1. Bonds Payable has a balance of $900,000 and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?

1. $1,200 gain
2. $17,000 gain
3. $1,200 loss
4. $17,000 loss

2. Which of the following is not an advantage of issuing bonds instead of common stock?
1. Income to common shareholders may increase.
2. Stockholder control is not affected.
3. Earnings per share on common stock may be lower.
4. Tax savings result

3. A $300,000 bond was redeemed at 103 when the carrying value of the bond was $315,000. The entry to record the redemption would include a
1. gain on bond redemption of $9,000.
2. loss on bond redemption of $6,000.
3. loss on bond redemption of $9,000.
4. gain on bond redemption of $6,000.

4. The Merchant Company issued 10-year bonds on January 1, 2009. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2009, Merchant should record interest expense (round to the nearest dollar) of
1. $7,500
2. $8,790
3. $14,065
4. $7,032

5. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will:
1. increase over the term of the note.
2. equal the interest rate on the note times the carrying amount of the note at the beginning of the period.
3. remain constant over the term of the note.
4. equal the interest rate on the note times the face amount.

1. To calculate the amount of gain or loss on redemption, we need to determine the carrying value of the bonds and compare it with the redemption price.

Carrying Value = Bonds Payable - Premium on Bonds Payable
Carrying Value = $900,000 - $10,000 = $890,000

Redemption Price = Carrying Value x (100% + Redemption Premium)
Redemption Price = $890,000 x (100% + 3%)
Redemption Price = $890,000 x 1.03
Redemption Price = $917,700

The redemption price is greater than the carrying value, indicating a gain on redemption.

Gain on Redemption = Redemption Price - Carrying Value
Gain on Redemption = $917,700 - $890,000
Gain on Redemption = $27,700

Therefore, the amount of gain on redemption is $27,700. None of the given options are correct.

2. The advantage of issuing bonds instead of common stock is that stockholder control is not affected. Therefore, option 2 is not an advantage of issuing bonds instead of common stock.

3. The entry to record the redemption would include a loss on bond redemption. Since the redemption price is greater than the carrying value, there will be a loss.

Loss on Bond Redemption = Redemption Price - Carrying Value
Loss on Bond Redemption = $315,000 - $300,000
Loss on Bond Redemption = $15,000

Therefore, the entry to record the redemption would include a loss on bond redemption of $15,000. None of the given options are correct.

4. To calculate the interest expense on July 1, 2009, we need to use the effective-interest method to amortize the bond discount.

First, calculate the annual interest payment:
Annual Interest Payment = Face Value x Interest Rate
Annual Interest Payment = $100,000 x 15%
Annual Interest Payment = $15,000

Next, calculate the bond interest expense for the period:
Bond Interest Expense = Carrying Value x Effective Interest Rate
Carrying Value = Bond Selling Price - Bond Discount
Carrying Value = $117,205 - ($100,000 - $117,205)
Carrying Value = $117,205 - $17,205
Carrying Value = $100,000

Bond Interest Expense = $100,000 x (12% ÷ 2)
Bond Interest Expense = $100,000 x 6%
Bond Interest Expense = $6,000

Therefore, on July 1, 2009, Merchant should record interest expense of $6,000.

5. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will remain constant over the term of the note. Option 3 is correct.

To answer these questions, we need to understand the concepts of bonds payable, premium/discount on bonds payable, bond redemption, and interest expense calculation. I will explain each concept briefly before providing the answers to the questions.

1. Bonds Payable: Bonds payable is a long-term liability representing the amount borrowed by a company through the issuance of bonds.

2. Premium on Bonds Payable: When bonds are issued at a price higher than their face value, the excess amount is recorded as a premium on bonds payable. The premium is amortized over the life of the bonds and reduces the interest expense.

3. Bond Redemption: Bond redemption refers to the repayment or premature retirement of a bond before its maturity date. When bonds are redeemed, the issuing company may realize a gain or loss depending on the difference between the redemption price and the carrying value of the bonds.

4. Effective-Interest Method: The effective-interest method is a way of amortizing bond discounts and premiums over the life of the bonds. It involves multiplying the carrying value of the bonds at the beginning of each period by the market interest rate to determine the interest expense.

Now, let's determine the answers to the questions:

1. To calculate the gain or loss on redemption, we need to compare the redemption price with the carrying value of the bonds. The redemption price is calculated as 103% of the face value ($900,000 x 103% = $927,000). The carrying value includes both the Bonds Payable ($900,000) and the Premium on Bonds Payable ($10,000), which is a total of $910,000. Therefore, the amount of gain or loss on redemption is $927,000 - $910,000 = $17,000. The correct answer is 2. $17,000 gain.

2. The advantage of issuing bonds instead of common stock include income to common shareholders may increase, stockholder control is not affected, and tax savings result. On the other hand, issuing bonds may result in lower earnings per share on common stock. Therefore, the correct answer is 3. Earnings per share on common stock may be lower.

3. The gain or loss on bond redemption is calculated as the difference between the redemption price and the carrying value of the bond. In this case, the redemption price is $300,000 x 103% = $309,000, and the carrying value is $315,000. The difference is $309,000 - $315,000 = -$6,000. Since it is a loss, the correct answer is 2. Loss on bond redemption of $6,000.

4. To calculate the interest expense, we need to use the effective-interest method. The carrying value of the bonds at the beginning of the period is $117,205, the market interest rate is 12%, and the face value is $100,000. The interest expense can be calculated as $117,205 x 12% = $14,065. The correct answer is 3. $14,065.

5. When a company borrows money as an installment note, the interest portion of each annual payment typically remains constant over the term of the note. It is usually calculated based on the interest rate on the note multiplied by the carrying amount of the note at the beginning of the period. Therefore, the correct answer is 2. Equal the interest rate on the note times the carrying amount of the note at the beginning of the period.

I hope this explanation helps! Let me know if you have any further questions.

1200 gain