MC Qu. 122 A company issued... A company issued 11%, 5-year bonds with a par val
ID: 2339318 • Letter: M
Question
MC Qu. 122 A company issued...
A company issued 11%, 5-year bonds with a par value of $150,000. The market rate when the bonds were issued was 12%. The company received $144,481 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:
Multiple Choice:
$8,250.00.
$8,668.86.
$17,337.72.
$9,000.00.
$16,500.00.
MC Qu. 148 On January 1, Year 1, Stratton...
On January 1, Year 1, Stratton Company borrowed $210,000 on a 10-year, 10% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $34,177 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is:
Multiple Choice:
Debit Interest Expense $21,000; debit Notes Payable $13,177; credit Cash $34,177.
Debit Notes Payable $21,000; debit Interest Expense $13,177; credit Cash $34,177.
Debit Interest Expense $19,682; debit Notes Payable $14,495; credit Cash $34,177.
Debit Notes Payable $34,177; credit Cash $34,177.
Debit Notes Payable $210,000; debit Interest Expense $13,177; credit Cash $34,177.
MC Qu. 149 On January 1, a company issues...
On January 1, a company issues bonds dated January 1 with a par value of $220,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $228,930. The journal entry to record the issuance of the bond is:
Multiple Choice:
Debit Cash $228,930; credit Discount on Bonds Payable $8,930; credit Bonds Payable $220,000.
Debit Cash $220,000; debit Premium on Bonds Payable $8,930; credit Bonds Payable $228,930.
Debit Bonds Payable $220,000; debit Bond Interest Expense $8,930; credit Cash $228,930.
Debit Cash $228,930; credit Bonds Payable $228,930.
Debit Cash $228,930; credit Premium on Bonds Payable $8,930; credit Bonds Payable $220,000.
Explanation / Answer
Solution:
MC Qu. 122
Answer:
The company is using effective interest method to amortize the discount or premium on bonds payable. In effective interest method the interest expense is calculated as follows:
Interest Expense for the period = Carrying Value of the bonds at the beginning of period x effective rate of interest
Here,
Carrying Value of the bonds is issue price = $144,481
Effective Rate of Interest = 12/2 = 6% semi annual
Interest Expense for the first semi annual interest period = Carrying Value 144,481 * Effective Rate of Interest 6% = $8,668.86
Hence, the correct option is $8,668.86
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