The following questions dealing with long-term liabilities are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
Questions 1 and 2 are based on the following information. On January 1, Matthew Company issued 7% term bonds with a face amount of $1,000,000 due in 8 years. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest rate of 6%.
1. The bonds were issued on January 1 at
a. a premium.
b. an amortized value.
c. book value.
d. a discount.
2. Assume the bonds were issued on January 1 for $1,062,809. Using the effective interest amortization method, Matthew Company recorded interest expense for the 6 months ended June 30 in the amount of
a. $35,000
b. $70,000
c. $63,769
d. $31,884
3. A bond issue sold at a premium is valued on the statement of financial position at the
a. maturity value.
b. maturity value plus the unamortized portion of the premium.
c. cost at the date of investment.
d. maturity value less the unamortized portion of the premium.