CPA Financial Accounting and Reporting Far Quiz: Bonds Issued At Par Discount Premium

What this quiz covers

This quiz focuses on Bonds Issued At Par Discount Premium, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Dr Cash $525,000; Cr Bonds payable$500,000; Cr Premium on bonds payable $25,000 (correct answer)
2. Dr Cash $500,000; Dr Discount on bonds payable$25,000; Cr Bonds payable $525,000
3. Dr Cash $525,000; Cr Bonds payable$525,000
4. Dr Cash $500,000; Cr Bonds payable$500,000; Cr Premium on bonds payable $25,000

Explanation: FASB ASC 470-10 requires bonds issued at a premium to be recorded with the premium shown as a separate credit balance that increases the bond's carrying amount. The company received $525,000 cash ($500,000 × 1.05) and must credit Bonds Payable for the face value of $500,000 and Premium on Bonds Payable for$25,000. Option B incorrectly treats this as a discount situation, option C fails to separate the premium from the bond liability, and option D shows an incorrect cash amount. The premium represents the excess amount investors paid above par value due to the bond's attractive stated rate relative to market rates. Proper presentation requires showing the face value and premium separately to maintain transparency about the bond's terms and the total obligation.

Question 2

1. Dr Cash $970,000; Cr Bonds payable$970,000
2. Dr Cash $970,000; Dr Discount on bonds payable$30,000; Cr Bonds payable $1,000,000 (correct answer)
3. Dr Cash $1,000,000; Cr Bonds payable$970,000; Cr Premium on bonds payable $30,000
4. Dr Cash $970,000; Cr Bonds payable$1,000,000; Cr Discount on bonds payable $30,000

Explanation: FASB ASC 470-10 requires bonds issued at a discount to be recorded with the discount shown as a debit balance that reduces the bond's net carrying amount. The company received $970,000 cash ($1,000,000 × 0.97) and must debit Cash for $970,000, debit Discount on Bonds Payable for$30,000, and credit Bonds Payable for the face value of $1,000,000. Option A fails to record the discount separately, option C incorrectly treats this as a premium situation, and option D incorrectly shows the discount as a credit. The discount represents the additional interest cost beyond stated interest that compensates investors for accepting a below-market stated rate. Proper accounting requires showing the face value and discount separately to maintain transparency about the bond's terms and total cost.

Question 3

1. $8,500 (cash interest$40,000 minus interest expense $31,500) (correct answer)
2. $2,500 (premium amortized straight-line over 10 years)
3. $10,000 (premium amortized straight-line over 5 years)
4. $0 (premium is not amortized when the effective interest method is used)

Explanation: Under FASB ASC 835-30's effective interest method, premium amortization equals the difference between cash interest paid and interest expense recognized. Cash interest is $40,000 ($500,000 × 8%) while interest expense is $31,500 ($525,000 × 6%), resulting in premium amortization of $8,500. Option B incorrectly uses straight-line calculation, option C uses an incorrect time period, and option D incorrectly states that premiums are not amortized under the effective interest method. Premium amortization reduces the bond's carrying amount and represents the portion of cash interest that exceeds the true borrowing cost. The effective interest method ensures that each period's interest expense reflects the actual cost of borrowing based on the carrying amount and market rate.

Question 4

1. $58,000 (based on the carrying amount at issuance multiplied by the stated rate)
2. $60,000 (cash interest paid based on par value multiplied by the stated rate)
3. $67,900 (based on the carrying amount at issuance multiplied by the market rate) (correct answer)
4. $70,000 (par value multiplied by the market rate)

Explanation: Under FASB ASC 835-30, when bonds are issued at a discount, interest expense is calculated using the effective interest method by multiplying the carrying amount by the market (effective) interest rate. The bonds were issued at 97, creating a carrying amount of $970,000 ($1,000,000 × 0.97), and the market rate was 7%. The correct interest expense for year 1 is $67,900 ($970,000 × 7%). Option A incorrectly uses the stated rate on the carrying amount, option B represents only the cash interest paid, and option D incorrectly applies the market rate to par value. The effective interest method ensures that interest expense reflects the true cost of borrowing, which includes both cash interest and discount amortization. When applying this method, always multiply the beginning carrying amount by the market rate at issuance to determine periodic interest expense.

Question 5

1. $40,000 (cash interest paid based on par value multiplied by the stated rate)
2. $31,500 (carrying amount at issuance multiplied by the market rate) (correct answer)
3. $30,000 (par value multiplied by the market rate)
4. $42,000 (carrying amount at issuance multiplied by the stated rate)

Explanation: Under FASB ASC 835-30's effective interest method, interest expense equals the carrying amount multiplied by the market rate at issuance. The bonds were issued at 105, creating an initial carrying amount of $525,000 ($500,000 × 1.05), and the market rate was 6%. Interest expense for year 1 is $31,500 ($525,000 × 6%). Option A represents only the cash interest payment, option C incorrectly uses par value instead of carrying amount, and option D incorrectly applies the stated rate to the carrying amount. The effective interest method ensures that interest expense reflects the true borrowing cost, which is lower than the cash payment when bonds are issued at a premium. This method systematically amortizes the premium by recognizing interest expense that is less than the cash interest paid.

Question 6

1. Dr Interest expense $52,500; Cr Cash$52,500 (correct answer)
2. Dr Interest expense $52,500; Cr Interest payable$52,500
3. Dr Interest expense $49,000; Cr Cash$49,000
4. Dr Cash $52,500; Cr Interest expense$52,500

Explanation: Under FASB ASC 835-30, bonds issued at par require straightforward interest accounting since there is no premium or discount to amortize. The annual interest payment equals $52,500 ($750,000 × 7%), which is both the cash payment and the interest expense. The correct entry debits Interest Expense and credits Cash for $52,500. Option B incorrectly uses Interest Payable instead of Cash for a payment actually made, option C uses an incorrect interest amount, and option D reverses the debit and credit. When bonds are issued at par, the stated rate equals the market rate, making interest accounting simple: interest expense equals cash interest paid. This represents the most straightforward bond accounting scenario with no amortization complications.

Question 7

1. Liabilities increase by $750,000 and assets increase by$750,000; no premium or discount is recognized (correct answer)
2. Liabilities increase by $750,000 and assets increase by$735,000; a discount is recognized for issuance costs
3. Liabilities increase by $750,000 and assets increase by$765,000; a premium is recognized because the market rate equals the stated rate
4. No balance sheet impact occurs until the first interest payment date

Explanation: Under FASB ASC 470-10, bonds issued at par (when the stated rate equals the market rate) are recorded at face value with no premium or discount. The company debits Cash and credits Bonds Payable for $750,000, increasing both assets and liabilities by the same amount. Option B incorrectly suggests a discount for issuance costs (which would be recorded separately), option C incorrectly creates a premium when rates are equal, and option D incorrectly delays balance sheet recognition. Bonds issued at par represent the simplest scenario where the stated interest rate perfectly matches market conditions. The balance sheet immediately reflects the cash received and the corresponding liability, with no need for premium or discount accounts that complicate subsequent accounting.

Question 8

1. Increase common stock by $400,000 and additional paid-in capital by$750,000 (correct answer)
2. Increase common stock by $400,000 and additional paid-in capital by$800,000
3. Increase common stock by $1,000,000 and additional paid-in capital by$150,000
4. Increase common stock by $1,200,000 and reduce additional paid-in capital by$50,000

Explanation: Under the book value method, the carrying amount of the bonds ($1,150,000) becomes the basis for the conversion. Common stock increases by the par value of shares issued: 40,000 shares ×$10 = $400,000. Additional paid-in capital increases by the remainder:$1,150,000 - $400,000 =$750,000. Choice B incorrectly uses $800,000 for APIC. Choice C uses incorrect amounts for both accounts. Choice D incorrectly uses face value instead of carrying amount.

Question 9

1. $54,000
2. $45,000
3. $46,125 (correct answer)
4. $55,125

Explanation: Issue price: $900,000 × 0.985 =$886,500. Discount: $900,000 -$886,500 = $13,500. Annual discount amortization:$13,500 ÷ 10 years = $1,350. Cash interest for 10 months (March 1 to December 31):$900,000 × 6% × (10/12) = $45,000. Discount amortization for 10 months:$1,350 × (10/12) = $1,125. Total interest expense:$45,000 + $1,125 =$46,125. Choice A uses full year cash interest. Choice B uses only cash interest for 10 months. Choice D incorrectly calculates the amortization.

Question 10

1. Record a loss on bond retirement of $108,550 and reduce the discount by$80,000
2. Record a loss on bond retirement of $28,550 and eliminate the remaining discount of$108,550 (correct answer)
3. Record a gain on bond retirement of $80,000 and eliminate the remaining discount of$108,550
4. Record a loss on bond retirement of $29,000 and reduce the discount by$79,000

Explanation: When bonds are retired before maturity, the gain or loss is calculated as the difference between the cash paid and the carrying amount. Loss = $920,000 -$891,450 = $28,550. The remaining discount ($1,000,000 - $891,450 =$108,550) must be eliminated from the books. Choice A incorrectly calculates the loss as the total discount remaining. Choice C incorrectly shows a gain when cash paid exceeds carrying amount. Choice D uses incorrect amounts for both the loss and discount elimination.

Question 11

1. $60,000
2. $68,216 (correct answer)
3. $75,000
4. $71,380

Explanation: The bonds were issued at a discount since the market rate (10%) exceeds the coupon rate (8%). Using 5% semi-annual market rate for 12 periods: Issue price = $1,364,318. For the first six months ending December 31, 2024, interest expense =$1,364,318 × 5% = $68,216. Choice A ($60,000) is the cash payment ($1,500,000 × 4$75,000) incorrectly applies the market rate to face value. Choice D represents a calculation error.