 In this presentation, we will take a look at multiple choice questions related to bonds, notes payable, and long-term liabilities. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. First question, a discount on bonds payable, a, happens when the contract rate is less than the market rate, b, happens when the contract rate is more than the market rate, c, increases the bond payable account, d, decreases the bonds payable account, or e, does not happen. Okay, so let's go through this again, process of elimination. A discount on bonds payable. Now note what we have here is we've got two sets here, which are very similar with one word difference. So you would think it'd be between a and b or c and d because we got these two kind of parallel wording. So a says a discount on the bonds payable, let's go through this again, a discount on bonds payable, a, happens when the contract rate is less than the market rate, while b says happens when the contract rate is more than the market rate. So you would think, hmm, if there was nothing else that looked really similar, it'd probably be between those two. Let's look at the rest of them, I'll leave those for now, c says increases bonds payable account and d says decreases bonds payable account. Now these two are actually not correct because the discount could, I mean, we're talking about between a discount and a premium could increase or decrease the carrying amount of the bond, but it doesn't increase or decrease the payable account, meaning when we put the thing on the books, if it's a thousand dollar bond, it's a thousand dollar bond, if it's issued at a premium or a discount doesn't change the thousand dollar bond, what it does changes the discount or premium and the carrying amount. So these two are more proper, these two are not right, c and d, and then we can probably narrow it down to a or b because of course those are very similar in language and e says does not happen, which also sounds like not a right term, like they just kind of threw that in there. So we're left with a and b. So if we go through this again, a discount on bonds payable, either a happens when the contract rate is less than the market rate or b happens when the contract rate is more than the market rate and I would go through a little scenario and just write this down just so you don't get it backwards. If you have, you know, the $1,000 bond and say it's 10% bond, that's what's on the bond. That's the contract rate on the bond. Then you have the market rate. You're trying to get $1,000 from somebody else from the market, you're trying to sell these bonds to get money for them. And if the market, if someone else says, hey, the market rate is 12%, well, then they're not going to give us a thousand dollars because we're only going to be paying them 10%. They're only going to get a 10% return when they could get 12% elsewhere. So they're not going to give us that because the market rate is higher unless we say, hey, you know, we'll accept less than $1,000 for this. We'll pay you back $1,000 plus 10%. We know 10% is lower than the 12%. You can get elsewhere. Therefore, you pay us something under the $1,000. We'll give it to you at a discount. If on the other hand, the market rate was only like, you know, 5%, then the investor would definitely want to, you know, buy the bond for, you know, give the $1,000 for the 10%. But now we would then say, no, well, we know you can only get 5% elsewhere and this is a 10% bond, you know, we're going to be paying you 10%, which is way over what you can find someplace else and therefore we would issue it at a premium, meaning we want more money than the 1,000. So in this case, it says we're looking for a discount. So that's going to be a happens when the contract rate is less than the market rate. So we'll issue it at a discount. So it's going to be a fine lancer, a discount happen, a discount on bonds payable a happens when the contract rate is less than the market rate. Next question, the effective, the effective interest amortization method a allocates bond interest expense over the bonds life using different interest rates be allocates bond interest expense over the bonds life using a constant interest rate D allocates bond interest expense using the contract rate or E is not the preferred method. Okay, let's go through this again using the process of elimination. The effective interest amortization method a allocates bond interest expense over the bonds life using different interest rates. That seems unlikely. It doesn't seem logical to do that. Right. It doesn't seem reasonable to use different rates, unless we're always trying to say what the market rate is, but I don't think it's a B says allocates bond interest expense over the bonds useful life using a constant interest rate. That sounds reasonable. D says allocates bond interest expense using the contract rate and that sounds could be so I'm going to take D as well and then E says is not the preferred method and that's actually not the case. And there's the effective method and then there's just a straight line method and actually the effective method is the preferred method and we should just kind of know that. So we're going to say the effective method is the one we don't really want to use because it's more difficult, but it's the preferred method because it matches better. It lines up with a cruel principles better. So we're left with B and D. If we go through this again, the effective interest amortization method either B allocates bond interest expense over the bonds life using a constant interest rate or D allocates bond interest expense using the contract rate. Now if you think about those two, note that B can be true without D being true. However, D can't really be true without B being true. In other words, B if we allocate the bond interest expense over the bonds life using a constant rate, meaning we're going to use the same interest rate over the life, that could be true whether or not that constant rate is the contract rate. On the other hand, D says allocate bond interest expense using the contract rate. The contract rate is a constant rate. It's just now we've specified a constant rate, the contract rate. So they can't both be true and D can't be true without B. However, B can be true without D. So that would leave us with B kind of has to be the right answer. And note what's happening here is we don't use the contract rate. We're trying to use a constant rate, but it's going to be the market rate. So that's why D is not the right answer. So we're left with B. So the effective interest amortization method B allocates bond interest expense over the bonds life using the constant interest rate using A constant interest rate.