Question 1

Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

Accepted Answer

A) True 
 B)False

Question 2

The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

Accepted Answer

A) True 
 B)False

Question 3

When a bond payable is issued at a premium,subsequent amortization of the premium does which of the following?

Accepted Answer

A) Increase interest expense. 
B) Decrease the book value of the bonds. 
C) Decrease in amount amortized for each year the bond gets older when the effective-interest method is used. 
D) Decrease the amount reported as a cash flow from operating activities. 
A) Increase interest expense. 
B) Decrease the book value of the bonds. 
C) Decrease in amount amortized for each year the bond gets older when the effective-interest method is used. 
D) Decrease the amount reported as a cash flow from operating activities.

Question 4

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.How much is the annual interest expense?

Accepted Answer

A) $4,700 
B) $4,300 
C) $4,500 
D) $4,680 
A) $4,700 
B) $4,300 
C) $4,500 
D) $4,680

Question 5

If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when their book value is $950,000,a loss of $20,000 will be reported.

Accepted Answer

A) True 
 B)False

Question 6

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

Accepted Answer

A) True 
 B)False

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 amount of straight-line discount amortization on each semi-annual interest date?

Accepted Answer

A) $90 
B) $45 
C) $900 
D) $450 
A) $90 
B) $45 
C) $900 
D) $450

Question 8

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

Accepted Answer

A) The interest expense over the life of the bond is less than 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 premium 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. 
A) The interest expense over the life of the bond is less than 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 premium 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.

Question 10

On January 1,2010,Tonika Corporation issued a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used,which of the following journal entries correctly records the 2010 interest expense (to the nearest dollar)?

Accepted Answer

A)  Interest expense
700
Cash
700

$\begin{array}{lr}
\text { Interest expense } & 700 \
\text { Cash } & &700 \
\end{array}$ 
B)  $\begin{array} { l c } 
\text { Interest expense } & 883 \
\text { Discount on bonds payable } & &183 \
\text { Cash } && 700
\end{array}$ 
C)  
$\begin{array} { l c } 
\text { Interest expense } & 773 \
\text { Discount on bonds payable } & &73 \
\text { Cash } && 700
\end{array}$ 
D)  $\begin{array} { l r r } 
\text { Interest expense } & 676 & \
\text { Discount on bonds payable } & 24 & \
\text { Cash } & & 700
\end{array}$ 
A)  Interest expense
700
Cash
700

$\begin{array}{lr}
\text { Interest expense } & 700 \
\text { Cash } & &700 \
\end{array}$ 
B)  $\begin{array} { l c } 
\text { Interest expense } & 883 \
\text { Discount on bonds payable } & &183 \
\text { Cash } && 700
\end{array}$ 
C)  
$\begin{array} { l c } 
\text { Interest expense } & 773 \
\text { Discount on bonds payable } & &73 \
\text { Cash } && 700
\end{array}$ 
D)  $\begin{array} { l r r } 
\text { Interest expense } & 676 & \
\text { Discount on bonds payable } & 24 & \
\text { Cash } & & 700
\end{array}$

Question 11

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

Accepted Answer

A) The market rate of interest is less than the stated interest rate. 
B) The interest expense over the life of the bonds will be less than the cash interest payments. 
C) The present value of the bonds' future cash flows is greater than the bonds' maturity value. 
D) The book value of the bond liability increases when interest payments are made on the due dates. 
A) The market rate of interest is less than the stated interest rate. 
B) The interest expense over the life of the bonds will be less than the cash interest payments. 
C) The present value of the bonds' future cash flows is greater than the bonds' maturity value. 
D) The book value of the bond liability increases when interest payments are made on the due dates.

Question 15

Which of the following statements regarding the debt to equity ratio is correct?

Accepted Answer

A) A high ratio means that the company is primarily financed through stockholder investments. 
B) A higher ratio is preferred. 
C) It is a measure of a company's ability to pay its debt. 
D) It is a measure of investor and creditor risk. 
A) A high ratio means that the company is primarily financed through stockholder investments. 
B) A higher ratio is preferred. 
C) It is a measure of a company's ability to pay its debt. 
D) It is a measure of investor and creditor risk.

Question 16

A corporation retired $200,000 of bonds which have an unamortized premium of $8,000,by repurchasing them for $210,000.How much was the gain or loss on the retirement of the bonds?

Accepted Answer

A) There was a $10,000 loss. 
B) There was a $2,000 loss. 
C) There was a $10,000 gain. 
D) There was an $18,000 loss. 
A) There was a $10,000 loss. 
B) There was a $2,000 loss. 
C) There was a $10,000 gain. 
D) There was an $18,000 loss.

Question 17

A convertible bond can be called for early retirement at the option of the issuing company.

Accepted Answer

A) True 
 B)False

Question 18

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.What is the bond liability to be reported on the December 31,2010 balance sheet?

Accepted Answer

A) $300,000 
B) $302,850 
C) $302,700 
D) $303,000 
A) $300,000 
B) $302,850 
C) $302,700 
D) $303,000

Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

When a bond payable is issued at a premium,subsequent amortization of the premium does which of the following?

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.How much is the annual interest expense?

If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when their book value is $950,000,a loss of $20,000 will be reported.

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

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 amount of straight-line discount amortization on each semi-annual interest date?

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

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?

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

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

Which of the following statements regarding the debt to equity ratio is correct?

A corporation retired $200,000 of bonds which have an unamortized premium of $8,000,by repurchasing them for $210,000.How much was the gain or loss on the retirement of the bonds?

A convertible bond can be called for early retirement at the option of the issuing company.

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

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

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

Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

When a bond payable is issued at a premium,subsequent amortization of the premium does which of the following?

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.How much is the annual interest expense?

If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when their book value is $950,000,a loss of $20,000 will be reported.

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

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 amount of straight-line discount amortization on each semi-annual interest date?

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

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?

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

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

Which of the following statements regarding the debt to equity ratio is correct?

A corporation retired $200,000 of bonds which have an unamortized premium of $8,000,by repurchasing them for $210,000.How much was the gain or loss on the retirement of the bonds?

A convertible bond can be called for early retirement at the option of the issuing company.

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

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

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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