CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Abbey Company issued $1,000,000 of 10-year bonds with a contractual interest rate of LIBOR + 2%. The interest rate is to be reset annually. Bondholders will receive interest annually. The LIBOR for 2015 is 5.5%. The entries to record interest expense for 2015 are ______.
A. Interest expense (debit) 55,000; Discount on bonds payable (debit) 20,000; Accrued interest payable (credit) 75,000
B. Interest expense (debit) 75,000; Discount on bonds payable (credit) 20,000; Accrued interest payable (credit) 55,000
C. Interest expense (debit) 75,000; Accrued interest payable (credit) 75,000
Explanation: Floating rate debt is almost always issued at par, so there is no premium or discount to be amortized. Interest expense is debited for $75,000 which is the face value of $1 million x the interest rate of 7.5% (the LIBOR of 5.5% plus 2%).

User Contributed Comments 2

User Comment
murli Floating rate securities has no impact on int. amortization! Because it is fixed at the time of issue.
gill15 Tricky....i was so confused. I was wondering what the coupon rate was on this question...now it makes sense
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