AC 202 Principles of Accounting II Name__________________________

Quiz 2A-Chapter 14

Multiple Choice Questions

1. A bond traded at 102½ means that:

A. The bond pays 2.5% interest.

B. The bond traded at $1,025 per $1,000 bond.
C. The market rate of interest is 2.5%.
D. The bonds were retired at $1,025 each.
E. The market rate of interest is 2 ½ % above the contract rate.

2. The payment pattern for an installment note that promises accrued interest plus equal amounts of
principal includes:

A. Decreasing total payments.

B. Decreasing accrued interest.
C. Constant principal payments.
D. Both A and B.
E. All of the above.

3. An advantage of bond financing is:

A. Bonds do not affect owners' control.

B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. All of the above.

4. A discount on bonds payable:

A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.

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Problem SHOW ALL WORK !!!!!!
On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and
pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is
. 6%. Compute the price of the bonds on their issue date. The following information is taken from present
value tables:

PV of Principal = $300,000 x 0.7441 = $223,230

PV of Coupon Payment = $300,000 x 8% x 6/12 x 8.5302 = $102,362
Price of Bond = $223,230 + $102,362 = $325,592

Problem #1
A corporation had stockholders' equity on January 1 as follows: Common Stock, $5 par value, 1,000,000
shares authorized, 500,000 shares issued; Contributed Capital in Excess of Par Value, Common Stock,
$1,000,000; Retained Earnings, $3,000,000. Prepare journal entries to record the following transactions:

Feb. 15
Debit. Retained Earnings $150,000 (500,000 shares x 5% x $6)
Credit. Common Stock Dividend Distributable $125,000 (500,000 shares x 5% x $5)
Credit. Contributed Capital in Excess of Par Value $25,000 (500,000 shares x 5% x $1)

March 1
No Entry

March 20
Debit. Common Stock Dividend Distributable $125,000
Credit. Common Stock $125,000

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Problem #2
On January 1, 2007, a company issued 10-year, 10% bonds payable with a par value of $500,000, and
received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The
bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for
amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1,
2007.

Discount = $500,000 - $442,647 = $57,353

Semi- Annual Amortization = $57,353 / (10 years x 2) = $2,867.65

Journal Entry (July 1)

Debit. Interest Expense $27,867.65 ($25,000 + $2,867.65)
Credit. Cash $25,000 ($500,000 x 10% x 6/12)
Credit. Discount on Bonds Payable $2,867.65