 In this presentation, we will take a look at the 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. Next question, the premium on bond payable account is A, a revenue account, B, a liability account, C, a contra liability account, D, a contra asset account, or E, an equity account. So if we go through this again, process of elimination, the premium on bond payable account is. So first, we might just want to get an idea of what a premium is. If we can think of the journal entry that creates the premium, that would be the easiest thing to do. It gives us a sense of what the premium is. That happens when we issue the bond. So say if we issued a bond for, we had a bond payable that we're going to issue, the payable is a thousand dollar bond, we're going to credit the bond. And then the question is, well, how do I get, we know we're going to get cash then when we issue the bond. So that would be the debit and it's very sloppy, but then we get cash. And the question is, if we get more than cash than the bond or less than the bond, well, what would result in a premium? If we got more cash than the bond, so 1,100, then we'd have to have a premium over here. And that means the premium must be a credit. So this would be the premium. So otherwise we'd have a discount, so a discount or a premium. You can kind of see that if you write out the original journal entry, I'm not a little bit neater than this, but if you write that out, so that would be the premium. So what is that premium? Well, it's linked to the bond in some way, it's linked to the bond, and the bond is something we're going to owe in the future, it's a liability. So just, you would think the premium being linked to the bond would be some type of liability. So if we go through this, then we're going to say, well, A says a revenue account, it's not revenue, a premium isn't revenue. Although you might think that because we got more money than the liability, but we didn't really sell anything, we're financing here. So the premium is going to be allocated to expense. So it's not revenue. B says a liability account, and then C says a contra liability. So those are similar. I would think B and C would be the two that stand out. D says a contra asset account, and there's nothing really about an asset that doesn't really make sense, it would be an asset, so and E says an equity account. And again, it's not equity, it's part of the liability. It will be an expense, interest expense, which is part of the income statement, which is kind of part of equity, but no. So we're left with B and C. So the premium on bonds payable account is either B a liability account or C a contra liability account. Now, note that the C is kind of a subset of B. In other words, if something is a contra liability account, it's also a liability. It's just a specific type of liability account. So if C is true, then B must also be true, and they can't both be true. On the other hand, if B is true, it's a liability account. It doesn't necessarily mean that C is true because it could be a liability account, but not a special subset of contra liability. So just from logical terms, you would think that B would have to be the correct answer. Now you can't really be totally sure on that because some test questions will say, well, if it was a contra liability, then that would be the more correct answer. We would be the more precise answer. So that typologic won't work all the time, but that might be one indication that you can kind of look through and say, well, if this one is true, this one has to be true. And if this one is true, that one doesn't necessarily have to be true. Therefore, B has to be the true answer that's definitely true. But if we think through this, then why would they have a contra liability? Well, the premium is actually a credit. Notice what happens here is the bond payable is on as a credit. The premium is also a credit, which is going the same way. It's not contra. It's not a debit. So why would contra liability be an option? Because a discount would be a contra liability because it would be a debit balance bringing down the bond premium and by being something contra debit as opposed to a credit. So it's not C because it's a premium and not a discount and B is the correct answer. Final answer, the premium on bonds payable account is B, a liability account. Next question. Bonds that have an option to retire them before maturity are A, normal bonds, B, serial bonds, C, sinking fund bonds, D, high value bonds, or E, callable bonds. Go through this again using the process of elimination. Bonds that have an option to retire them before maturity are A, normal bonds. Now there's probably such a thing as a normal bond, but it's not a term we usually use. So it's not something that should sound really familiar or something we're using. So it's not A, B says serial bonds, and that's something we have been thinking, talking about, so we'll keep that for now. C says sinking fund bonds, and that's not something we've spent a whole lot of time on. I'm going to say it's not C, I don't think. D says high value bonds, and again that doesn't ring a bell, something we've spent a lot of time talking about. It sounds like an investing term that we might hear, but it's not one of the bond types that we've looked at, so it's not that one. And then E says callable bonds, and that is one that we've a term that sounds familiar. So we're left with B and E serial bonds and callable bonds. If we go through this again, bonds that have an option to retire them before maturity are either B serial bonds or E callable bonds. In other two it's going to be E here. Callable means we can call them before maturity time. Serial means it's going to have multiple different maturity dates. So it's going to be E here, so once again, bonds that have an option to retire them before maturity are callable bonds. Next question, a bond sold at 101 means, A, bonds pay 1% interest, B, bond sold at 101% of its par value, C, a market rate of interest is 1%, D, 101 bonds were sold, E, the market rate of interest is 101% of the contract rate. So let's go through this again. A bond sold at 101 means either A, the bond pays interest at 1%. That might sound kind of reasonable, we'll keep that for now. B says the bond sold at 101% of par value, that sounds kind of reasonable, just to keep that for now. C says the market rate of interest is 1%. Again A and C are kind of related here, I'll keep that for now. D says 101 bonds were sold, so it says A bond was sold, so I'm not going to say it doesn't seem like multiple bonds wouldn't make sense because it says A bond. And then D says the market rate of interest is 101% above the contract rate, that seems pretty high. That doesn't seem right, it seems like way above the contract rate. Okay, so I don't think it's going to be, so we're left with A, B and C. So a bond sold at 101 means the bond pays interest at, pays 1% interest A, B, bond sold at 101% of the par value or C, market rate of interest is 1%. So of those three, like A and C sounds pretty similar except for, we're talking about the bond pays interest, I guess the contract rate versus the market rate. Normally those two, if I had no idea what this question was, I might start to narrow down on those two because they sound very similar except for that one term. And this is actually a point where that's not the case. This is a time where, although a lot of times when we see something that looks very similar and wording except for one change, meaning market rate versus contract rate, oftentimes it's between those two. In this case it's not, so that's not the rule that will apply all the time. But oftentimes when we see that trend, we can say, hmm, if I have no other idea maybe it's that. But we just have to kind of know here that the bond, when we say it's sold at 101%, that's referring to the price we're selling it for. So if it's a thousand dollar bond, we're selling it at 1.01%, so 110 is how we'd have to do that. The only way to know that is just to know that. So 101 just means it would mean 110%, or I'm sorry, 101% of the face amount, 101% of the face amount. And if you move the decimal point over two places, that's 1.01. So whatever the face amount is, the par value, you multiply it times the 1.01, that's what it's actually selling for, that's going to be the market price. That's what the market price is to sell the bond. So final answer, a bond sold at 101 means B, bond sold at 101% of its par value.