Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value

01/01/2021 $ 8,640,967

06/30/2021 $ 300,000 $ 345,639 $ 45,639 8,686,606

12/31/2021 300,000 347,464 47,464 8,734,070

06/30/2022 300,000 349,363 49,363 8,783,433

12/31/2022 300,000 351,337 51,337 8,834,770

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.)

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Answer: C

When bonds are retired before their maturity date:

A) GAAP has been violated.

B) The issuing company will always report a non-operating gain.

C) The issuing company will always report a non-operating loss.

D) The issuing company may report a non-operating gain or loss.

Answer: D

An amortization schedule for a bond issued at a premium:

A) Has a carrying value that increases over time.

B) Is contained in the balance sheet.

C) Is a schedule that reflects the changes in the carrying value of the bond over its term to maturity.

D) All of the other answer choices are correct.

Answer: C

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value

01/01/2021 $ 8,640,967

06/30/2021 $ 300,000 $ 345,639 $ 45,639 8,686,606

12/31/2021 300,000 347,464 47,464 8,734,070

06/30/2022 300,000 349,363 49,363 8,783,433

12/31/2022 300,000 351,337 51,337 8,834,770

What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.)

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Answer: D

When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

A) Less than the interest expense.

B) Equal to the interest expense.

C) Greater than the interest expense.

D) More than if the bonds had been sold at a discount.

Answer: C

When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense:

A) Increases.

B) Decreases.

C) Remains the same.

D) Is equal to the change in book value.

Answer: A

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

A) Increases.

B) Decreases.

C) Remains the same.

D) Is equal to the change in book value.

Answer: B

How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?

A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium.

B) Decrease for bonds issued at a discount and increase for bonds issued at a premium.

C) Increase for bonds issued at a discount and decrease for bonds issued at a premium.

D) Increase for bonds issued at a discount and increase for bonds issued at a premium.

Answer: C

An amortization schedule for a bond issued at a discount:

A) Has a carrying value that decreases over time.

B) Is contained in the balance sheet.

C) Is a schedule that reflects the changes in carrying value of the bond over its term to maturity.

D) All of the other answer choices are correct.

Answer: C

How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?

A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium.

B) Decrease for bonds issued at a discount and increase for bonds issued at a premium.

C) Increase for bonds issued at a discount and decrease for bonds issued at a premium.

D) Increase for bonds issued at a discount and increase for bonds issued at a premium.

Answer: C

The carrying value, using the effective interest method, would increase each year:

A) If the bonds were sold at a discount.

B) If the bonds were sold at a premium.

C) If the bonds were sold at either a discount or a premium.

D) The carrying value of bonds will never increase.

Answer: A

The carrying value, using the effective interest method, would decrease each year:

A) If the bonds were sold at a discount.

B) If the bonds were sold at a premium.

C) If the bonds were sold at either a discount or a premium.

D) The carrying value of bonds will never decrease.

Answer: B

When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

A) Less than the interest expense.

B) Equal to the interest expense.

C) Greater than the interest expense.

D) More than if the bonds had been sold at a premium.

Answer: A

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

A) Carrying value and interest expense increase.

B) Carrying value and interest expense decrease.

C) Carrying value decreases and interest expense increases.

D) Carrying value increases and interest expense decreases.

Answer: B

Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?

A) Increase assets and liabilities.

B) Increase and decrease assets.

C) Increase assets and stockholders' equity.

D) Increase and decrease stockholders' equity.

Answer: A

Bonds payable should be reported as a long-term liability in the balance sheet at the:

A) Face value.

B) Current bond market price.

C) Carrying value.

D) Face value less accrued interest since the last interest payment date.

Answer: C

The cash interest payment each period is calculated as the:

A) Face amount times the stated interest rate.

B) Face amount times the market interest rate.

C) Carrying value times the market interest rate.

D) Carrying value times the stated interest rate.

Answer: A

When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?

A) Carrying value and interest expense increase.

B) Carrying value and interest expense decrease.

C) Carrying value decreases and interest expense increases.

D) Carrying value increases and interest expense decreases.

Answer: A

Which of the following is true for bonds issued at a premium?

A) The stated interest rate is less than the market interest rate.

B) The market interest rate is less than the stated interest rate.

C) The stated interest rate and the market interest rate are equal.

D) The stated interest rate and the market interest rate are unrelated.

Answer: B

Interest expense on bonds payable is calculated as the:

A) Face amount times the stated interest rate.

B) Face amount times the market interest rate.

C) Carrying value times the market interest rate.

D) Carrying value times the stated interest rate.

Answer: C