Question 1

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

Accepted Answer

A) True 
 B)False

Question 2

The journal entry to record the sale of bonds at their par value results in which of the following?

Accepted Answer

A)  An increase in assets and liabilities equal to the par value of the bonds. 
B)  An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments. 
C) An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bonds' future cash flows. 
D) An increase in assets and liabilities equal to the bonds' future cash flows. 
A)  An increase in assets and liabilities equal to the par value of the bonds. 
B)  An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments. 
C) An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bonds' future cash flows. 
D) An increase in assets and liabilities equal to the bonds' future cash flows.

Question 3

Stone Company issued a $1,000,000 bond on January 1, 2014. The bond was dated January 1, 2014, had an 8% stated rate, pays interest annually on December 31, and sold for $1,084,249 at a time when the market rate of interest was 6%. Stone uses the effective-interest method to account for its bonds.
Required:
Prepare the necessary journal entry for each of the following dates:
January 1, 2014
December 31, 2014
December 31, 2015

Accepted Answer

The answer of Stone Company issued a $1,000,000 bond on...

Question 4

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, the interest expense for the six-month period ending December 31, 2014 is closest to:

Accepted Answer

A)  $24,000. 
B)  $20,491. 
C) $20,000. 
D) $20,825. 
A)  $24,000. 
B)  $20,491. 
C) $20,000. 
D) $20,825.

Question 5

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?

Accepted Answer

A)  There was a $50,000 loss. 
B)  There was a $10,000 loss. 
C) There was a $10,000 gain. 
D) There was a $20,000 loss. 
A)  There was a $50,000 loss. 
B)  There was a $10,000 loss. 
C) There was a $10,000 gain. 
D) There was a $20,000 loss.

Question 6

Newton Corporation issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2014. The bonds pay interest annually, beginning on December 31, 2014. Newton Corporation received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Corporation has a December 31 year-end. Assume that no adjusting journal entries have been made during the year.
Required:
A. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the effective-interest method is used.
B. Compute the amount of the premium that Newton Corporation should amortize on December 31, 2014, assuming the straight-line method is used.
C. Which method above is theoretically the better to use for amortizing a bond premium?

Accepted Answer

A. ($1,000,000 × 7% = $70,000)

Question 7

A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

Accepted Answer

A) True 
 B)False

Question 8

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?
Interest expense
Premium on bonds payable 
Cash

Accepted Answer

A)  The bonds payable book value decreases by the amount of the debit to premium on bonds payable. 
B)  Assets decrease by the amount of the credit to cash. 
C) Stockholders' equity decreases by the amount of the debit to interest expense. 
D) The cash payment is reported as a cash flow from financing activities. 
A)  The bonds payable book value decreases by the amount of the debit to premium on bonds payable. 
B)  Assets decrease by the amount of the credit to cash. 
C) Stockholders' equity decreases by the amount of the debit to interest expense. 
D) The cash payment is reported as a cash flow from financing activities.

Question 9

Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was 11%. Which of the following statements is correct?

Accepted Answer

A)  The bonds were issued at a premium. 
B)  Annual interest expense will exceed the company's actual cash payments for interest. 
C) Annual interest expense will be $500,000. 
D) The book value of the bond will decrease as the bond matures. 
A)  The bonds were issued at a premium. 
B)  Annual interest expense will exceed the company's actual cash payments for interest. 
C) Annual interest expense will be $500,000. 
D) The book value of the bond will decrease as the bond matures.

Question 10

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?

Accepted Answer

A)  Dates of each interest payment. 
B)  The stated interest rate. 
C) The maturity date. 
D) The market rate of interest. 
A)  Dates of each interest payment. 
B)  The stated interest rate. 
C) The maturity date. 
D) The market rate of interest.

Question 11

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

Accepted Answer

A) True 
 B)False

Question 12

During 2014, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. During 2013, they reported net income of $3,568 million, interest expense of $163 million and income tax expense of $1,424 million. The times interest earned ratios for 2014 and 2013, respectively, are closest to:

Accepted Answer

A)  32.2 and 29.4 times. 
B)  28.4 and 23.8 times. 
C) 34.4 and 31.6 times. 
D) 34.1 and 26.6 times. 
A)  32.2 and 29.4 times. 
B)  28.4 and 23.8 times. 
C) 34.4 and 31.6 times. 
D) 34.1 and 26.6 times.

Question 13

A company prepared the following journal entry: Which of the following statements is correct?
Bonds payable
Premium on bonds payable
Loss on bond retirement
Cash

Accepted Answer

A)  The book value of the bonds was less than the cash payment. 
B)  The increase in stockholders' equity equals the loss on the bond retirement. 
C) The decrease in assets is greater than the decrease in liabilities and, as a result, stockholders' equity decreases. 
D) The net cash flow from financing activities decreases by the book value of the bonds payable. 
A)  The book value of the bonds was less than the cash payment. 
B)  The increase in stockholders' equity equals the loss on the bond retirement. 
C) The decrease in assets is greater than the decrease in liabilities and, as a result, stockholders' equity decreases. 
D) The net cash flow from financing activities decreases by the book value of the bonds payable.

Question 14

Assuming no adjusting journal entries have been made during the year, the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared. Which of the following is not an effect of the entry?

Accepted Answer

A)  An increase in expenses and a decrease in liabilities. 
B)  An increase in expenses and an increase in liabilities. 
C) A decrease in both liabilities and stockholders' equity. 
D) A decrease in both assets and liabilities. 
A)  An increase in expenses and a decrease in liabilities. 
B)  An increase in expenses and an increase in liabilities. 
C) A decrease in both liabilities and stockholders' equity. 
D) A decrease in both assets and liabilities.

Question 15

A company prepared the following journal entry: Which of the following statements is incorrect?
Bonds payable
Premium on bonds payable
Gain on bond retirement
Cash

Accepted Answer

A)  The book value of the bonds was less than the cash payment. 
B)  The increase in stockholders' equity equals the gain on the bond retirement. 
C) The decrease in assets is less than the decrease in liabilities. 
D) The net cash flow from financing activities decreases by the cash payment. 
A)  The book value of the bonds was less than the cash payment. 
B)  The increase in stockholders' equity equals the gain on the bond retirement. 
C) The decrease in assets is less than the decrease in liabilities. 
D) The net cash flow from financing activities decreases by the cash payment.

Question 16

A corporation retired $500,000 of bonds, which have an unamortized discount of $10,000, by repurchasing them for $500,000. How much was the gain or loss on the retirement of the bonds?

Accepted Answer

A)  There was no gain or loss. 
B)  There was a $10,000 loss. 
C) There was a $10,000 gain. 
D) There was a $500,000 loss. 
A)  There was no gain or loss. 
B)  There was a $10,000 loss. 
C) There was a $10,000 gain. 
D) There was a $500,000 loss.

Question 17

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the book value of the bonds after the November 1, 2014 interest payment was recorded, assuming the straight-line method of amortization is utilized?

Accepted Answer

A)  $29,010. 
B)  $29,100. 
C) $29,190. 
D) $29,280. 
A)  $29,010. 
B)  $29,100. 
C) $29,190. 
D) $29,280.

Question 18

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method of amortization is used, which of the following statements is incorrect?

Accepted Answer

A)  The market rate of interest on the sale date was less than the stated rate of interest. 
B)  The book value of the bond will decrease as the bond reaches maturity. 
C) The interest expense will decrease as the bond reaches maturity. 
D) The amortization of the premium on bonds payable will decrease as the bond matures. 
A)  The market rate of interest on the sale date was less than the stated rate of interest. 
B)  The book value of the bond will decrease as the bond reaches maturity. 
C) The interest expense will decrease as the bond reaches maturity. 
D) The amortization of the premium on bonds payable will decrease as the bond matures.

Question 19

Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?

Accepted Answer

A)  The interest expense over the life of the bond exceeds the cash interest payments. 
B)  The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used. 
C) The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used. 
D) The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is useD.When bonds are issued at a discount, their book value increases over time and eventually reach the bonds' maturity value. Interest expense increases because the book value increases. The amortization of discount on bonds payable is the difference between the increasing interest expense and the constant cash interest payment. 
A)  The interest expense over the life of the bond exceeds the cash interest payments. 
B)  The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used. 
C) The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used. 
D) The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is useD.When bonds are issued at a discount, their book value increases over time and eventually reach the bonds' maturity value. Interest expense increases because the book value increases. The amortization of discount on bonds payable is the difference between the increasing interest expense and the constant cash interest payment.

Question 20

On March 31, 2015 Ridgetop Corp. retired bonds early by repurchasing them in the market for $9,700,000. The total face value of the bonds retired equaled $10 million and there was $450,000 of unamortized discount on these bonds.
Required:
Prepare the journal entry to retire the bonds.

Accepted Answer

The answer of On March 31, 2015 Ridgetop Corp. retired...

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

The journal entry to record the sale of bonds at their par value results in which of the following?

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?

A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Interest expense Premium on bonds payable Cash

Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was 11%. Which of the following statements is correct?

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

A company prepared the following journal entry: Which of the following statements is correct? Bonds payable Premium on bonds payable Loss on bond retirement Cash

Assuming no adjusting journal entries have been made during the year, the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared. Which of the following is not an effect of the entry?

A company prepared the following journal entry: Which of the following statements is incorrect? Bonds payable Premium on bonds payable Gain on bond retirement Cash

A corporation retired $500,000 of bonds, which have an unamortized discount of $10,000, by repurchasing them for $500,000. How much was the gain or loss on the retirement of the bonds?

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method of amortization is used, which of the following statements is incorrect?

Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?

On March 31, 2015 Ridgetop Corp. retired bonds early by repurchasing them in the market for $9,700,000. The total face value of the bonds retired equaled $10 million and there was $450,000 of unamortized discount on these bonds. Required: Prepare the journal entry to retire the bonds.

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

Adjustments, Financial Statements, and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Reporting and Interpreting Liabilities

Reporting and Interpreting Owners Equity

Statement of Cash Flows

Analyzing Financial Statements

Reporting and Interpreting Investments in Other Corporations

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Exam 10: Reporting and Interpreting Bonds

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

The journal entry to record the sale of bonds at their par value results in which of the following?

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?

A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Interest expense Premium on bonds payable Cash

Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was 11%. Which of the following statements is correct?

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

A company prepared the following journal entry: Which of the following statements is correct? Bonds payable Premium on bonds payable Loss on bond retirement Cash

Assuming no adjusting journal entries have been made during the year, the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared. Which of the following is not an effect of the entry?

A company prepared the following journal entry: Which of the following statements is incorrect? Bonds payable Premium on bonds payable Gain on bond retirement Cash

A corporation retired $500,000 of bonds, which have an unamortized discount of $10,000, by repurchasing them for $500,000. How much was the gain or loss on the retirement of the bonds?

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method of amortization is used, which of the following statements is incorrect?

Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?

On March 31, 2015 Ridgetop Corp. retired bonds early by repurchasing them in the market for $9,700,000. The total face value of the bonds retired equaled $10 million and there was $450,000 of unamortized discount on these bonds. Required: Prepare the journal entry to retire the bonds.

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

Adjustments, Financial Statements, and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

Reporting and Interpreting Liabilities

Reporting and Interpreting Owners Equity

Statement of Cash Flows

Analyzing Financial Statements

Reporting and Interpreting Investments in Other Corporations

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