Question 1

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.

Accepted Answer

A) True 
 B)False

Question 2

Sorenson Co., is considering the following alternative plans for financing their company:
  Income tax is estimated at 40% of income.
Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

Accepted Answer

The answer of Sorenson Co., is considering the following alternative...

Question 3

A corporation issues for cash $8,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount received for the bonds will be

Accepted Answer

A)   present value of 50 semiannual interest payments of $320,000, plus present value of $8,000,000 to be repaid in 25 years
B)   present value of 25 annual interest payments of $640,000
C)   present value of 25 annual interest payments of $640,000, plus present value of $8,000,000 to be repaid in 25 years
D)   present value of $8,000,000 to be repaid in 25 years, less present value of 50 semiannual interest payments of $320,000E) None of the above
F) A) and B)

Question 4

An installment note payable for a principal amount of $48,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $11,395 beginning December 31, 2011, for each of the next five years. After the final payment, the carrying amount on the note will be

Accepted Answer

A)   $5,425
B)   $8,975
C)   $11,395
D)   $0E) C) and D)
F) B) and C)

Question 5

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  True

Question 6

The market interest rate related to a bond is also called the

Accepted Answer

A)   stated interest rate
B)   effective interest rate
C)   contract interest rate
D)   straight-line rateE) A) and B)
F) A) and C)

Question 7

The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is

Accepted Answer

A)   debit Interest Expense, credit Cash and Discount on Bonds Payable
B)   debit Interest Expense, credit Cash
C)   debit Interest Expense and Discount on Bonds Payable, credit Cash
D)   debit Interest Expense, credit Interest Payable and Discount on Bonds PayableE) A) and B)
F) A) and C)

Question 8

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.

Accepted Answer

A) True 
 B)False

Question 9

The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should be classified on the balance sheet as

Accepted Answer

A)   fixed assets
B)   current assets
C)   intangible assets
D)   investmentsE) B) and C)
F) All of the above

Question 10

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 11

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Accepted Answer

A) True 
 B)False

Question 12

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.

Accepted Answer

A) True 
 B)False

Question 13

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

Accepted Answer

A) True 
 B)False

Question 14

The Miracle Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

Accepted Answer

A)   debit to Discount on Bonds Payable for $40,000.
B)   debit to Cash of $1,000,000.
C)   credit to Bonds Payable for $960,000.
D)   credit to Cash for $960,000.E) B) and D)
F) A) and C)

Question 15

On January 1, 2010, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $196,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2014. Horton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2010, is

Accepted Answer

A)   $19,800
B)   $19,200
C)   $20,800
D)   $24,000E) B) and C)
F) B) and D) C

Question 16

When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are

Accepted Answer

A)   convertible bonds
B)   unsecured bonds
C)   debenture bonds
D)   callable bondsE) B) and D)
F) None of the above

Question 17

Given the following data, prepare an amortization table (use the effective method)
1/1/10 - issue $800,000, 9%, 3 year bonds, interest paid annually on 12/31, to yield 8%
Use the following format (round to nearest dollar - may have a slight rounding difference);
Date Cash Paid Interest Exp. Amortization Bond Carrying Value

Accepted Answer

Date Cash Paid Interest Exp. Amortization Bond Carrying Value
1/1/10 820,615
12/31/10 72,000 65,649 6,351 814,264
12/31/11 72,000 65,141 6,859 807,405
12/31/12 72,000 64,592 7,408 800,000 (rounded)

Question 18

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

Accepted Answer

A)   enterprise fund
B)   sinking fund
C)   special assessments fund
D)   general fundE) A) and D)
F) A) and C)

Question 19

Any unamortized premium should be reported on the balance sheet of the issuing corporation as

Accepted Answer

A)   a direct deduction from the face amount of the bonds in the liability section
B)   as paid-in capital
C)   a direct deduction from retained earnings
D)   an addition to the face amount of the bonds in the liability sectionE) B) and D)
F) B) and C)

Question 20

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at

Accepted Answer

A)   a premium
B)   their face value
C)   their maturity value
D)   a discountE) B) and C)
F) C) and D)

Exam 12: Long-Term Liabilities: Bonds and Notes

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.

Correct Answer
verified

Sorenson Co., is considering the following alternative plans for financing their company: Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

Correct Answer
verified

A corporation issues for cash $8,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount received for the bonds will be

Correct Answer
verified

An installment note payable for a principal amount of $48,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $11,395 beginning December 31, 2011, for each of the next five years. After the final payment, the carrying amount on the note will be

Correct Answer
verified

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 Answer
verified
True

The market interest rate related to a bond is also called the

Correct Answer
verified

The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is

Correct Answer
verified

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.

Correct Answer
verified

The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should be classified on the balance sheet as

Correct Answer
verified

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 Answer
verified

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Correct Answer
verified

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.

Correct Answer
verified

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

Correct Answer
verified

The Miracle Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

Correct Answer
verified

Correct Answer
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C

When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are

Correct Answer
verified

Correct Answer
verified
Date Cash Paid Interest Exp. Amortization Bond Carrying Value 1/1/10 820,615 12/31/10 72,000 65,649 6,351 814,264 12/31/11 72,000 65,141 6,859 807,405 12/31/12 72,000 64,592 7,408 800,000 (rounded)

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

Correct Answer
verified

Any unamortized premium should be reported on the balance sheet of the issuing corporation as

Correct Answer
verified

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at

Correct Answer
verified

Exam 12: Long-Term Liabilities: Bonds and Notes

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.

Correct AnswerverifiedShow Answer

Sorenson Co., is considering the following alternative plans for financing their company: Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

Correct AnswerverifiedShow Answer

A corporation issues for cash $8,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount received for the bonds will be

Correct AnswerverifiedShow Answer

An installment note payable for a principal amount of $48,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $11,395 beginning December 31, 2011, for each of the next five years. After the final payment, the carrying amount on the note will be

Correct AnswerverifiedShow Answer

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 AnswerverifiedTrue

The market interest rate related to a bond is also called the

Correct AnswerverifiedShow Answer

The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is

Correct AnswerverifiedShow Answer

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.

Correct AnswerverifiedShow Answer

The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should be classified on the balance sheet as

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

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Correct AnswerverifiedShow Answer

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.

Correct AnswerverifiedShow Answer

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

Correct AnswerverifiedShow Answer

The Miracle Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are

Correct AnswerverifiedShow Answer

Correct AnswerverifiedDate Cash Paid Interest Exp. Amortization Bond Carrying Value 1/1/10 820,615 12/31/10 72,000 65,649 6,351 814,264 12/31/11 72,000 65,141 6,859 807,405 12/31/12 72,000 64,592 7,408 800,000 (rounded)

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

Correct AnswerverifiedShow Answer

Any unamortized premium should be reported on the balance sheet of the issuing corporation as

Correct AnswerverifiedShow Answer

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at

Correct AnswerverifiedShow Answer

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True

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C

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Date Cash Paid Interest Exp. Amortization Bond Carrying Value 1/1/10 820,615 12/31/10 72,000 65,649 6,351 814,264 12/31/11 72,000 65,141 6,859 807,405 12/31/12 72,000 64,592 7,408 800,000 (rounded)

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