Quiz #5 for Bonds The following information pertains to the next seven questions. On January 1, 20X1, De Anza Corporation issued a $5,000 face value bond that sold for 90. The bond carried a five-year term and paid 10 percent annual interest. The company used the proceeds from the bond issue to buy a nondepreciable asset. The asset was used to earn $600 of cash revenue per year and was sold at the end of the 5th year for $4,200 cash. 1. The carrying value of the bond liability on January 1,20X , would be: $4,600. $4,500. ss,000. $4,000. a. isswe ,c. d. 2. The amount of interest expense appearing on the December 31, 20X1, income statement would be: a. $450 b. $400. . c. $500. $600. 3. Interest expense appearing on the income statement over the life of the bond would: increase by $100 each year a. b. decrease by $100 each year. C stay the same each year. equal the stated rate of interest. 4. The carrying value of the bond liability on December 31, 20x5 would be: a. $4,500. $5,000. c. $4,900. d. $4,600. 5. The sale of the asset on December 31,20X5, would increase retained earnings by $300. increase equity by $700. reduce net income by $300. have no effect on retained earnings. a. b. 6. The total amount of liability associated with the bond issue would increase each year as a result of the amortization of the discount. decrease each year as a result of the amortization of the discount. stay the same each year. always be equal to the face value of the bond payable. a c. d.
Answer to Question 1.
Option b i.e. $4,500 is Correct.
Carrying Value, January 1, 20X1 = Issue Price of Bond
Carrying Value, January 1, 20X1 = $5,000 * 0.90
Carrying Value, January 1, 20X1 = $4,500
Answer to Question 2.
Option d i.e. $600 is Correct.
Interest Expenses, December 31, 20X1 = Interest payable on Bonds for the year + Discount amortized
Discount on Bonds = $5,000 * 0.10 = $500
Discount amortized = $500 / 5 = $100
Interest Expenses, December 31, 20X1 = ($5,000 * 10%) + $100
Interest Expenses, December 31, 20X1 = $500 + $100
Interest Expenses, December 31, 20X1 =$600
Answer to Question 3.
Option c i.e. Stay the same each expense is Correct.
Each year Interest expenses over the life of bond will remains same i.e. sum total of Interest to be paid and Discount amortized.
Answer to Question 4.
Option b i.e. $5,000 is Correct.
Carrying Value, December 31, 20X5 = Carrying Value, January 1, 20X1 + Discount amortized in 5 years
Discount amortized in 5 years = Discount to be amortized each year * 5
Discount on Bonds = $5,000 * 0.10 = $500
Discount to be amortized each year = $500 / 5 = $100
Discount amortized in 5 years = $100 * 5 = $500
Carrying Value, December 31, 20X5 = $4,500 + $500
Carrying Value, December 31, 20X5 = $5,000
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