Deck 10: Reporting and Interpreting Bond Securities

Question 1

The journal entry for the cash payment of interest on a bond issued at a premium results in an increase in the book value of the bond liability.

Answer 1

False

Question 2

A company has a December 31 fiscal year-end and a bond on which interest is paid annually on December 31.When the bond initially sells at par value,the bond interest expense on the income statement equals the amount of the interest cash payment.

Answer 2

True

Question 3

The journal entry for the cash payment of interest on a bond issued at a discount will result in an increase in the book value of the bond liability.

Answer 3

True

Question 4

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

Question 5

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 at the coupon rate.

Question 6

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

Question 7

The proceeds received from a bond issue will be greater than the bond maturity value when the coupon rate exceeds the market rate of interest.

Question 8

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

Question 9

Amortization of discount on bonds payable will make the amount of interest expense less than the cash owed for interest for that year.

Question 10

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

Question 11

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

Question 12

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.

Question 13

For bonds issued at par,the payment of bond interest on the interest payment date reduces both the bond liability and assets,assuming that interest expense is recorded at the time of the cash payment.

Question 14

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.

Question 15

When the market rate of interest is greater than the coupon rate,the bond will sell at a discount.

Question 16

A bond will sell at its par value when the market rate of interest equals the coupon rate of interest.

Question 17

A bond's interest payments are determined by multiplying the bond's principal amount by the coupon rate.

Question 18

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

Question 19

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

Question 20

The issuing company and the trustee determine the selling price of a bond.

Question 21

Which of the following statements best describes callable bonds?

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 22

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

Question 23

Which of the following statements best describes convertible bonds?

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 converted to common stock at the option of the issuer.

Question 24

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

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

Question 25

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

Question 26

Which of the following statements is not correct?

A)The bond principal is the amount due at the maturity date of the bond.
B)The coupon 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 27

Which of the following types of bonds has specific assets pledged to guarantee repayment?

A)Debenture bond.
B)Callable bond.
C)Secured bond.
D)Convertible bond.

Question 28

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

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

Question 29

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

Question 30

When a company prepares a bond indenture,certain provisions of the bonds are included.Which of the following is not specified in the indenture?

A)Date of each interest payment.
B)The coupon interest rate.
C)The maturity date.
D)The market rate of interest.

Question 31

The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

Question 32

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

Question 33

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

Question 34

Which of the following is the title of a regulatory document with regard to a bond offering?

A)Certificate
B)Covenant
C)Indenture
D)Prospectus

Question 35

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

Question 36

When a company needs funds to finance the expansion of its operations,which of the following is not an advantage of issuing bonds rather than issuing stock?

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)Bonds can usually be issued at a low interest rate and the proceeds can be invested to earn a higher rate.
D)The dates for the interest and maturity payments are fixed.

Question 37

The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus stockholders' equity.

Question 38

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

Question 39

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

Question 40

A bond issued at a premium will pay periodic cash interest in excess of the amount of interest expense recognized for accounting purposes.

Question 41

Which of the following statements is correct?

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 42

On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization.

- How much is the amount of discount amortization on each semiannual interest date?

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

Question 43

On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization.

- How much is the semiannual interest expense when the straight-line method of amortization is utilized?

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

Question 44

Which of the following statements does not correctly describe the accounting for bonds that were issued at their face (maturity)value?

A)The market rate of interest equals the coupon rate.
B)The interest expense over the life of the bonds will equal the total 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.

Question 45

Halverson's times interest earned ratio was 2.98 in 2019,2.79 in 2018,and 2.31 in 2017.Which of the following statements about the ratio is correct?

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

Question 46

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds,the market rate of interest was 10%.Which of the following statements is incorrect?

A)The bonds were issued at par.
B)Annual interest expense will equal the company's annual cash payments for interest.
C)The book value of the bonds will decrease as cash interest payments are made.
D)Annual interest expense is the same regardless of whether the effective-interest or straight-line method of amortization is used.

Question 47

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

A)An increase in expenses and a decrease in liabilities.
B)An increase in expenses and a decrease in assets.
C)A decrease in both liabilities and stockholders' equity.
D)A decrease in both assets and liabilities.

Question 48

Skylar Company issued $50,000,000 of its 10% bonds at par on January 1,2019.On December 31,2019,the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

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

Question 49

On January 1,2019,Tonika Company 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.Tonika uses the effective-interest amortization method.

- Rounding calculations to the nearest whole dollar,which of the following journal entries correctly records the 2019 interest expense?

A)
B)
C)
D)

Question 50

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds,the market rate of interest was 11%.Which of the following statements is correct?

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 51

During 2019,Patty's Pizza reported net income of $4,212 million,interest expense of $167 million and income tax expense of $1,372 million.During 2018,Patty's reported net income of $3,568 million,interest expense of $163 million and income tax expense of $1,424 million.The times interest earned ratios for 2019 and 2018,respectively,are closest to:

A)32.2 and 29.4 times.
B)28.4 and 23.8 times.
C)34.4 and 31.6 times.
D)34.1 and 26.6 times.

Question 52

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

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 53

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds,the market rate of interest was 8%.Which of the following statements is incorrect?

A)The bonds were issued at a premium.
B)Annual interest expense will be less than the company's annual cash payments for interest.
C)The book value of the bonds will decrease as the bond matures.
D)The annual interest expense will increase if the effective-interest method of amortization is used.

Question 54

On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization.

- How much is the book value of the bonds after the November 1,2020 interest payment was recorded using the straight-line method of amortization?

A)$29,010.
B)$29,100.
C)$29,190.
D)$29,280.

Question 55

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

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 56

On January 1,2019,Tonika Company 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.Tonika uses the effective-interest amortization method.

- The interest expense on the income statement for the year ended December 31,2019 is closest to:

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

Question 57

Zero coupon bonds are bonds that are issued:

A)With a zero effective interest rate.
B)At a rate that provides a large discount at issuance.
C)At a rate that has zero difference between the coupon rate and the market rate of interest.
D)As bonds that will have zero amortization recorded over the life of the bond.

Question 58

Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?

A)The interest expense over the life of the bond exceeds the total 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 discount 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 59

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

A)The market rate of interest is less than the coupon interest rate.
B)The interest expense over the life of the bonds will be less than the total 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 60

On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization.

- Which of the following is incorrect with regard to the Davis bonds when the straight-line method of amortization is utilized?

A)The market rate of interest exceeded the coupon rate of interest when the bonds were issued.
B)The semiannual interest expense is $1,095.
C)The book value of the bonds increases $45 every six months.
D)The semiannual interest expense is less than the semiannual cash interest payment.

Question 61

On January 1,2019,Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually.The following present value factors have been provided:

-Calculate the issuance price if the market rate of interest is 12%.

A)$4,427,500.
B)$4,477,500.
C)$4,435,000.
D)$5,000,000.

Question 62

On January 1,2019,Tonika Company 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.Tonika uses the effective-interest amortization method.

- The December 31,2020 book value after the December 31,2020 interest payment was made is closest to:

A)$9,662.
B)$9,820.
C)$9,668.
D)$9,723.

Question 63

Mayberry,Inc. ,issued $100,000 of 10-year,12% bonds dated April 1,2019,for $102,360 on April 1,2019.The bonds pay interest annually on April 1,beginning in 2020.Straight-line amortization is used by the company.What entry is required at April 1,2020 for the first interest payment?

A)
B)
C)
D)

Question 64

On July 1,2019,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2019,and semiannual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.

- What is the net amount of the bond liability to be reported on the December 31,2020 balance sheet?

A)$300,000.
B)$302,550.
C)$302,700.
D)$303,000.

Question 65

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

A)The interest expense over the life of the bond is less than the total 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 amount of amortization of the premium on bonds payable 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 66

On January 1,2019,a company issued $400,000 of 10-year,12% bonds.The interest is payable semiannually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.The effective-interest method of amortization is used.

-Rounding all calculations to the nearest whole dollar,what is the interest expense for the six-month period ending June 30,2019?

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

Question 67

On January 1,2019,Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually.The following present value factors have been provided:

- What was the issuance price of the bonds if the market rate of interest was 8%?

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

Question 68

On July 1,2019,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2019,and semiannual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.

-What is the net amount of the bond liability to be reported on the December 31,2019 balance sheet?

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

Question 69

On July 1,2019,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2019,and semiannual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.

-Which of the following statements is incorrect?

A)The market rate of interest was less than the coupon rate of interest on July 1,2019.
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 semiannual interest expense is $300 less than the semiannual interest payment.

Question 70

On January 1,2019,Tonika Company 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.Tonika uses the effective-interest amortization method.

-The book value of the bonds as of December 31,2019 is closest to:

A)$8,968.
B)$9,945.
C)$9,641.
D)$9,741.

Question 71

On January 1,2019,a company issued $400,000 of 10-year,12% bonds.The interest is payable semiannually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.The effective-interest method of amortization is used.

-What is the book value of the bond liability as of June 30,2019 (to the nearest dollar)?

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

Question 72

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.Gammell Company uses the straight-line method of amortization.

- Which of the following statements is incorrect?

A)The market rate of interest exceeded the coupon 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 73

On January 1,2019,Broker Corp.issued $3,000,000 par value 12%,10-year bonds which pay interest each December 31.If the market rate of interest was 14%,what was the issue price of the bonds? (The present value factor for $1 in 10 periods at 12% is 0.3220 and at 14% is 0.2697.The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161. )

A)$3,339,084.
B)$2,843,172.
C)$3,000,000.
D)$2,686,896.

Question 74

On January 1,2019,Tonika Company 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.Tonika uses the effective-interest amortization method.

-The 2020 interest expense is closest to:

A)$779.
B)$796.
C)$677.
D)$700.

Question 75

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.Gammell Company uses the straight-line method of amortization.

- What is the amount of the annual interest expense?

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

Question 76

On July 1,2019,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2019,and semiannual interest will be paid each December 31 and June 30.Garden Works Inc.uses the straight-line method of amortization.

- What is the amount of the semiannual interest expense?

A)$14,000.
B)$14,150.
C)$10,350.
D)$11,000.

Question 77

Assuming no adjusting journal entries have been made during the year,the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared.Which of the following is not an effect of the entry?

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 78

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

A)The market rate of interest is less than the coupon 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 less than the bonds' maturity value.
D)The book value of the bond liability decreases when interest payments are made on the due dates.

Question 79

On January 1,2019,a company issued $400,000 of 10-year,12% bonds.The interest is payable semiannually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.The effective-interest method of amortization is used.

- Which of the following statements is incorrect?

A)The market rate of interest on the sale date was less than the coupon rate of interest.
B)The book value of the bond will decrease as the bond reaches maturity.
C)The interest expense will decrease as the bond reaches maturity.
D)The amortization of the premium on bonds payable will decrease as the bond matures.

Question 80

On January 1,2019,Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually.The following present value factors have been provided:

- Calculate the issuance price if the market rate of interest was 10%.

A)$5,427,000.
B)$4,477,000.
C)$4,435,000.
D)$5,000,000.