Question 1

Which of the following statements best describes callable bonds?

Accepted Answer

A) They can be turned in for early retirement at the option of the bondholder. 
B) They can be converted to common stock at the option of the bondholder. 
C) They can be called for early retirement at the option of the issuer. 
D) They can be called for early retirement at the option of the lien holder. 
A) They can be turned in for early retirement at the option of the bondholder. 
B) They can be converted to common stock at the option of the bondholder. 
C) They can be called for early retirement at the option of the issuer. 
D) They can be called for early retirement at the option of the lien holder.

Question 2

On January 1,2009,Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually.The following present value factors have been provided:

$$\begin{array}{ll }
\begin{array} { ll  } 
\text { Time Period } & \text { Interest } \
10 & 10 \% \
10 & 8 \% \
10 & 12 \%
\end{array}
\begin{array} { l l } 
\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity } \
.386 & 6.145 \
.463 & 6.710 \
.322 & 5.650
\end{array}
\end{array}$$
 What was the issuance price of the bonds if the market rate of interest was 8%?

Accepted Answer

A) $5,000,000 
B) $5,670,000 
C) $5,387,500 
D) $5,712,500 
A) $5,000,000 
B) $5,670,000 
C) $5,387,500 
D) $5,712,500

Question 3

When a company purchases and retires their outstanding bonds payable for an amount less than their book value,an increase in stockholders' equity results.

Accepted Answer

A) True 
 B)False

Question 4

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 book value of the bond liability as of June 30,2010 (to the nearest dollar)?

Accepted Answer

A) $400,000 
B) $416,495 
C) $409,811 
D) $403,342 
A) $400,000 
B) $416,495 
C) $409,811 
D) $403,342

Question 5

Which of the following statements is not correct?

Accepted Answer

A) The bond principal is the amount due at the maturity date of the bond. 
B) The stated interest rate is used to determine the cash interest payments. 
C) The bond principal is used to determine the cash interest payments. 
D) The market rate of interest is used to determine the cash interest payments. 
A) The bond principal is the amount due at the maturity date of the bond. 
B) The stated interest rate is used to determine the cash interest payments. 
C) The bond principal is used to determine the cash interest payments. 
D) The market rate of interest is used to determine the cash interest payments.

Question 6

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

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 semi-annual interest expense when the straight-line method is utilized?

Accepted Answer

A) $2,010 
B) $2,190 
C) $1,095 
D) $2,055 
A) $2,010 
B) $2,190 
C) $1,095 
D) $2,055

Question 8

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 9

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1,2010.On December 31,2010 the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

Accepted Answer

A) The market rate increased. 
B) The market rate decreased. 
C) The market rate stayed the same. 
D) The change in the market rate can't be determined. 
A) The market rate increased. 
B) The market rate decreased. 
C) The market rate stayed the same. 
D) The change in the market rate can't be determined.

Question 10

Which of the following statements is correct?

Accepted Answer

A) A secured bond has specific assets pledged as collateral to secure it. 
B) An unsecured bond can be paid at the option of the issuer. 
C) A bond trustee is appointed to represent the issuing company. 
D) The bond indenture specifies the market rate of interest the investors will earn. 
A) A secured bond has specific assets pledged as collateral to secure it. 
B) An unsecured bond can be paid at the option of the issuer. 
C) A bond trustee is appointed to represent the issuing company. 
D) The bond indenture specifies the market rate of interest the investors will earn.

Question 11

The annual interest rate specified within a bond indenture is called which of the following?

Accepted Answer

A) The stated rate of interest. 
B) The market rate of interest. 
C) The effective rate of interest. 
D) The actual rate of interest. 
A) The stated rate of interest. 
B) The market rate of interest. 
C) The effective rate of interest. 
D) The actual rate of interest.

Question 12

On March 31,2010,Bundy Corporation retired $10,000,000 of bonds which have an unamortized premium of $500,000,by repurchasing them for $9,850,000.How much was the gain or loss on the retirement of the bonds?

Accepted Answer

A) $150,000 loss 
B) $150,000 gain 
C) $650,000 gain 
D) $350,000 loss 
A) $150,000 loss 
B) $150,000 gain 
C) $650,000 gain 
D) $350,000 loss

Question 13

Which of the following statements is correct?

Accepted Answer

A) An outflow of cash for interest payments is reported as a cash flow from financing activities. 
B) The conversion of bonds to stock is reported as a cash flow from financing activities. 
C) An outflow of cash when callable bonds are recalled by the issuer is reported as a cash flow from financing activities. 
D) Amortization of discounts and premiums on bonds payable are reported as a cash flow from financing activities. 
A) An outflow of cash for interest payments is reported as a cash flow from financing activities. 
B) The conversion of bonds to stock is reported as a cash flow from financing activities. 
C) An outflow of cash when callable bonds are recalled by the issuer is reported as a cash flow from financing activities. 
D) Amortization of discounts and premiums on bonds payable are reported as a cash flow from financing activities.

Question 14

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000,by repurchasing them for $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 15

If a bond is issued at 101,the stated rate of interest was

Accepted Answer

A) higher than the market rate of interest. 
B) lower than the market rate of interest. 
C) equal to the market rate of interest. 
D) not related to the market rate of interest. 
A) higher than the market rate of interest. 
B) lower than the market rate of interest. 
C) equal to the market rate of interest. 
D) not related to the market rate of interest.

Question 16

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Accepted Answer

A) True 
 B)False

Question 17

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,how much is the interest expense on the income statement for the year ended December 31,2010 (to the nearest dollar)?

Accepted Answer

A) $677 
B) $883 
C) $773 
D) $700 
A) $677 
B) $883 
C) $773 
D) $700

Question 18

A bond issued at a discount will pay total cash payments for interest that is more than the total interest expense recognized over the life of the bond.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is not a reason that a corporation would want to issue bonds instead of stock?

Accepted Answer

A) Interest payments can be deducted for income tax purposes. 
B) Stockholders maintain control. 
C) The impact on earnings may be positive. 
D) There is less risk associated with a bond issue. 
A) Interest payments can be deducted for income tax purposes. 
B) Stockholders maintain control. 
C) The impact on earnings may be positive. 
D) There is less risk associated with a bond issue.

Question 20

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

Accepted Answer

A) Total liabilities increase by the amount of the debit to cash. 
B) Premium on bonds payable is reported on the balance sheet as a contra-liability account. 
C) Total liabilities increase by the amount of the credit to bonds payable. 
D) The credit to bonds payable is the amount reported as a cash flow from financing activities. 
A) Total liabilities increase by the amount of the debit to cash. 
B) Premium on bonds payable is reported on the balance sheet as a contra-liability account. 
C) Total liabilities increase by the amount of the credit to bonds payable. 
D) The credit to bonds payable is the amount reported as a cash flow from financing activities.

Which of the following statements best describes callable bonds?

When a company purchases and retires their outstanding bonds payable for an amount less than their book value,an increase in stockholders' equity results.

Which of the following statements is not correct?

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

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 semi-annual interest expense when the straight-line method is utilized?

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.

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1,2010.On December 31,2010 the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

Which of the following statements is correct?

The annual interest rate specified within a bond indenture is called which of the following?

On March 31,2010,Bundy Corporation retired $10,000,000 of bonds which have an unamortized premium of $500,000,by repurchasing them for $9,850,000.How much was the gain or loss on the retirement of the bonds?

Which of the following statements is correct?

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

If a bond is issued at 101,the stated rate of interest was

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

A bond issued at a discount will pay total cash payments for interest that is more than the total interest expense recognized over the life of the bond.

Which of the following is not a reason that a corporation would want to issue bonds instead of stock?

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

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

Exam 10: Reporting and Interpreting Bonds

Which of the following statements best describes callable bonds?

When a company purchases and retires their outstanding bonds payable for an amount less than their book value,an increase in stockholders' equity results.

Which of the following statements is not correct?

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

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 semi-annual interest expense when the straight-line method is utilized?

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.

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1,2010.On December 31,2010 the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

Which of the following statements is correct?

The annual interest rate specified within a bond indenture is called which of the following?

On March 31,2010,Bundy Corporation retired $10,000,000 of bonds which have an unamortized premium of $500,000,by repurchasing them for $9,850,000.How much was the gain or loss on the retirement of the bonds?

Which of the following statements is correct?

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

If a bond is issued at 101,the stated rate of interest was

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

A bond issued at a discount will pay total cash payments for interest that is more than the total interest expense recognized over the life of the bond.

Which of the following is not a reason that a corporation would want to issue bonds instead of stock?

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

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: Cash $\quad$ Premium on bonds payable $\quad$ Bonds payable Which of the following statements correctly describes the effect of this journal entry on the financial statements?