CPA Quiz: Bonds Issued At Par Discount Premium
11 questions · exam conditions
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Bonds Issued At Par Discount PremiumQuestion 1 of 11

A for-profit technology company issued $500,000 of 8% bonds on January 1, 20X1, at 105 when the market interest rate was 6%. The bonds pay cash interest annually each December 31 and mature in 10 years. In accordance with FASB ASC, which journal entry should the issuer record at issuance to recognize the bonds issued at a premium?

Dr Cash $525,000; Cr Bonds payable $500,000; Cr Premium on bonds payable $25,000
Dr Cash $500,000; Dr Discount on bonds payable $25,000; Cr Bonds payable $525,000
Dr Cash $525,000; Cr Bonds payable $525,000
Dr Cash $500,000; Cr Bonds payable $500,000; Cr Premium on bonds payable $25,000
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CPA Quiz: Bonds Issued At Par Discount Premium

Practice Bonds Issued At Par Discount Premium in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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.

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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.

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Question 1

A for-profit technology company issued $500,000 of 8% bonds on January 1, 20X1, at 105 when the market interest rate was 6%. The bonds pay cash interest annually each December 31 and mature in 10 years. In accordance with FASB ASC, which journal entry should the issuer record at issuance to recognize the bonds issued at a premium?

  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 525,000cash(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

A for-profit construction company issued $1,000,000 of 6% bonds on January 1, 20X1, at 97 when the market interest rate was 7%. The bonds pay cash interest annually each December 31 and mature in 5 years. In accordance with FASB ASC, what is the correct journal entry at issuance to record the bonds issued at a discount?

  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 970,000cash(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

A for-profit pharmaceutical company issued $500,000 of 8% bonds on January 1, 20X1, at 105 when the market interest rate was 6%. The bonds pay cash interest annually each December 31 and mature in 10 years. Under the effective interest method in accordance with FASB ASC, what amount of bond premium amortization should be recognized for the year ended December 31, 20X1?

  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(40,000 (500,000 × 8%) while interest expense is 31,500(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

A for-profit manufacturing company issued $1,000,000 of 6% bonds (stated rate) on January 1, 20X1, at 97 when the market interest rate was 7%. The bonds pay cash interest annually each December 31 and mature in 5 years. Using the effective interest method in accordance with FASB ASC, what amount of interest expense should the issuer recognize for the year ended December 31, 20X1?

  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(970,000 (1,000,000 × 0.97), and the market rate was 7%. The correct interest expense for year 1 is 67,900(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

A for-profit services company issued $500,000 of 8% bonds on January 1, 20X1, at 105 when the market interest rate was 6%. The bonds pay cash interest annually each December 31 and mature in 10 years. Using the effective interest method under FASB ASC, what interest expense should the issuer recognize for the year ended December 31, 20X1?

  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(525,000 (500,000 × 1.05), and the market rate was 6%. Interest expense for year 1 is 31,500(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

A for-profit energy company issued $750,000 of 7% bonds on January 1, 20X1, at par because the market interest rate equaled the stated rate. The bonds pay cash interest annually each December 31 and mature in 6 years. Under FASB ASC, which journal entry should the issuer record on December 31, 20X1, to recognize the first year's interest (assume no bond issuance costs)?

  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(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

A for-profit logistics company issued $750,000 of 7% bonds on January 1, 20X1, at par because the market interest rate equaled the stated rate. The bonds pay cash interest annually each December 31 and mature in 6 years. Under FASB ASC, what financial statement impact does issuing bonds at par have on the issuer's balance sheet at issuance?

  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

Horizon Industries issued convertible bonds with the following terms: $1,200,000 face value, 5% stated rate, 8-year maturity, convertible into 40,000 shares of $10 par common stock. The bonds were issued when the market rate for similar non-convertible bonds was 7%. On the issue date, Horizon's common stock was trading at $25 per share.

Using the book value method, what would be the impact on stockholders' equity if all bonds are converted when the carrying amount is $1,150,000?

  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

Sterling Corp. issued $900,000 of bonds at 98.5 on March 1, 2024. The bonds mature in 10 years and pay 6% interest annually each March 1. Sterling's fiscal year ends December 31, and the company uses straight-line amortization. What is the interest expense for the year ended December 31, 2024?

  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

Delta Industries issued $1,000,000 of 10-year, 5% bonds when the market rate was 7%. The bonds pay interest annually on December 31. Three years after issuance, when the carrying amount was $891,450, Delta retired the entire bond issue by paying bondholders $920,000 in cash. How should Delta account for this bond retirement?

  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.Theremainingdiscount(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

Apex Manufacturing issued $1,500,000 of 8%, 6-year bonds on July 1, 2024, when the market interest rate was 10%. The bonds pay interest semi-annually on January 1 and July 1. Apex's fiscal year ends on December 31, and the company uses the effective interest method for amortization.

What amount of interest expense should Apex record for the six-month period ending December 31, 2024?

  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.ChoiceA(68,216. Choice A (60,000) is the cash payment (1,500,000×41,500,000 × 4%). Choice C (75,000) incorrectly applies the market rate to face value. Choice D represents a calculation error.