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Home / Questions / Lassen Corporation issued 10-year term bonds on January 1, 20x7, with a face value of $800

Lassen Corporation issued 10-year term bonds on January 1, 20x7, with a face value of $800

Lassen Corporation issued 10-year term bonds on January 1, 20x7, with a face value of $800,000. The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The bonds were issued for $690,960 to yield an effective annual interest rate of 8 percent. The effective interest method of amortization is to be used. The entry to be recorded on December 31, 20x7, for the payment of interest and the amortization of discount will include a

 

a.

debit to Bond Interest Expense for $24,000.

b.

credit to Cash for $27,784.

c.

credit to Unamortized Bond Discount for $3,784.

d.

credit to Unamortized Bond Discount for $3,638.

 

 

 

158.Lassen Corporation issued 10-year term bonds on January 1, 20x7, with a face value of $800,000. The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The bonds were issued for $690,960 to yield an effective annual interest rate of 8 percent. The effective interest method of amortization is to be used. The carrying value of the bonds payable on the December 31, 20x7, balance sheet date should be

 

a.

$698,236.

b.

$698,382.

c.

$696,412.

d.

$690,960.

 

 

 

159.Lenz Corporation issued 10-year, 8 percent bonds in 20x7 at a premium. During 20x8, the company's accountant failed to amortize any of the bond premium. The omission of the premium amortization will

 

a.

cause net income for 20x7 to be overstated.

b.

cause retained earnings at the end of 20x7 to be overstated.

c.

not affect net income reported for 20x7.

d.

cause net income for 20x7 to be understated.

 

 

 

160.Penmark Corporation issued 15-year term bonds at a discount in 20x7. Interest is payable semiannually. Which of the following statements is true, assuming that the effective interest method of amortization is used for the bond discount?

 

a.

Interest expense decreases each six-month interest period.

b.

Interest expense increases each six-month interest period.

c.

Interest expense as a percentage of the bond's book value changes from period to period.

d.

Interest expense remains constant in amount for each interest period.

 

 

 

161.When the effective interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the

 

a.

carrying value of the bonds at the beginning of the period by the effective interest rate.

b.

face value of the bonds at the beginning of the period by the effective interest rate.

c.

carrying value of the bonds at the beginning of the period by the face interest rate.

d.

face value of the bonds at the beginning of the period by the face interest rate.

 

 

 

162.The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that

 

a.

has no predictable relationship with the amount of cash to be paid for interest for the period.

b.

equals the amount of cash to be paid for interest for the period.

c.

is less than the amount of cash to be paid for interest for the period.

d.

exceeds the amount of cash to be paid for interest for the period.

 

 

 

163.When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by

 

a.

deducting the amount of discount amortization for the period from the amount of cash paid for interest during the period.

b.

multiplying the face value of the bonds by the face interest rate.

c.

adding the amount of discount amortization for the period to the amount of cash paid for interest during the period.

d.

multiplying the carrying value of the bonds by the effective interest rate.

 

 

 

164.If bonds payable were issued initially at a discount, the carrying value of the bonds at a balance sheet date will be calculated by

 

a.

deducting the amount of discount amortized between the issuance date and the balance sheet date from the face value.

b.

adding the amount of discount amortized between the issuance date and the balance sheet date to the face value.

c.

deducting the balance of unamortized bond discount from the face value.

d.

adding the balance of unamortized bond discount to the face value.

 

 

 

165.When bonds have been issued at a premium, the periodic amortization of the premium will

 

a.

cause the carrying value always to equal the face value of the bonds.

b.

increase the carrying value of the bonds.

c.

have no effect on the carrying value of the bonds.

d.

decrease the carrying value of the bonds.

 

 

 

166.A company has $782,000 in bonds payable with an unamortized premium of $20,000. If one-fourth of the bonds are converted to common stock, the carrying value of the bonds will decrease by

 

a.

$190,500.

b.

$215,500.

c.

$195,500.

d.

$200,500.

 

 

 

 

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