Question 1

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

Accepted Answer

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

Question 2

The terms of the bond issue are set forth in a formal legal document called a bond indenture.

Accepted Answer

A) True 
 B)False  True

Question 3

United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

Accepted Answer

1. Issue 50,000 shares of $10 par value common stock at $50 per share.
2. Issue $2,500,000, 10%, 10-year bonds at par.
It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 100,000 shares of common stock outstanding prior to the new financing.
Instructions
Determine the effect on net income and earnings per share for these two methods of financing.

Question 4

The market interest rate is often called the

Accepted Answer

A)  stated rate. 
B)  effective rate. 
C)  coupon rate. 
D)  contractual rate. 
A)  stated rate. 
B)  effective rate. 
C)  coupon rate. 
D)  contractual rate.

Question 5

If bonds have been issued at a discount, over the life of the bonds, the

Accepted Answer

A)  carrying value of the bonds will decrease. 
B)  carrying value of the bonds will increase. 
C)  interest expense will increase, if the discount is being amortized on a straight-line basis. 
D)  unamortized discount will increase. 
A)  carrying value of the bonds will decrease. 
B)  carrying value of the bonds will increase. 
C)  interest expense will increase, if the discount is being amortized on a straight-line basis. 
D)  unamortized discount will increase.

Question 6

In a recent year Cey Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year?

Accepted Answer

A)  $500,000 
B)  $450,000 
C)  $400,000 
D)  None of the above. 
A)  $500,000 
B)  $450,000 
C)  $400,000 
D)  None of the above.

Question 7

The following exhibit is for Kmart bonds.   The contractual interest rate of the K mart bonds is

Accepted Answer

A)  greater than the market interest rate. 
B)  less than the market interest rate. 
C)  equal to the market interest rate. 
D)  not determinable. 
A)  greater than the market interest rate. 
B)  less than the market interest rate. 
C)  equal to the market interest rate. 
D)  not determinable.

Question 8

Presented here is a partial amortization schedule for Courtney Company who sold $200,000, five year 10% bonds on January 1, 2010 for $208,000 and uses annual straight-line amortization.   Which of the following amounts should be shown in cell (iii)?

Accepted Answer

A)  $4,000 
B)  $8,000 
C)  $1,600 
D)  $800 
A)  $4,000 
B)  $8,000 
C)  $1,600 
D)  $800

Question 9

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Accepted Answer

A) True 
 B)False

Question 10

Herman Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2009. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization.
What is the amount of interest Herman must pay the bondholders in 2009?

Accepted Answer

A)  $15,080 
B)  $16,000 
C)  $17,150 
D)  $14,850 
A)  $15,080 
B)  $16,000 
C)  $17,150 
D)  $14,850

Question 11

Each of the following is correct regarding bonds except they are

Accepted Answer

A)  a form of interest-bearing notes payable. 
B)  attractive to many investors. 
C)  issued by corporations and governmental agencies. 
D)  sold in large denominations. 
A)  a form of interest-bearing notes payable. 
B)  attractive to many investors. 
C)  issued by corporations and governmental agencies. 
D)  sold in large denominations.

Question 12

The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Accepted Answer

A) True 
 B)False

Question 13

Over the term of the bonds, the balance in the Discount on Bonds Payable account will

Accepted Answer

A)  fluctuate up and down if the market is volatile. 
B)  decrease. 
C)  increase. 
D)  be unaffected until the bonds mature. 
A)  fluctuate up and down if the market is volatile. 
B)  decrease. 
C)  increase. 
D)  be unaffected until the bonds mature.

Question 14

Eby Corporation entered into the following transactions:

Accepted Answer

1. On January 1, 2010 Gant Car Rental le

Question 15

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Accepted Answer

A) True 
 B)False

Question 16

The adjusted trial balance for Payne Corporation at the end of the current year contained the following accounts:   
Instructions
(a) Prepare the long-term liabilities section of the balance sheet.
(b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

Accepted Answer

(a) Long-term liabilities
 @#IMG-DLM& (b

Question 17

Bonds that are issued in the name of the owner are

Accepted Answer

A)  coupon bonds. 
B)  bearer bonds. 
C)  serial bonds. 
D)  registered bonds. 
A)  coupon bonds. 
B)  bearer bonds. 
C)  serial bonds. 
D)  registered bonds.

Question 18

Under a capital lease, the lease/asset is reported on the balance sheet under plant assets.

Accepted Answer

A) True 
 B)False

Question 19

On January 1, Martinez Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond discount. At the end of the first year, Martinez should report unamortized bond discount of:

Accepted Answer

A)  $164,700. 
B)  $171,300. 
C)  $154,830. 
D)  $153,000. 
A)  $164,700. 
B)  $171,300. 
C)  $154,830. 
D)  $153,000.

Question 20

A bond discount must

Accepted Answer

A)  always be amortized using straight-line amortization. 
B)  always be amortized using the effective-interest method. 
C)  be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. 
D)  be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method. 
A)  always be amortized using straight-line amortization. 
B)  always be amortized using the effective-interest method. 
C)  be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. 
D)  be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.

Exam 15: Long-Term Liabilities

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

The terms of the bond issue are set forth in a formal legal document called a bond indenture.

United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

The market interest rate is often called the

If bonds have been issued at a discount, over the life of the bonds, the

In a recent year Cey Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year?

The following exhibit is for Kmart bonds. The contractual interest rate of the K mart bonds is

Presented here is a partial amortization schedule for Courtney Company who sold $200,000, five year 10% bonds on January 1, 2010 for $208,000 and uses annual straight-line amortization. Which of the following amounts should be shown in cell (iii)?

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Each of the following is correct regarding bonds except they are

The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Over the term of the bonds, the balance in the Discount on Bonds Payable account will

Eby Corporation entered into the following transactions:

A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

Bonds that are issued in the name of the owner are

Under a capital lease, the lease/asset is reported on the balance sheet under plant assets.

A bond discount must

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