On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104, resulting in a 4% premium. They had a 20-year term and a stated rate of Interest of 7% payable in cash on December 31 of each year. The effective rate of Interest was6.633%. Assuming Residence uses the effective interest rate method, the Journal entry necessary to recognize Interest expense on December 31, Year 1 IsMultiple ChoiceAccount TitleInterest ExpensePremium on Bonds PayableCashAccount TitleInterest ExpensePremium on Bonds PayableCashAccount TitleInterest ExpensePremium on Bonds PayableCashAccount TitleInterest ExpenseCashDebit3,44951Debit3,34951Debit3,551Debit3,500Credit3,500Credit3,400Credit513,500Credit3,500 The following Information is drawn from the income statements of East Company and West Company.Income before interest and taxes (EBIT)Interest expenseIncome before taxesIncome tax expense for East $48,000 x 0.30Income tax expense for West $40,000 x 0.30Net IncomeAll other things being equal,Multiple ChoiceEast$ 60,000(12,000)48,000(14,400)$ 33,600West$ 40,000(10,000)40,000(12,000)$ 28,000East Company is more likely to be able to make its legally required Interest payments than West Company.East Company is less likely to be able to make its legally required Interest payments than West Company.The answer cannot be determined using the Information provided.East Company and West Company are equally able to make their legally required interest payments.

Journal entry is the first stage of accounting process. Journal entry used to record business…

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104, resulting in a 4% premium. They had a 20-year term and a stated rate of interest of 7% payable in cash on December 31 of each year. The effective rate of Interest 5.633%. Assuming Residence uses the effective Interest rate method, the journal entry necessary to recognize Interest expense on December 31, Year 1 is Multiple Choice Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Cash Debit 3,449 51 Debit 3,349 51 Debit 3,551 Debit 3,500 Credit 3,500 Credit 3,400 Credit 51 3,500 Credit 3,500

On January 1, Year 1 Residence Company issued bonds with a $50,000 face value. The bonds were issued at 104, resulting in a 4% premium. They had a 20-year term and a stated rate of interest of 7% payable in cash on December 31 of each year. The effective rate of Interest 5.633%. Assuming Residence uses the effective Interest rate method, the journal entry necessary to recognize Interest expense on December 31, Year 1 is Multiple Choice Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Premium on Bonds Payable Cash Account Title Interest Expense Cash Debit 3,449 51 Debit 3,349 51 Debit 3,551 Debit 3,500 Credit 3,500 Credit 3,400 Credit 51 3,500 Credit 3,500

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter9: Long-term Liabilities

Section: Chapter Questions

Problem 7MCQ

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