Discount on Bonds

Concept: Issuing Bonds at a Discount

10m

Concept: Discount Bonds: Interest Expense, Amortization, and Cash

10m

Concept: Discount Bonds: Interest Expense, Amortization, and Interest Payable

5m

Concept: Discount Bonds: Repaying Principal at Maturity

3m

Problem: In 2014, ABC Company issued $100,000, 10%, bonds while the market interest rate was 12%. The bonds mature in the current year. The amount of principal that ABC Company will repay in the current year is equal to:

3m

Discount on Bonds Additional Practice Problems

Mega Corp. sold $25,000,000 of its 9% bonds at par on January 1, 2012. On December 31, 2012, the bonds were trading on the bond exchange at 98.5. Since the issue date, the market rate of interest on similar bonds has:

A. Increased

B. Decreased

C. Stayed the same

D. None of the above

Watch Solution

Consider the following information:

Assume the bonds are retired early at the call price. Determine the loss on the bond call.

A) $40,000

B) $100,000

C) $60,000

D) $50,000

Watch Solution

Bonds with a par value of $500,000 are sold at discount for $481,000. Other than the Cash account, what other account is debited.

A) Premium on Bonds Payable

B) Discount on Bonds Payable

C) Bonds Payable

D) Interest Expense

Watch Solution

A company issues a $1,000,000, 6%, 10 year bond when the market rate was 8%.  The bond will be issued at:

a. par

b. premium

c. discount

d. this bond will not be issued

Watch Solution

Which of the following statements are not correct regarding bonds sold at a discount?

A.The carrying amount gets larger each year.

B.The Discount on Bonds Payable account gets smaller each year.

C.At maturity, the face value and carrying value will be equal.

D.The balance of Bonds Payable account will get larger each year.

E.At maturity, the balance of the Discount on Bonds Payable will be zero.

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Gomez Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 98. The journal entry to record the issuance will show a

a. debit to Cash of $1,000,000.

b. credit to Discount on Bonds Payable for $20,000.

c. credit to Bonds Payable for $980,000.

d. debit to Cash for $980,000.

Watch Solution

Jack Henry Corporation issued $100,000 worth of 8% bonds quoted at 96 when the market rate of interest was 10%. Kraft Corporation issued $100,000 worth of 8% bonds when the market rate of interest was 8%. Both bonds mature in 5 years. Which of the following statements are true?

a. Jack Henry’s bonds result in less interest expense than Kraft’s bonds.

b. Jack Henry’s bonds result in greater interest expense than Kraft’s bonds.

c. Jack Henry’s pays its bondholders a greater amount of cash over the term of the bond as compared to Kraft’s bondholders.

d. Jack Henry’s pays its bondholders a reduced amount of cash over the term of the bond as compared to Kraft’s bondholders.

Watch Solution