Page 620 - Accounting Principles (A Business Perspective)

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Callable bonds may be called at the option of the holder of the bonds.
Favorable financial leverage results when borrowed funds are used to increase earnings per share of common
stock.

If the market rate of interest exceeds the contract rate, the bonds are issued at a discount.
The straight-line method of amortization is the recommended method.
Multiple-choice
Select the best answer for each of the following questions.
Harner Company issued USD 100,000 of 12 per cent bonds on 2010 March 1. The bonds are dated 2010 January
1, and were issued at 96 plus accrued interest. The entry to record the issuance would be:
a.
Cash 98,000
Discount on bonds payable 4,000
Bonds payable 100,000
Bonds interest payable 2,000
b.
Cash 102,000
Bonds payable 100,000
Bond interest payable 2,000
c.
Cash 96,000
Discount on bonds payable 4,000
Bonds payable 100,000
d. None of the above.
If the bonds in the first question had been issued at 104, the entry to record the issuance would have been:
a. Cash 104,000
Bonds payable 100,000
Premium on bonds payable 4,000

b.
Cash 102,000
Bonds payable 100,000
Bonds interest payable 2,000

c.
Cash 106,000
Bonds payable 100,000
Premium on bonds payable 4,000
Bonds interest payable 2,000
d. None of the above.
On 2010 January 1, the Alvarez Company issued USD 400,000 face value of 8 per cent, 10-year bonds for cash
of USD 328,298, a price to yield 11 per cent. The bonds pay interest semiannually and mature on 2020 January 1.
Using the effective interest rate method, the bond interest expense for the first six months of 2010 would be:
a. USD 36,113.
b. USD 18,056.
c. USD 32,000.
d. USD 16,000.

If the straight-line amortization method had been used in the previous question, the interest expense for the
first six months would have been:
a. USD 39,170.
b. USD 32,000.
c. USD 18,000.

Accounting Principles: A Business Perspective 621 A Global Text