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On October 1, 2013, Jack Company issued a $5,000, 6%, bond payable. The interest is payable annually each September 30 and the bond matures in five years. The annual accounting period for the company ends December 31. Required: Complete the following entries at the date specified under three different assumptions as to the issue price. Use straight-line amortization. Assume no adjusting entries have been made during the year.

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Houston Company authorized a $1,000,000, 10-year, 6% bond issue dated July 1, 2014, with annual interest to be paid each December 31. On July 1, 2014, the bonds were issued for $886,500. Houston Company has a December 31 year-end. Required: A. Prepare the journal entry to record the sale of the bonds. B. Prepare the required journal entry on December 31, 2014 to record amortization (use the straight-line method.) No adjusting journal entries were made during the year. C. Was the bond issued at par, at a discount, or at a premium? D. Will interest expense be greater than or less than the cash payments for interest?

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C. Discoun...

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When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?


A) Interest expense would increase.
B) The book value of the bonds would increase.
C) The amortization for each year the bond approaches maturity, when the effective-interest method is used, would increase.
D) The amount of amortization would be reported as an increase in cash flow from operating activities.

E) A) and B)
F) A) and C)

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On March 1, 2014, Halbur Corporation, issued $500,000 of 6%, five-year bonds at par. The bonds were dated March 1, 2014, and the first annual interest payment will be on February 28, 2015. The accounting period ends December 31. Assume no adjusting entries have been made during the year. Required: Complete the journal entry grid for each of the following dates:

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blured image Computations: (a) Issued at par, $500,0...

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When a company purchases and retires its outstanding bonds payable for an amount less than their book value, a decrease in stockholders' equity results.

A) True
B) False

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Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?


A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid.
B) The amount of interest expense recognized each period increases over time.
C) The amount of discount amortized each period decreases over time.
D) The book value of the bonds payable liability decreases.

E) A) and C)
F) B) and C)

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On March 31, 2014, Bundy Corporation retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. How much was the gain or loss on the retirement of the bonds?


A) $150,000 loss.
B) $150,000 gain.
C) $650,000 gain.
D) $350,000 loss.

E) A) and D)
F) C) and D)

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Which of the following statements is not correct?


A) The bond principal is the amount due at the maturity date of the bond.
B) The stated interest rate is used to determine the cash interest payments.
C) The bond principal is used to determine the cash interest payments.
D) The market rate of interest is used to determine the cash interest payments.

E) A) and C)
F) A) and D)

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When a company needs funds to finance the expansion of its operations, which of the following is not an advantage of issuing bonds rather than issuing stock?


A) Stockholders remain in control as bondholders cannot vote or share in the company's earnings.
B) Interest expense is tax deductible but dividends are not.
C) Bonds can usually be issued at a low interest rate and the proceeds can be invested to earn a higher rate.
D) The dates for the interest and maturity payments are fixeD.The fixed payment dates create inflexibility and therefore increase bankruptcy risk.

E) A) and B)
F) A) and C)

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Which of the following statements is correct?


A) A secured bond has specific assets pledged as collateral to secure it.
B) An unsecured bond can be paid at the option of the issuer.
C) A bond trustee is appointed to represent the issuing company.
D) The bond indenture specifies the market rate of interest the investors will earn.

E) A) and B)
F) All of the above

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On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the December 31, 2015 book value after the December 31, 2015 interest payment was made is closest to:


A) $9,662.
B) $9,820.
C) $9,668.
D) $9,723.

E) A) and C)
F) A) and D)

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On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to be reported on the December 31, 2014 balance sheet?


A) $300,000.
B) $302,850.
C) $302,700.
D) $303,000.

E) None of the above
F) A) and D)

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Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

A) True
B) False

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On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the book value of the bonds as of December 31, 2014 is closest to:


A) $8,968.
B) $9,945.
C) $9,641.
D) $9,741.

E) A) and D)
F) A) and B)

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If a bond is issued at 98, the stated rate of interest was


A) higher than the market rate of interest.
B) lower than the market rate of interest.
C) equal to the market rate of interest.
D) not related to the market rate of interest.

E) C) and D)
F) B) and C)

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The following information was taken from the income statement of Tommy Toys for the years 2013 through 2015 (in millions): Required: A. Compute Tommy Toys times interest earned ratio for all three years. Round your answers to two decimal places. B. Briefly interpret the times interest earned ratio for the three years.

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blured image Times interest earned ratio = (Net inco...

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On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the amount of straight-line discount amortization on each semi-annual interest date?


A) $90.
B) $45.
C) $900.
D) $450.

E) A) and D)
F) C) and D)

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Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 8%. Which of the following statements is incorrect?


A) The bonds were issued at a premium.
B) Annual interest expense will be less than the company's annual cash payments for interest.
C) The book value of the bonds will decrease as the bond matures.
D) The annual interest expense will increase if the effective-interest method of amortization was useD.Given that the market rate of interest was less than the stated rate of interest, the bonds sold at a premium. Therefore, the book value decreases as the premium on bond payable account is amortized, as a result interest expense decreases.

E) All of the above
F) B) and C)

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Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

A) True
B) False

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Which of the following statements correctly describes the accounting for bonds that were issued at a discount?


A) The market rate of interest is less than the stated interest rate.
B) The interest expense over the life of the bonds will be less than the cash interest payments.
C) The present value of the bonds' future cash flows is greater than the bonds' maturity value.
D) The book value of the bond liability increases when interest payments are made on the due dates.

E) A) and C)
F) A) and B)

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