Question 1

Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following statements doesn't correctly describe the accounting for bonds that were issued at their maturity value?

Accepted Answer

A) The market rate of interest equals the stated interest rate. 
B) The interest expense over the life of the bonds will equal the cash interest payments. 
C) The present value of the bonds' future cash flows equals the bonds' maturity value. 
D) The book value of the bond liability decreases when interest payments are made on the due dates. 
A) The market rate of interest equals the stated interest rate. 
B) The interest expense over the life of the bonds will equal the cash interest payments. 
C) The present value of the bonds' future cash flows equals the bonds' maturity value. 
D) The book value of the bond liability decreases when interest payments are made on the due dates. D

Question 3

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

Accepted Answer

A) True 
 B)False  False

Question 4

On March 1,2010,Halbur Corporation,issued $500,000 of 8%,five-year bonds at par.The bonds were dated March 1,2010,and the first annual interest payment will be on February 28,2011.The accounting period ends December 31.Assuming no adjusting entries have been made during the year.
Complete the journal entry grid for each of the following dates (round to the nearest dollar):

Accepted Answer

The answer of On March 1,2010,Halbur Corporation,issued $500,000 of 8%,five-year...

Question 5

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 6

Which of the following is not an advantage of issuing bonds versus issuing stock to finance expansion?

Accepted Answer

A) Stockholders remain in control as bondholders cannot vote or share in the company's earnings. 
B) Interest expense is tax deductible but dividends are not. 
C) Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets. 
D) The fixed payment dates for the interest and maturity value. 
A) Stockholders remain in control as bondholders cannot vote or share in the company's earnings. 
B) Interest expense is tax deductible but dividends are not. 
C) Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets. 
D) The fixed payment dates for the interest and maturity value.

Question 7

On November 1,2009,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2009,and interest is payable each November 1 and May 1.How much is the book value of the bonds after the November 1,2010 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 8

Mayberry,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,2009,for $102,360 on April 1,2009.The bonds pay interest annually on April 1.Straight-line amortization is used by the company.What entry is needed at April 1,2010 for the first interest payment?

Accepted Answer

A)  $\begin{array} { l r r } 
\text { Interest expense } & 11,764 & \
\text { Premium on bonds payable } & 236 & \
\text { Cash } & & 12,000
\end{array}$ 
B)  $\begin{array} { l r } 
\text { Interest expense } & 12,236 \
\quad \text { Premium on bonds payable } && 236 \
\text { Cash } & &12,000
\end{array}$ 
C)  $\begin{array} { l r r } 
\text { Interest expense } & 12,000 & \
\text { Premium on bonds payable } & 236 & \
\quad \text { Cash } & & 12,236
\end{array}$ 
D)

$\begin{array} { l r r } 
\text { Interest expense } & 12,000 & \
\quad \text { Cash } & & 12,000
\end{array}$ 
A)  $\begin{array} { l r r } 
\text { Interest expense } & 11,764 & \
\text { Premium on bonds payable } & 236 & \
\text { Cash } & & 12,000
\end{array}$ 
B)  $\begin{array} { l r } 
\text { Interest expense } & 12,236 \
\quad \text { Premium on bonds payable } && 236 \
\text { Cash } & &12,000
\end{array}$ 
C)  $\begin{array} { l r r } 
\text { Interest expense } & 12,000 & \
\text { Premium on bonds payable } & 236 & \
\quad \text { Cash } & & 12,236
\end{array}$ 
D)

$\begin{array} { l r r } 
\text { Interest expense } & 12,000 & \
\quad \text { Cash } & & 12,000
\end{array}$

Question 9

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon)rate.

Accepted Answer

A) True 
 B)False

Question 10

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

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 11

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

Accepted Answer

A) True 
 B)False

Question 12

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.Which of the following statements is incorrect?

Accepted Answer

A) The market rate of interest was less than the stated rate of interest on July 1, 2010. 
B) The interest expense during the life of the bonds is $3,000 less than the cash interest payments during the life of the bonds. 
C) The book value of the bond liability decreases by $300 per year. 
D) The semi-annual interest expense is $300 less than the semi-annual interest payment. 
A) The market rate of interest was less than the stated rate of interest on July 1, 2010. 
B) The interest expense during the life of the bonds is $3,000 less than the cash interest payments during the life of the bonds. 
C) The book value of the bond liability decreases by $300 per year. 
D) The semi-annual interest expense is $300 less than the semi-annual interest payment.

Question 13

Halverson's times interest earned ratio was 2.98 in 2010,2.79 in 2009,and 2.31 in 2008.Which of the following statements about their ratio is possibly correct?

Accepted Answer

A) Their increasing ratio indicates decreasing levels of debt on which interest is incurred. 
B) Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments. 
C) The increasing ratio implies increased long-term debt financing. 
D) Their increasing ratio would be considered by creditors to be an indicator of higher risk. 
A) Their increasing ratio indicates decreasing levels of debt on which interest is incurred. 
B) Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments. 
C) The increasing ratio implies increased long-term debt financing. 
D) Their increasing ratio would be considered by creditors to be an indicator of higher risk.

Question 14

Assuming no adjusting journal entries have been made during the year,the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following?

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

The journal entry to record the interest cash payment for a bond issued at a premium results in a decrease in the bond.

Accepted Answer

A) True 
 B)False

Question 16

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.Which of the following statements is incorrect?

Accepted Answer

A) The market rate of interest exceeded the stated rate of interest when the bonds were issued. 
B) The annual interest expense exceeds the annual cash interest payment by $200. 
C) The annual increase in the bond book value is $200. 
D) The annual interest expense is $4,300. 
A) The market rate of interest exceeded the stated rate of interest when the bonds were issued. 
B) The annual interest expense exceeds the annual cash interest payment by $200. 
C) The annual increase in the bond book value is $200. 
D) The annual interest expense is $4,300.

Question 17

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Accepted Answer

A) True 
 B)False

Question 18

On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.Assuming the effective-interest method of amortization is used,what is the interest expense for the six-month period ending June 30,2010 (to the nearest dollar)?

Accepted Answer

A) $24,000 
B) $24,789 
C) $20,000 
D) $20,658 
A) $24,000 
B) $24,789 
C) $20,000 
D) $20,658

Question 19

On January 1,2010,a corporation issued a $400,000,12% bond.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,what is the interest expense for the six-month period ending December 31,2010 (to the nearest dollar)?

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 20

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Accepted Answer

A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid. 
B) The amount of interest expense recognized each period increases over time. 
C) The amount of discount amortized each period decreases over time. 
D) The book value of the bonds payable liability decreases. 
A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid. 
B) The amount of interest expense recognized each period increases over time. 
C) The amount of discount amortized each period decreases over time. 
D) The book value of the bonds payable liability decreases.

Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

Which of the following statements doesn't correctly describe the accounting for bonds that were issued at their maturity value?

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

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?

Which of the following is not an advantage of issuing bonds versus issuing stock to finance expansion?

Mayberry,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,2009,for $102,360 on April 1,2009.The bonds pay interest annually on April 1.Straight-line amortization is used by the company.What entry is needed at April 1,2010 for the first interest payment?

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon)rate.

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

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.Which of the following statements is incorrect?

Halverson's times interest earned ratio was 2.98 in 2010,2.79 in 2009,and 2.31 in 2008.Which of the following statements about their ratio is possibly correct?

Assuming no adjusting journal entries have been made during the year,the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following?

The journal entry to record the interest cash payment for a bond issued at a premium results in a decrease in the bond.

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.Which of the following statements is incorrect?

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

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; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Owners Equity

Reporting and Interpreting Investments in Other Corporations

Statement of Cash Flows

Analyzing Financial Statements

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Exam 10: Reporting and Interpreting Bonds

Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

Which of the following statements doesn't correctly describe the accounting for bonds that were issued at their maturity value?

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

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?

Which of the following is not an advantage of issuing bonds versus issuing stock to finance expansion?

Mayberry,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,2009,for $102,360 on April 1,2009.The bonds pay interest annually on April 1.Straight-line amortization is used by the company.What entry is needed at April 1,2010 for the first interest payment?

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon)rate.

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

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.Which of the following statements is incorrect?

Halverson's times interest earned ratio was 2.98 in 2010,2.79 in 2009,and 2.31 in 2008.Which of the following statements about their ratio is possibly correct?

Assuming no adjusting journal entries have been made during the year,the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following?

The journal entry to record the interest cash payment for a bond issued at a premium results in a decrease in the bond.

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.Which of the following statements is incorrect?

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

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; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Owners Equity

Reporting and Interpreting Investments in Other Corporations

Statement of Cash Flows

Analyzing Financial Statements

Filters

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