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%
Present value of 1 for 8 periods at 8%
Present value of 1 for 16 periods at 3%
Present value of 1 for 16 periods at 4%
Present value of annuity for 8 periods at 6%
Present value of annuity for 8 periods at 8%
Present value of annuity for 16 periods at 3%
Present value of annuity for 16 periods at 4%

.627
.540
.623
.534
6.210
5.747
12.561
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?

Present value of a single sum for 5 periods

Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
a.
b.
c.
d.

5,000,000
5,216,494
5,218,809
5,217,308

2.5%
.88385
.78120
4.64583
8.75206

3.0%
.86261
.74409
4.57971
8.53020

5.0%
.78353
.61391
4.32948
7.72173

6.0%
.74726
.55839
4.21236
7.36009

____

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?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
a.
b.
c.
d.

2.5%
.88385
.78120
4.64583
8.75206

3.0%
.86261
.74409
4.57971
8.53020

5.0%
.78353
.61391
4.32948
7.72173

6.0%
.74726
.55839
4.21236
7.36009

10,000,000
10,432,988
10,437,618
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
Legal fees
Fees paid to independent accountants for registration
Commissions paid to underwriter

150,000
800,000
100,000
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%
Present value of an ordinary annuity of 1 for 10 periods at 10%

0.3855
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)
PV of annual interest payments (500,000 x 2.4437)
Total present value of bonds

3,656,000
1,221,850
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)
PV of annual interest payments (500,000 x
2.4018)
Total present value of bonds

3,559,000
1,200,900
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, Kenneths 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 Johns 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

Bonds Payable
Answer Section
MULTIPLE CHOICE
1. A
1,000,000 .534 = 534,000
2. B
(1,000,000 .03) 11.652 = 349,560.
3. A
534,000 + 349,560 = 883,560
4. C
(5,000,000 .78120) + (150,000 8.75206) = 5,218,809
5. C
(10,000,000 .78120) + (300,000 8.75206) = 10,437,618
6. C
(20,000,000 .97) + (1,800,000 2/12) = 19,700,000
7. C
Issue price (2,000,000 x 99%)
1,980,000
Accrued interest from January 1 to April 1, 2011
40,000
(2,000,000 x 8% x 3/12)
Total
2,020,000
Bond issue cost
70,000
Net cash received from the bond issue
1,950,000
8. A
9. A
Issue price (5,000,000 x 99%)
4,950,000
Bonds payable
5,000,000
Discount on bonds payable
(50,000)
Bond issue cost
(425,000)
Book value of liability
4,525,000
10. D
PV of 1 at 4% for 20 periods
.46
PV of an ordinary annuity of 1 at 4% for 20 periods
13.59
PV of principal (2,000,000 x .46)
920,000
PV of semiannual interest payments (100,000 x 13.59)
1,359,000
Issue price of bonds
2,279,000
11. D
PV of principal (5,000,000 x .3855)
1,927,500
PV of annual interest payments (400,000 x 6.145)
2,458,000
Total present value or issue price of bonds
4,385,500
12. D
Carrying value of bonds (5,000,000 x 99%-150,000)
4,800,000
Interest expense (4,800,000 x 11.66%
559,680
Let x=
x=
11%
12%

the effective rate

4,800,000
4,877,850
4,759,900

This means that the effective rate is higher than 11% but lower than 12%. This, by interpolation, the interest
differential is determined as follows:
(x-11%)/(12%-11%)=(4,800,000-4,877,850)/(4,759,900-4,877,850)
77,850/117,950=.66
13. D
Interest expense (3,504,000 x 10% x 6/12)
175,200
Interest paid (4,000,000 x 8% x 6/12)
160,000
Discount amortization for 6 months
15,200
14. B
Interest expense (4,695,000 x 10% )
469,500
Interest paid (4,000,000 x 8% x 6/12)
450,000
Amortization of discount for 2011
19,500
Bonds payable
Discount on bonds payable (305,000-19,500)
Book value , December 31, 2011
15. A
Interest expense (3,756,000 x 10% )
Interest paid (4,000,000 x 9% )
Discount amortization for 2011
Discount on bonds payable
Less: Discount amortization for 2011
Discount on bonds payable, December 31, 2011
16. B
Cash received
Accrued interest from June 30 to November 1,
2011 (5,000,000 x 6% x 4/12)
Issue price of bonds payable
Face value
Premium on bonds payable
17. A
Life of bonds (10 years x 12)

Monthly amortization of premium (234,000/117)

Premium on bonds payable
Less: Amortization from Feb 1, 2006-May 1, 2009
(2,000 x 39)
Premium on bonds payable, May 1, 2009
Face value
Book value
Less: Retirement price (2,000,000 x 102)
Gain on bond retirement
18. A
Date
Interest paid
Interest expense
Jan 1, 2011

5,000,000
(285,500)
4,714,500
375,600
360,000
15,600
244,000
(15,600)
228,400
5,150,000
(100,000)
5,050,000
5,000,000
50,000
120 mos.
3
117 mos
2,000
2340,000
78,000
156,000
2,000,000
2,156,000
2,040,000
116,000
Discount Amort

Book value
886,000

July 1, 2011
Jan 1, 2012

50,000
50,000
100,000

Interest paid (1,000,000 x 10% x 6/12)

Interest expense
886,000 x 12% x 6/12
889,160 x 12% x 6/12
19.
20.
21.
22.
23.
24.
25.
26.

A
A
D
A
A
D
B
C

53,160
53,350
106,510
50,000

53,160
53,350
106,510

3,160
3,350
6,510

889,160
892,510