Question

1/ A company issued 5-year, 9.50% bonds with a par value of $109,000. The market rate when the bonds were issued was 9.00%. The company received $111,294 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

Multiple Choice

$5,177.50.

$10,355.00.

$5,008.23.

$9,953.54.

$2,588.75.

2/ On January 1 of Year 1, Congo Express Airways issued $3,650,000 of 8% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,350,000 and the market rate of interest for similar bonds is 9%. The bond premium or discount is being amortized at a rate of $10,000 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

Multiple Choice

$272,000.

$156,000.

$312,000.

$328,500.

$292,000.

3/ On January 1, Parson Freight Company issues 8.0%, 10-year bonds with a par value of $2,700,000. The bonds pay interest semiannually. The market rate of interest is 9.0% and the bond selling price was $2,516,532. The bond issuance should be recorded as:

Multiple Choice

Debit Cash $2,700,000; credit Bonds Payable $2,700,000.

Debit Cash $2,516,532; credit Bonds Payable $2,516,532.

Debit Cash $2,700,000; credit Bonds Payable $2,516,532; credit Discount on Bonds Payable $183,468.

Debit Cash $2,516,532; debit Discount on Bonds Payable $183,468; credit Bonds Payable $2,700,000.

Debit Cash $2,516,532; debit Interest Expense $183,468; credit Bonds Payable $2,700,000.

Answer 1

Answer is C.

Proceed from Issue = $111,294
Annual Market rate = 9.00%
Semi-annual Market Rate = 4.50%

Interest Expense = Proceed from Issue * Semi-annual Market Rate
Interest Expense = $111,294 * 4.50%
Interest Expense = $5,008.23

Interest expense of $5,008.23 will recorded for the first semi-annual interest period.

Answer 2 is C.

Face Value = $3,650,000
Annual Interest Rate = 8%
Semi-annual Interest Rate = 4%
Semi-annual Amortization of Discount = $10,000

Semi-annual Cash Interest = Face Value * Semi-annual Interest Rate
Semi-annual Cash Interest = $3,650,000 * 4%
Semi-annual Cash Interest = $146,000

Semi-annual Interest Expense = Semi-annual Cash Interest + Semi-annual Amortization of Discount
Semi-annual Interest Expense = $146,000 + $10,000
Semi-annual Interest Expense = $156,000

Annual Interest Expense = 2 * Semi-annual Interest Expense
Annual Interest Expense = 2 * $156,000
Annual Interest Expense = $312,000

Interest expense of $312,000 is recognized on the bond issue in Year 1.

Answer 3 is D.

Face Value = $2,700,000
Proceed from Issue = $2,516,532

Discount on Issue = Face Value - Proceed from Issue
Discount on Issue = $2,700,000 - $2,516,532
Discount on Issue = $183,468

Journal entry to record issue of bonds is: