable?
a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

15. On January 1, 2012, Kenneth Company issued its 9% bonds in face amount of P4,000,000, which mature on
January 1, 202. The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000.
Kenneth uses the interest method of amortizing discount. Interest is payable annually on December 31. At
December 31, 2011, Kenneth’s unamortized bond discount should be
a. 228,400
b. 208,000
c. 206,440
d. 204,000

16. Jeff Company is authorzied to issue P5,000,000 of 6% 10 year bonds dated July 1, 2011 with interest
payments on June 30 and December 31. When the bonds are issued on November 1, 2011, Jeff Company
received cash of P5,150,000 including accrued interest. The journal entry to record the issuance of the
bonds would include
a. 150,000 bond premium
b. 50,000 bond premium
c. 150,000 bond discount
d. no bond premium and discount

17. On February 1, 2006, John Company issued 12%, P2,000,000 face amount, 10 year bonds for P2,234,000 plus
accrued interest. The bonds are dated November 1, 2005 and interest is payable on May 1 and November 1.
The entity uses the straight line method of amortization. John reacquired all of these bonds at 102 on May 1,
2009 and retired them. Ignoring income tax, what was John’s gain on the bond retirement?
a. 116,000
b. 194,000
c. 234,000
d. 237,000

18. On January 1, 3022, Kareen Company issued its 10% bonds in the face amount of P1,000,000 that mature on
January 1, 2021. The bonds were issued for P886,000 to yield 12% resulting in bond discount of P114,000.
Kareen Company uses the interest method of amortizing bond discount. Interest is payable on January 1 and
July 1.For the year ended December 31, 2011, Kareen should report bond interest expense at
a. 106,510
b. 100,000
c. 53,160
d. 50,000

19. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds
b. term bonds
 c. debenture bonds
d. secured bonds

20. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest
expense in the earlier years will be
a. greater than if the straight-line method were used
b. greater than the amount of the interest payments.
c. the same as if the straight-line method were used.
d. less than if the straight-line method were used

21. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats
any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt issued
over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt which
should be recognized in the period of redemption.

22. When bonds are sold between interest dates, any accrued interest is credited to
a. Interest payable
b. Interest revenue
c. Interest receivable
d. Bonds payable

23. If bonds are initially sold at a discount and the straight line method of amortization is used, interest expense in
the earlier years
a. Will exceed what it would have been had the scientific method of amortization been used
b. Will be less than what it would have been had the scientific method of amortization been
used
c. Will be the same as what it would have been had the scientific method of amortization
been used
d. Will be less than the coupon rate of interest.

24. Which of the following is true of a premium on bonds payable?

a. The premium or bonds payable is a contra stockholders’ equity account
b. The premium on bonds payable is an account that appears only on the books of the
investor
c. The premium on bonds payable increases when amortization entries are made until it
reaches its maturity value
d. The premium on bonds payable decreases when amortization entries are made until its
balance reaches zero at the maturity date.

25. The net amount of a bond liability that appears in the balance sheet is the
a. Call price of the bond plus bond discount or minus bond premium
b. Face value of the bond plus related premium or minus related discount
c. Face value of the bond plus related discount or minus related premium
d. Maturity value of the bond plus related discount or minus related premium

26. The market price of a bond issued at a discount is the present value of its principal amount at the market rate
of interest
a. Less the present value of all future interest payments at the market rate of interest
b. Less the present value of all future interest payments at the rate of interest stated on the
bond
c. Plus the present value of all future interest payments at the market rate of interest
d. Plus the present value of all future interest payments at the rate of interest stated on the
bond