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Straight Line Amortization of Bond Premium or Discount quiz #1

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  • How is the straight-line method used to amortize a bond premium, and what is the effect on interest expense each period?
    The straight-line method amortizes a bond premium by dividing the total premium by the number of interest periods, resulting in equal amounts each period. This amortization reduces the interest expense each period, as the premium is debited and interest expense is the plug in the journal entry.
  • What journal entry is made when a bond is issued at a discount, and how is the discount amortized using the straight-line method?
    When a bond is issued at a discount, the journal entry debits cash for the amount received, debits discount on bonds payable for the discount amount, and credits bonds payable for the face value. The discount is amortized by dividing the total discount by the number of interest periods, and each period, a portion is credited to reduce the discount and increase interest expense.
  • What determines whether a bond is issued at face value, a discount, or a premium?
    A bond is issued at face value if the stated rate equals the market rate, at a discount if the stated rate is less than the market rate, and at a premium if the stated rate is greater than the market rate.
  • How do you calculate the cash received when a bond is issued at a premium?
    Multiply the face value of the bond by the premium percentage (e.g., \$50,000 × 1.08 for 108%), which gives the total cash received.
  • What is the journal entry for issuing a bond at a premium?
    Debit cash for the amount received, credit bonds payable for the face value, and credit premium on bonds payable for the premium amount.
  • How is the straight-line method used to amortize a bond premium, and what is the effect on interest expense each period?
    The straight-line method amortizes a bond premium by dividing the total premium by the number of interest periods, resulting in equal amounts each period. This amortization reduces the interest expense each period, as the premium is debited and interest expense is the plug in the journal entry.
  • What is the formula for calculating the amount of premium or discount amortized each period using the straight-line method?
    Divide the total bond premium or discount by the total number of interest periods to get the amount amortized per period.
  • What journal entry is made when a bond is issued at a discount, and how is the discount amortized using the straight-line method?
    When a bond is issued at a discount, the journal entry debits cash for the amount received, debits discount on bonds payable for the discount amount, and credits bonds payable for the face value. The discount is amortized by dividing the total discount by the number of interest periods, and each period, a portion is credited to reduce the discount and increase interest expense.
  • How does amortizing a bond discount affect the carrying value of the bond over time?
    Amortizing a bond discount increases the carrying value of the bond each period, as the discount is reduced and the liability approaches the face value at maturity.
  • How is the cash interest payment calculated for bonds with semiannual interest payments?
    Multiply the face value by the stated rate, then divide by 2 to account for the semiannual period.