Question 1

Match each description below to the appropriate term (a-g).
​
-If the contract rate is less than the effective rate

Accepted Answer

A) Contract rate 
B) Effective rate 
C) Bond discount 
D) Bond premium 
E) Bond
F)Bond indenture
G)Principal 
A) Contract rate 
B) Effective rate 
C) Bond discount 
D) Bond premium 
E) Bond
F)Bond indenture
G)Principal

Question 2

Bondholders are creditors of the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 3

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Prepare entries to record the following transactions for the current fiscal year:
(a)Issuance of the bonds.
(b)Second semiannual interest payment.
(c)Amortization of bond premium for the first year, using the straight-line method of amortization.

Accepted Answer

The answer of On the first day of the fiscal...

Question 4

If a company borrows money from a bank as an installment note, the interest portion of each annual payment will

Accepted Answer

A)  equal the interest rate on the note times the carrying amount of the note at the beginning of the period 
B)  remain constant over the term of the note 
C)  equal the interest rate on the note times the face amount 
D)  increase over the term of the note 
A)  equal the interest rate on the note times the carrying amount of the note at the beginning of the period 
B)  remain constant over the term of the note 
C)  equal the interest rate on the note times the face amount 
D)  increase over the term of the note

Question 5

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 6

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 shareholders 
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 shareholders

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 Payable 
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 Payable

Question 8

On January 1, $2,000,000, five-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is

Accepted Answer

A)  $8,000 
B)  $2,000 
C)  $4,000 
D)  $10,000 
A)  $8,000 
B)  $2,000 
C)  $4,000 
D)  $10,000

Question 9

The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date.

Accepted Answer

A) True 
 B)False

Question 10

The times interest earned ratio is computed as

Accepted Answer

A)  (Income Before Income Taxes + Interest Expense) ÷ Interest Expense 
B)  (Income Before Income Taxes - Interest Expense) ÷ Interest Expense 
C)  Income Before Income Taxes ÷ Interest Expense 
D)  (Income Before Income Taxes + Interest Expense) ÷ Interest Revenue 
A)  (Income Before Income Taxes + Interest Expense) ÷ Interest Expense 
B)  (Income Before Income Taxes - Interest Expense) ÷ Interest Expense 
C)  Income Before Income Taxes ÷ Interest Expense 
D)  (Income Before Income Taxes + Interest Expense) ÷ Interest Revenue

Question 11

When callable bonds are redeemed below carrying value,

Accepted Answer

A)  Gain on Redemption of Bonds is credited 
B)  Loss on Redemption of Bonds is debited 
C)  Retained Earnings is credited 
D)  Retained Earnings is debited 
A)  Gain on Redemption of Bonds is credited 
B)  Loss on Redemption of Bonds is debited 
C)  Retained Earnings is credited 
D)  Retained Earnings is debited

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Selling the bonds at a premium has the effect of

Accepted Answer

A)  raising the effective interest rate above the stated interest rate 
B)  attracting investors that are willing to pay a lower rate of interest than on similar bonds 
C)  causing the interest expense to be higher than the bond interest paid 
D)  causing the interest expense to be lower than the bond interest paid 
A)  raising the effective interest rate above the stated interest rate 
B)  attracting investors that are willing to pay a lower rate of interest than on similar bonds 
C)  causing the interest expense to be higher than the bond interest paid 
D)  causing the interest expense to be lower than the bond interest paid

Question 14

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 15

On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the issuance of the installment note for cash on January 1 would include a

Accepted Answer

A)  debit to Interest Expense for $11,550 
B)  credit to Interest Payable for $11,550 
C)  credit to Notes Payable for $165,000 
D)  debit to Notes Payable for $165,000 
A)  debit to Interest Expense for $11,550 
B)  credit to Interest Payable for $11,550 
C)  credit to Notes Payable for $165,000 
D)  debit to Notes Payable for $165,000

Question 16

On January 1, Marshall Co. issued a $360,000, three-year, 6% installment note payable with payments of $134,680 principal and interest due on January 1 for each of the next three years.?
(a) Prepare the adjusting journal entry to accrue interest at December 31, Year 2. If required, round answers to the nearest whole amount.?
(b) Show the account (s) and amount (s) and where it (they) will appear on a classified balance sheet prepared on December 31, Year 2.

Accepted Answer

(a)Interest Expense 14,815Inte

Question 17

On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000. Present entries to record the following transactions:​
(a)Issuance of bonds.
(b)Payment of first semiannual interest on December 31 
(record separate entry from premium amortization).
(c)Amortization by straight-line method of bond premium on December 31.

Accepted Answer

The answer of On June 30, Jamison Company issued $2,500,000...

Question 18

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

Question 19

Sorenson Co. is considering the following alternative plans for financing the 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 20

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 annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. 
B)  The amount of 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. 
A)  The amount of annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. 
B)  The amount of 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.

Exam 14: Long-Term Liabilities: Bonds and Notes

Match each description below to the appropriate term (a-g). ​ -If the contract rate is less than the effective rate

Bondholders are creditors of the issuing corporation.

If a company borrows money from a bank as an installment note, the interest portion of each annual payment will

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

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

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

On January 1, $2,000,000, five-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is

The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date.

The times interest earned ratio is computed as

When callable bonds are redeemed below carrying value,

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

Selling the bonds at a premium has the effect of

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.

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

Sorenson Co. is considering the following alternative plans for financing the 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.

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?

Introduction to Accounting and Business

Analyzing Transactions

The Adjusting Process

Completing the Accounting Cycle

Accounting Systems

Accounting for Merchandising Businesses

Inventories

Internal Control and Cash

Receivables

Long-Term Assets: Fixed and Intangible

Current Liabilities and Payroll

Accounting for Partnerships and Limited Liability Companies

Corporations: Organization, Stock Transactions, and Dividends

Investments and Fair Value Accounting

Statement of Cash Flows

Financial Statement Analysis

Introduction to Managerial Accounting

Job Order Costing

Process Cost Systems

Cost-Volume-Profit Analysis

Evaluating Variances From Standard Costs

Decentralized Operations

Differential Analysis, Product Pricing, and Activity-Based Costing

Capital Investment Analysis

Filters

Match each description below to the appropriate term (a-g). -If the contract rate is less than the effective rate

Sorenson Co. is considering the following alternative plans for financing the 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.