1. A company issues $10,000 of 9%, 5 year bonds dated January 1, 2011, that mature on December 31, 2015, and pay interest semiannually on each June 30 and December 31. Prepare the entry to record this bond issuance and the first semiannual interest payment.
2. How do you compute the amount of interest a bond issuer pays in cash each year?
3. When the contract rate is above the market rate, do bonds sell at a premium or a discount? Do purchasers pay more or less than the par value of the bonds?
4. Are these bonds issued at a discount or a premium? Explain your answer.
5. What is the issuer’s journal entry to record the issuance of these bonds?
6. What is the amount of bond interest expense recorded at the first semiannual period using the straight line method?
7. Are these bonds issued at a discount or a premium? Explain your answer.
8. Using the straight line method to allocate bond interest expense, the issuer records the second interest payment (on December 31, 2011) with a debit to Premium on Bonds Payable in the amount of (a) $7,470, (b) $530, (c) $8,000, or (d) $400.
9. How are these bonds reported in the long term liability section of the issuer’s balance sheet as of December 31, 2011?
10. Six years ago, a company issued $500,000 of 6%, eight year bonds at a price of 95. The current carrying value is $493,750. The company decides to retire 50% of these bonds by buying them on the open market at a price of 1021⁄2. What is the amount of gain or loss on the retirement of these bonds?
11. Which of the following is true for an installment note requiring a series of equal total cash payments? (a) Payments consist of increasing interest and decreasing principal; (b) payments consist of changing amounts of principal but constant interest; or (c) payments consist of decreasing interest and increasing principal.
12. How is the interest portion of an installment note payment computed?
13. When a borrower records an interest payment on an installment note, how are the balance sheet and income statement affected?
14. A company enters into an agreement to make four annual year end payments of $1,000 each, starting one year from now. The annual interest rate is 8%. The present value of these four payments is (a) $2,923, (b) $2,940, or (c) $3,312.
15. Suppose a company has an option to pay either (a) $10,000 after one year or (b) $5,000 after six months and another $5,000 after one year. Which choice has the lower present value?
16. On May 1, a company sells 9% bonds with a $500,000 par value that pay semiannual interest on each January 1 and July 1. The bonds are sold at par plus interest accrued since January 1. The issuer records the first semiannual interest payment on July 1 with (a) a debit to Interest Payable for $15,000, (b) a debit to Bond Interest Expense for $22,500, or (c) a credit to Interest Payable for $7,500.