Question

Question 13
If the market interest rate is greater than the contractual interest rate, bonds will sell

A.at a discount.
B.only after the stated interest rate is increased.
C.at face value.
D.at a premium.

Question 15
If the market interest rate is 5%, a $10,000, 6%, 10-year bond that pays interest annually would sell at an amount

A.greater than face value.
B.less than face value.
C.that cannot be determined.
D.equal to face value.

Question 16
Oriole Company issues 1600, 10-year, 8%, $1000 bonds dated January 1, 2020, at 98. The journal entry to record the issuance will show a

A.debit to Cash for $1568000
B.debit to Cash of $1600000.
C.credit to Discount on Bonds Payable for $32000.
D.credit to Bonds Payable for $1632000.

Question 17
The market interest rate is often called the

A.coupon rate.
B.effective rate.
C.contractual rate.
D.stated rate.

Question 19
If the present value of lease payments equals or exceeds 90% of the fair value of the leased property, the

A.conditions are met for the lease to be considered a capital lease.
B.lease is uneconomical and should not be entered into.
C.lease may be classified as an operating lease.
D.recording of a lease liability is optional—that is, the off-balance sheet approach can be elected.

Question 20
A lease where the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor is called

A.a capital lease.
B.an operating lease.
C.a purchase of property.
D.off-balance sheet financing.

Question 18
3400 bonds with a face value of $1000 each, are sold at 105. The entry to record the issuance is

A.Cash   3570000     
Premium on Bonds Payable      170000
Bonds Payable      3400000

B.Cash   3400000     
Premium on Bonds Payable   170000     
Bonds Payable      3570000

C.Cash   3570000     
Discount on Bonds Payable       170000
Bonds Payable      3400000

D.Cash   3570000     
Bonds Payable      3570000

Question 14
On January 1, 2020, Vaughn Manufacturing issued $5800000, 10-year, 4% bonds at 102. Interest is payable annually on January 1. The journal entry to record this transaction on January 1, 2020 is

A.Cash   5800000     
Bonds Payable      5800000

B.Cash   5916000     
Bonds Payable      5916000

C.Premium on Bonds Payable   116000     
Cash   5800000     
Bonds Payable      5916000

D.Cash   5916000     
Bonds Payable       5800000
Premium on Bonds Payable      116000

Answer 1

13)
The relationship between market interest rate and coupon rate is
If market interest rate > coupon rate then the bond is at discount
If market interest rate < coupon rate then the bond is at premium
Applying the above theory , the bond is at discount
Conclusion: A
15)
Year	Cash Flows	Discount factor @5%	Present Value
1	600	0.952380952	571.4285714
2	600	0.907029478	544.2176871
3	600	0.863837599	518.3025591
4	600	0.822702475	493.6214849
5	600	0.783526166	470.1156999
6	600	0.746215397	447.729238
7	600	0.71068133	426.4087981
8	600	0.676839362	406.1036172
9	600	0.644608916	386.7653497
10	10600	0.613913254	6507.480488
		Value of bond	10772.17349
As coupon rate is more than market interest rate the bond is issued at premium
The above calcultion supports the conclusion.
Conclusion: A

16)

1000*1600*98%

1568000

Conclusion :A

17)
The market interest rate is often called effective rate as it is always changing unlike stated interest rate
Conclusion: B
19)
One of the conditions of capital lease that lease payments should exceed 90% of
fair value of asset and the ownership is transferred to the lesse.
Conclusion: A

20)
An Operating Lease is a lease where ownership of asset is not transferred.
Conclusion: B
18)
The Relevant Entry is
Cash	3570000	(3400*1000*1.05)
To Bonds Payable		3400000	(3400*1000)
To Premium on Bond Payable		170000
(Being issue of bond at premium)
Conclusion: A

14)
Cash	5916000	(5800000*1.02)
To Bond Payable		5800000
To Premium Payable on bond		116000	(5916000-5800000)
(Being issue of bond at premium)
Conclusion: D