Bonds Practice problem
1). Moore Company issued $100,000 bonds. The stated rate of interest was 6% and the market rate
7%. Which of the following statements is true?
A.
The bonds were issued at a premium.
B.
The bonds were issued at a discount.
C.
Annual interest expense will be $7,000.
D.
Moore Company cannot issue bonds if the market rate is higher than the stated
rate.
2). On January 1, 2012, Stone Corporation sold a 10-year, $1,000,000, 8% bond. The interest is
payable annually each December 31. The issue price was $1,070,000 based on a 7% market rate.
Assuming effective-interest amortization is used, the interest expense on the 2013 income
statement would be (to the nearest dollar)
A.
B.
C.
D.
$ 74,543.
$ 74,900.
$ 80,000.
$ 89,600.
3). Amortization Inc. issued $10,000, 10%, 10-year bonds for an issue price of
$10,777 . Amortization uses the effective interest method to amortize any
premium or discount on issued bonds. Assuming a market rate of interest of 8%,
what amount of premium should be amortized for the first year of the bond’s
life?
A. $ 78
B. $ 138
C. $ 862
D. $1,000
4). On January 1, your company issues a 5-year bond with a face value of $10,000
and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the
bond was $10,866. Using the effective interest method of amortization and rounding
to the nearest dollar, the interest expense in the first year ended December 31 would
be:
A. $700.
B. $543.
C. $667.
D. $759.
5). If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual
interest rate of 8% would issue at an amount:
A. less than face value.
B. equal to the face value.
C. greater than face value.
D. that cannot be determined.