Question

1. On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond is:

• Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.

• Debit Cash $312,177; credit Bonds Payable $312,177.

• Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.

• Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.

• Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.

2.

During August, Boxer Company sells $356,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 5% of the selling price. The warranty liability account has a credit balance of $12,800 before adjustment. Customers returned merchandise for warranty repairs during the month that used $9,400 in parts for repairs. The entry to record the estimated warranty expense for the month is:

Multiple Choice

• Debit Warranty Expense $14,400; credit Estimated Warranty Liability $14,400.

• Debit Estimated Warranty Liability $17,800; credit Warranty Expense $17,800.

• Debit Warranty Expense $5,000; credit Estimated Warranty Liability $5,000.

• Debit Estimated Warranty Liability $9,400; credit Warranty Expense $9,400.

• Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800.

Answer 1

1. The correct answer is C "Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000"

2. The correct answer is E "Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800"

The estimated warranty liability is calculated on the basis of the credit sales of the year and percentage estimated. Here, the credit sales of the year is $ 356,000 and the estimated percentage is 5 % of credit sales. Thus, estimated warranty liability is = 356,000 x 5% = 17,800