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Stone Company issued a $1,000,000 bond on January 1, 2014. The bond was dated January 1, 2014, had an 8% stated rate, pays interest annually on December 31, and sold for $1,084,249 at a time when the market rate of interest was 6%. Stone uses the effective-interest method to account for its bonds. Required: Prepare the necessary journal entry for each of the following dates: January 1, 2014 December 31, 2014 December 31, 2015

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On March 31, 2015 Ridgetop Corp. retired bonds early by repurchasing them in the market for $9,700,000. The total face value of the bonds retired equaled $10 million and there was $450,000 of unamortized discount on these bonds. Required: Prepare the journal entry to retire the bonds.

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The journal entry to record the sale of bonds at their par value results in which of the following?


A) An increase in assets and liabilities equal to the par value of the bonds.
B) An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments.
C) An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bonds' future cash flows.
D) An increase in assets and liabilities equal to the bonds' future cash flows.

E) None of the above
F) A) and D)

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Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?


A) The interest expense over the life of the bond exceeds the cash interest payments.
B) The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used.
C) The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used.
D) The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is useD.When bonds are issued at a discount, their book value increases over time and eventually reach the bonds' maturity value. Interest expense increases because the book value increases. The amortization of discount on bonds payable is the difference between the increasing interest expense and the constant cash interest payment.

E) None of the above
F) All of the above

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Assuming no adjusting journal entries have been made during the year, the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared. Which of the following is not an effect of the entry?


A) An increase in expenses and a decrease in liabilities.
B) An increase in expenses and an increase in liabilities.
C) A decrease in both liabilities and stockholders' equity.
D) A decrease in both assets and liabilities.

E) A) and D)
F) A) and B)

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A company prepared the following journal entry: Which of the following statements is correct? Bonds payable Premium on bonds payable Loss on bond retirement Cash


A) The book value of the bonds was less than the cash payment.
B) The increase in stockholders' equity equals the loss on the bond retirement.
C) The decrease in assets is greater than the decrease in liabilities and, as a result, stockholders' equity decreases.
D) The net cash flow from financing activities decreases by the book value of the bonds payable.

E) B) and C)
F) None of the above

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The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

A) True
B) False

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A company prepared the following journal entry: Which of the following statements is incorrect? Bonds payable Premium on bonds payable Gain on bond retirement Cash


A) The book value of the bonds was less than the cash payment.
B) The increase in stockholders' equity equals the gain on the bond retirement.
C) The decrease in assets is less than the decrease in liabilities.
D) The net cash flow from financing activities decreases by the cash payment.

E) A) and B)
F) A) and C)

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Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was 11%. Which of the following statements is correct?


A) The bonds were issued at a premium.
B) Annual interest expense will exceed the company's actual cash payments for interest.
C) Annual interest expense will be $500,000.
D) The book value of the bond will decrease as the bond matures.

E) A) and C)
F) A) and B)

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During 2014, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. During 2013, they reported net income of $3,568 million, interest expense of $163 million and income tax expense of $1,424 million. The times interest earned ratios for 2014 and 2013, respectively, are closest to:


A) 32.2 and 29.4 times.
B) 28.4 and 23.8 times.
C) 34.4 and 31.6 times.
D) 34.1 and 26.6 times.

E) None of the above
F) All of the above

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A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

A) True
B) False

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When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?


A) Dates of each interest payment.
B) The stated interest rate.
C) The maturity date.
D) The market rate of interest.

E) B) and C)
F) C) and D)

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On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the book value of the bonds after the November 1, 2014 interest payment was recorded, assuming the straight-line method of amortization is utilized?


A) $29,010.
B) $29,100.
C) $29,190.
D) $29,280.

E) All of the above
F) B) and C)

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On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, the interest expense for the six-month period ending December 31, 2014 is closest to:


A) $24,000.
B) $20,491.
C) $20,000.
D) $20,825.

E) All of the above
F) A) and B)

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Newton Corporation issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2014. The bonds pay interest annually, beginning on December 31, 2014. Newton Corporation received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Corporation has a December 31 year-end. Assume that no adjusting journal entries have been made during the year. Required: A. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the effective-interest method is used. B. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the straight-line method is used. C. Which method above is theoretically the better to use for amortizing a bond premium?

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A. ($1,000,000 × 7% = $70,000)...

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A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?


A) There was a $50,000 loss.
B) There was a $10,000 loss.
C) There was a $10,000 gain.
D) There was a $20,000 loss.

E) B) and D)
F) None of the above

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A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Interest expense Premium on bonds payable Cash


A) The bonds payable book value decreases by the amount of the debit to premium on bonds payable.
B) Assets decrease by the amount of the credit to cash.
C) Stockholders' equity decreases by the amount of the debit to interest expense.
D) The cash payment is reported as a cash flow from financing activities.

E) None of the above
F) C) and D)

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A corporation retired $500,000 of bonds, which have an unamortized discount of $10,000, by repurchasing them for $500,000. How much was the gain or loss on the retirement of the bonds?


A) There was no gain or loss.
B) There was a $10,000 loss.
C) There was a $10,000 gain.
D) There was a $500,000 loss.

E) B) and D)
F) A) and B)

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A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

A) True
B) False

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On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method of amortization is used, which of the following statements is incorrect?


A) The market rate of interest on the sale date was less than the stated rate of interest.
B) The book value of the bond will decrease as the bond reaches maturity.
C) The interest expense will decrease as the bond reaches maturity.
D) The amortization of the premium on bonds payable will decrease as the bond matures.

E) None of the above
F) B) and D)

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