Question 1

The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.

Accepted Answer

A) True 
 B)False

Question 2

If bonds payable are not callable, the issuing corporation

Accepted Answer

A)   can exchange it for common stock
B)   can repurchase them in the open market
C)   must get special permission from the SEC to repurchase them
D)   is more likely to repurchase them if the interest rates increaseE) B) and C)
F) None of the above

Question 3

A $300,000 bond was redeemed at 98 when the carrying value of the bond was $296,000. The entry to record the redemption would include a

Accepted Answer

A)   loss on bond redemption of $4,000.
B)   gain on bond redemption of $4,000.
C)   gain on bond redemption of $2,000.
D)   loss on bond redemption of $2,000.E) A) and C)
F) B) and D)

Question 4

One potential advantage of financing corporations through the use of bonds rather than common stock is

Accepted Answer

A)   the interest on bonds must be paid when due
B)   the corporation must pay the bonds at maturity
C)   the interest expense is deductible for tax purposes by the corporation
D)   a higher earnings per share is guaranteed for existing common shareholdersE) None of the above
F) A) and B)

Question 5

Which of the following is not an advantage of issuing bonds instead of common stock?

Accepted Answer

A)   Tax savings result
B)   Income to common shareholders may increase.
C)   Earnings per share on common stock may be lower.
D)   Stockholder control is not affected.E) None of the above
F) A) and D)

Question 6

On June 30, 2011, Arlington Company issued $1,500,000 of 10-year, 8% bonds, dated June 30, for $1,540,000. Present entries to record the following transactions:

Accepted Answer

The answer of On June 30, 2011, Arlington Company issued...

Question 7

If the market rate of interest is greater than the contractual rate of interest, bonds will sell

Accepted Answer

A)   at a premium.
B)   at face value.
C)   at a discount.
D)   only after the stated rate of interest is increased.E) A) and D)
F) A) and C)

Question 8

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 9

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption?

Accepted Answer

A)   $500 loss
B)   $15,500 loss
C)   $15,500 gain
D)   $500 gainE) A) and B)
F) A) and C)

Question 10

An equal stream of periodic payments is called an annuity.

Accepted Answer

A) True 
 B)False

Question 11

A corporation issues for cash $10,000,000 of 8%, 30-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Accepted Answer

A)   The amount of annual interest paid to bondholders remains the same over the life of the bonds.
B)   The amount of annual interest expense decreases as the bonds approach maturity.
C)   The amount of annual interest paid to bondholders increases over the 30-year life of the bonds.
D)   The carrying amount decreases from its amount at issuance date to $10,000,000 at maturity.E) A) and B)
F) All of the above

Question 12

If bonds are issued at a discount, it means that the

Accepted Answer

A)   bondholder will receive effectively less interest than the contractual rate of interest.
B)   market interest rate is lower than the contractual interest rate.
C)   market interest rate is higher than the contractual interest rate.
D)   financial strength of the issuer is suspect.E) C) and D)
F) A) and B)

Question 13

The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

Accepted Answer

A) True 
 B)False

Question 14

The balance in Discount on Bonds Payable

Accepted Answer

A)   should be reported on the balance sheet as an asset because it has a debit balance
B)   should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the interest method
C)   would be added to the related bonds payable to determine the carrying amount of the bonds
D)   would be subtracted from the related bonds payable on the balance sheetE) A) and B)
F) A) and C)

Question 15

A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Accepted Answer

A)   The amount of the annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year.
B)   The amount of the annual interest expense gradually decreases over the life of the bonds.
C)   The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity.
D)   The bonds will be issued at a premium.E) C) and D)
F) A) and B)

Question 16

Debenture bonds are

Accepted Answer

A)   bonds secured by specific assets of the issuing corporation
B)   bonds that have a single maturity date
C)   issued only by the federal government
D)   issued on the general credit of the corporation and do not pledge specific assets as collateral.E) A) and C)
F) B) and C)

Question 17

There is a loss on redemption of bonds when bonds are redeemed above carrying value.

Accepted Answer

A) True 
 B)False

Question 18

The interest expense recorded on an interest payment date is increased

Accepted Answer

A)   only if the market rate of interest is less than the stated rate of interest on that date.
B)   by the amortization of premium on bonds payable.
C)   by the amortization of discount on bonds payable.
D)   only if the bonds were sold at face value.E) A) and C)
F) B) and C)

Question 19

The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond.

Accepted Answer

A) True 
 B)False

Question 20

When the market rate of interest was 11%, Valley Corporation issued $100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be

Accepted Answer

A)   $4,000
B)   $896
C)   $17,926
D)   $1,793E) A) and B)
F) None of the above

Exam 12: Long-Term Liabilities: Bonds and Notes

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption?

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The balance in Discount on Bonds Payable

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If bonds are issued at a discount, it means that the

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The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.

Correct AnswerverifiedShow Answer

Debenture bonds are

Correct AnswerverifiedShow Answer

A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Correct AnswerverifiedShow Answer

There is a loss on redemption of bonds when bonds are redeemed above carrying value.

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The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

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An equal stream of periodic payments is called an annuity.

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A $300,000 bond was redeemed at 98 when the carrying value of the bond was $296,000. The entry to record the redemption would include a

Correct AnswerverifiedShow Answer

The interest expense recorded on an interest payment date is increased

Correct AnswerverifiedShow Answer

When the market rate of interest was 11%, Valley Corporation issued $100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be

Correct AnswerverifiedShow Answer

Which of the following is not an advantage of issuing bonds instead of common stock?

Correct AnswerverifiedShow Answer

If the market rate of interest is greater than the contractual rate of interest, bonds will sell

Correct AnswerverifiedShow Answer

One potential advantage of financing corporations through the use of bonds rather than common stock is

Correct AnswerverifiedShow Answer

The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond.

Correct AnswerverifiedShow Answer

If bonds payable are not callable, the issuing corporation

Correct AnswerverifiedShow Answer

On June 30, 2011, Arlington Company issued $1,500,000 of 10-year, 8% bonds, dated June 30, for $1,540,000. Present entries to record the following transactions:

Correct AnswerverifiedShow Answer

A corporation issues for cash $10,000,000 of 8%, 30-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Correct AnswerverifiedShow Answer

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

Correct AnswerverifiedShow Answer

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