CPA Financial Accounting and Reporting (FAR) : Bonds Payable & Long-term Debt
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Bonds Payable & Long Term Debt
On January 1, Year 1, a $100,000 bond with a 5% annual stated rate is issued at 94 to yield an effective rate of 7%. Interest payments are made each December 31. If the effective interest method is applied, how much interest expense is recognized in Year 1?
$6,580
$7,000
$5,000
$4,700
$6,580
Interest expense is calculated by taking the beginning period carrying value by the yield rate. A $100K bond issued at 94 has a beginning carrying value of $94K. Thus, the interest expense for Year 1 is $94K x 7%.
Example Question #2 : Bonds Payable & Long Term Debt
On January 2, Year 1, Beanstock Corporation offers to sell a $100,000 bond coming due in 10 years. The bond pays interest of 4% at the end of each year. Beanstock finds a buyer who wants to earn 7% each year, and agrees to the 7% rate at a sales price of $80,000. On the December 31, Year 1 balance sheet, what amount is reported for the liability of this bond?
$85,600
$83,200
$96,000
$93,000
$85,600
The beginning carrying value of the bond is its purchase price of $80K. Interest expense for Year 1 is the carrying value of $80K x the yield rate of 7% = $5,600. The carrying value of the bond increases by the amount of the interest expense to $85,600.
Example Question #1 : Bonds Payable & Long Term Debt
A $100,000 bond payable is issued on July 1, Year 2, at 106. The bond comes due in exactly 5 years. The bond pays interest of 10% per year with payments every January 1st and July 1st. If the straight-line method is used, what amount should be reported for the liability as of December 31, Year 2?
$104,800
$104,000
$105,400
$100,000
$105,400
Under the straight line method, the difference between the carrying value and the face value is amortized evenly over the life of the bond. Here, the premium of $6K is amortized evenly over 5 years, at $1,200 per year. 6 months have gone by since the sale of the bond, so the carrying value of $106K is reduced by $600 ($1,200 x 6/12 months).
Example Question #4 : Bonds Payable & Long Term Debt
Of the following which is a cost associated with exit and disposal activities?
Benefits related to voluntary employee termination
Costs associated with the retirement of a fixed asset
Costs to terminate a capital lease
Costs to relocate employees
Costs to relocate employees
Costs to relocate employees are costs associated with exit and disposal activities.
Example Question #2 : Bonds Payable & Long Term Debt
Which of the following is generally associated with payables classified as A/P? A) Periodic payment of interest B) Secured by collateral
B
A
Neither
Both
Neither
Neither are generally associated with payables classified as A/P. A liability that is secured by collateral should be classified as a loan payable.
Example Question #1 : Bonds Payable & Long Term Debt
The process of accounting for a discount or premium on bonds until their maturity is known as:
Amortization
Depletion
None of the answer choices are correct
Depreciation
Amortization
Bonds will likely demonstrate issuance at a discount or premium, and the process of returning the bond to its original value is known as amortization.
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