Question

MC Qu. 150 On January 1, a company issues...

On January 1, a company issues bonds dated January 1 with a par value of $370,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $384,280. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.)

Multiple Choice:

Debit Bond Interest Expense $18,922; debit Premium on Bonds Payable $1,428; credit Cash $20,350.

Debit Bond Interest Expense $18,922; debit Discount on Bonds Payable $1,428; credit Cash $20,350.

Debit Interest Payable $20,350; credit Cash $20,350.

Debit Bond Interest Expense $21,778; credit Discount on Bonds Payable $1,428; credit Cash $20,350.

Debit Bond Interest Expense $21,778; credit Premium on Bonds Payable $1,428; credit Cash $20,350.

MC Qu. 151 On January 1, a company issues...

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $415,437. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.)

Multiple Choice:

Debit Bond Interest Expense 23,544.00; credit Premium on Bonds Payable $1,544.00; credit Cash $22,000.00.

Debit Interest Expense $20,772; debit Premium on Bonds Payable $1,228; credit Cash $22,000.

Debit Interest Payable $22,000.00; credit Cash $22,000.00.

Debit Bond Interest Expense $20,772.00; debit Discount on Bonds Payable $1,228.00; credit Cash $22,000.00.

Debit Bond Interest Expense $20,456.00; debit Premium on Bonds Payable $1,544.00; credit Cash $22,000.00.

MC Qu. 152 Marwick Corporation issues...

Marwick Corporation issues 10%, 5 year bonds with a par value of $1,240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%. What is the bond's issue (selling) price, assuming the following Present Value factors:

n=		i=			Present Value of an Annuity			Present value of $1
5		10	%			3.7908		0.6209
10		5	%			7.7217		0.6139
5		8	%			3.9927		0.6806
10		4	%			8.1109		0.6756

Multiple Choice:

$1,240,000

$1,029,244

$1,742,876

$1,340,620

$737,124

Answer 1

Solution 1:

Semi annual interest payment = $370,000*5.50% = $20,350

Preimum on issue of bond = $384,280 - $370,000 = $14,280

Premium amortization per semiannual period = Total premium / nos of semiannual period till maturity

= $14,280 / 10 = $1,428

Interest expense for each semiannual period = $20,350 - $1,428 = $18,922

Therefore in order to record first interest payment, "Debit Bond Interest Expense $18,922; debit Premium on Bonds Payable $1,428; credit Cash $20,350."

Hence first option is correct.

Solution 2:

Semi annual interest payment = $400,000*5.50% = $22,000

Preimum on issue of bond = $415,437 - $400,000 = $15,437

Interest expense using effective interest method for first semiannual period = $415,437*5% = $20,772

Premium to be amortized = $22,000 - $20,772 = $1,228

Therefore in order to record first interest payment, "Debit Bond Interest Expense $20,772; debit Premium on Bonds Payable $1,228; credit Cash $22,000."

Hence 2nd option is correct.

Solution 3:

Computation of bond price
Table values are based on:
n=	10
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.67560	$1,240,000	$837,744
Interest (Annuity)	8.11090	$62,000	$502,876
Price of bonds			$1,340,620

Hence 4th option is correct.