Deck 22: Long-Term Bonds

Question 1

Investors will pay an amount greater than the face amount of a bond if the face interest rate on bonds is greater than the market interest rate.

Answer 1

True

Question 2

Bonds are often issued as a means of raising capital to pay off short-term debt.

Answer 2

False

Question 3

In the case of liquidation,bondholders and other creditors must be paid in full before stockholders can receive anything.

Answer 3

True

Question 4

When bonds are issued at a premium,the annual interest expense reported will be greater than the annual cash interest payments.

Question 5

The Bond Sinking Fund Investment account is reported as an investment in the Assets section of the balance sheet.

Question 6

The Bonds Payable account would be credited for $104,000 to record the issuance of $100,000 par value,10 percent bonds at a market price of 104.

Question 7

The IRS requires companies to issue coupon bonds in order to track taxable interest payments made to the bond holders.

Question 8

Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement.

Question 9

The adjusting entry to record accrued bond interest is reversed on the first day of the following period.

Question 10

Amortizing bond premiums over the period from the issue date to the maturity date reduces bond interest expense shown on the income statement.

Question 11

If retained earnings are appropriated for bond retirement,a bond retirement sinking fund must be established.

Question 12

The Bond Interest Expense account is usually listed under Operating Expenses on the income statement.

Question 13

When a corporation pays bond interest,Bond Interest Expense is debited.

Question 14

The issuing corporation has the right to require the owner of a convertible bond to surrender the bond for payment before the maturity date of the bond.

Question 15

A corporation pays only the face value of its bonds if they are retired prior to the maturity date.

Question 16

Bond interest is not deducted when a corporation determines its taxable income.

Question 17

To systematically accumulate cash for the retirement of bonds at maturity,a corporation may set up a bond sinking fund investment.

Question 18

The face interest is the contractual interest specified on the bond.

Question 19

When bonds are issued at a price below face value,the Discount on Bonds Payable account is credited for the difference between the issue price and the face value.

Question 20

Interest on bonds must be paid in full even when the corporation operates at a loss.

Question 21

Using borrowed funds to earn a profit greater than the interest that must be paid on the bonds is called trading on the equity,or ____________________.

Question 22

Bonds on which a corporation has pledged property to guarantee payment to the bondholders are known as ____________________ bonds.

Question 23

A planned fund established to accumulate assets to pay off bonds when they mature is called a bond ____________________ fund investment.

Question 24

Retained earnings may be appropriated for bond retirement by order of the board of directors,by the bond contract,or by vote of the shareholders.

Question 25

To calculate the gain or loss on the retirement of bonds,the carrying value of the bonds is subtracted from the repurchase price.

Question 26

If the market rate of interest on the day that bonds are issued is lower than the face rate of interest,the bonds will sell at a discount.

Question 27

In the interest formula (I = Prt)the Prt stands for ___________________________.

Question 28

When bonds are sold at a market price of 105,the cash received for the bonds is 105 percent of face value.

Question 29

The Discount on Bonds Payable account will have a(n)____________________ balance.

Question 30

To calculate the gain or loss on the retirement of bonds,the face amount of the bonds is subtracted from the repurchase price.

Question 31

The straight-line amortization method amortizes ____________________ amounts of the premium each month.

Question 32

Coupon bonds are often referred to as ____________________ bonds.

Question 33

A bond is ____________________ if the issuing corporation has the right to require the owner to surrender the bond for payment before the maturity date.

Question 34

The balance of the Bonds Payable account plus the balance of the Premium on Bonds Payable account or minus the balance of the Discount on Bonds Payable account is called the ____________________ value of the bonds.

Question 35

To pay interest on ____________________ bonds,the corporation must keep a record of the name of each bondholder.

Question 36

The issuing corporation ___________________ the bond discount from the date of issue to the maturity date.Here a bond issued at a discount will increases the bond interest expense shown on the income statement.

Question 37

When bonds are issued at a price below face value,the Discount on Bonds Payable account is ____________________ for the difference between the issue price and the face value.

Question 38

Bonds with a face value of $100,000 and a carrying value of $103,000 are retired early by paying a price of $101,000.If the retirement is judged to be unusual and infrequent,an extraordinary ____________________ will be reported on the income statement for the period.

Question 39

Bond interest expense usually appears in the _____________________________ section of the income statement.

Question 40

The investment banker who acts to protect the bondholders' interests,as in the case of default,is called a ____________________.

Question 41

Bonds with a face value of $400,000 were issued at 98.The entry to record the issuance will include a debit to the Discount on Bonds Payable account for

A) $2,000.
B) $4,000.
C) $6,000.
D) $8,000.

Question 42

Bonds with a face value of $400,000 were issued at 98.The entry to record the issuance will include a credit to the Bonds Payable account for

A) $408,000.
B) $392,000.
C) $400,000.
D) $398,000.

Question 43

Bonds with a face value of $200,000 were issued at 103.The entry to record the issuance will include a credit to the Bonds Payable account for

A) $206,000.
B) $200,000.
C) $103,000.
D) $230,000.

Question 44

When bonds mature,a corporation will pay the bondholders

A) the current market value of the bonds.
B) the face amount plus the original premium or minus the original discount.
C) the face amount plus the interest accrued since the date the bonds were issued.
D) the face amount of the bonds.

Question 45

Ten-year bonds with a face value of $500,000 were issued at 96.The carrying value of the bond after the second year of interest payments is:

A) $484,000.
B) $480,000.
C) $500,000.
D) $482,000.

Question 46

A company issued 6%,10 year bonds with a par value of $500,000 on April 1.Interest is payable each Sept.30 and March 31.The journal entry to accrue interest expense as of December 31 is:

A)

B)

C)

D)

Question 47

When bonds are issued at a premium,the bond premium

A) reduces the amount of interest expense over the life of the bonds.
B) increases the amount of interest expense over the life of the bonds.
C) does not change the amount of interest expense over the life of the bonds.
D) is charged to interest expense when the bonds are issued.

Question 48

The entry to record the adjustment for accrued bond interest includes

A) a debit to Bond Interest Expense and a credit to Cash.
B) a debit to Bond Interest Expense and a credit to Bond Interest Payable.
C) a debit to Bond Interest Payable and a credit to the Bond Interest Expense.
D) a debit to Bond Interest Expense and a credit to Bonds Payable.

Question 49

A company issued 6%,10-year bonds with a par value of $500,000.The current market rate of interest is 5%.The journal entry to record each semiannual interest payment is:

A)

B)

C)

D)

Question 50

Unsecured Bonds:

A) represent a safer investment than secured bonds.
B) are called debentures.
C) are backed by the issuer's bank.
D) are the same as sinking bonds.

Question 51

Bonds with a face value of $200,000 were issued at 103.The entry to record the issuance will include a debit to the Cash account for

A) $206,000.
B) $200,000.
C) $103,000.
D) $230,000.

Question 52

A bond that trades at 105½ means that:

A) the bond pays 5½% interest.
B) the bond traded at $1,055 per $1,000 bond.
C) the market rate of interest is 5½%.
D) the market rate of interest is 5½% higher than the contract rate.

Question 53

The Premium on Bonds Payable account is shown

A) in the Current Assets section of the balance sheet.
B) in the Current Liabilities section of the balance sheet.
C) in the Long-Term Liabilities section of the balance sheet.
D) in the Revenue section of the income statement.

Question 54

A company issues 8%,20-year bonds with a par value of $400,000.The current market rate of interest is 9%.The amount of interest owed to the bondholders for each semiannual interest payment is:

A) $36,000.
B) $32,000.
C) $18,000.
D) $16,000.

Question 55

On December 31,2013,a corporation issued $200,000 face value,12 percent bonds that mature 10 years from the date of issue.The issue price was 97.If the firm uses the straight-line method of amortization,interest expense for 2014 will be reported at

A) $24,600.
B) $24,000.
C) $23,400.
D) $19,400.

Question 56

Which of the following is not a disadvantage of raising capital through the issue of bonds payable?

A) the bonds are classified as a long-term liability
B) interest must be paid even if the firm suffers a loss
C) the face amount must be repaid at maturity
D) interest is deductible for income tax purposes

Question 57

On December 31,2013,a corporation issued $200,000 face value,12 percent bonds that mature 10 years from the date of issue.The issue price was 103.If the firm uses the straight-line method of amortization,interest expense for 2014 will be reported at

A) $24,600.
B) $24,000.
C) $23,400.
D) $19,400.

Question 58

A company issues 6%,10 year bonds with a par value of $500,000 at 98.The current market rate of interest is 7%.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

A)

B)

C)

D)

Question 59

A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized discount balance of $3,000.The entry to record the early retirement of the bonds will include the recognition of a loss of

A) $7,000.
B) $4,000.
C) $1,000.
D) $3,000.

Question 60

If bonds are issued for a price below their face value,the bond discount should be

A) charged to expense on the date the bonds are issued.
B) amortized over the life of the bond issue.
C) shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet.
D) shown as a current liability on the balance sheet.

Question 61

Twenty-year bonds with a face value of $400,000 are issued on January 1 of the current year at 102.How much premium will be amortized under the straight-line method in the first semi-annual interest period?

A) $200.
B) $400.
C) $800.
D) $8,000.

Question 62

A company issued 10-year,6% bonds with a par value of $1,000,000.The company received $960,000 upon issuance.Using the straight-line method,the amount of interest expense for the first semi-annual interest period is:

A) $24,000.
B) $30,000.
C) $32,000.
D) $60,000.

Question 63

A bond sinking fund investment is started on January 5,2016,by transferring $10,000 in cash to the fund.This $10,000 is invested and earns $1,100 during 2016.The entry to record the earnings made on the sinking fund investment includes

A) a debit to Cash for $1,100 and a credit to Income from Sinking Fund Investment for $1,100.
B) a debit to Cash for $1,100 and a credit to Bond Sinking Fund Investment for $1,100.
C) a debit to Bond Sinking Fund Investment for $1,100 and a credit to Income from Sinking Fund Investment for $1,100.
D) a debit to Cash for $1,100 and a credit to Interest Income for $1,100.

Question 64

If market interest rates are higher than the rate offered on the bonds being sold,they will be sold at

A) a premium.
B) a discount.
C) face value.
D) a loss.

Question 65

Retained earnings are often appropriated while the bonds are outstanding.Which of the following is a reason for the appropriation?

A) Corporation management wants to protect the bondholders.
B) The bond underwriters always require it.
C) Tax law requires it.
D) The buyers require it.

Question 66

Corporations with many bondholders will open a separate checking account because

A) it is required by law.
B) the account earns interest.
C) it is easier to do the bookkeeping on the bond interest.
D) it keeps the bond interest records separate for tax purposes.

Question 67

The difference between the face value and the selling price of a 10-year discounted bond issued two years after authorization,is amortized for

A) 10 years.
B) 8 years.
C) 2 years.
D) The difference is not amortized,only interest is amortized.

Question 68

A bond sinking fund investment is started on January 5,2016,by transferring $12,000 in cash to the fund.The company intends to accumulate $12,000 each year in the fund.This $12,000 is invested and earns $1,500 during 2016.On January 5,2017,the amount of cash transferred to the sinking fund investment will be

A) $10,500.
B) $12,000.
C) $13,500.
D) $1,500.

Question 69

Bonds issued at a premium are

A) traded for stock.
B) sold at face value.
C) sold at less than face value.
D) sold for more than face value.

Question 70

Bonds with a face value of $400,000 were issued at 98.The entry to record the issuance will include a debit to the Cash account for

A) $408,000.
B) $400,000.
C) $398,000.
D) $392,000.

Question 71

The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are

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

Question 72

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

A) on the Income Statement.
B) on the Balance Sheet.
C) on the Bond Interest Reconciliation Schedule.
D) on the Statement of Cash Flows.

Question 73

In the interest formula I = Prt,the P stands for

A) Payment.
B) Principal.
C) Premium.
D) Prime number.

Question 74

On April 1,Fifedom,Inc.repurchased its $100,000 10-year,9% bonds on the open market at 107.The bond's carrying value after accruing interest was $98,000 at the time of repurchase.The gain/loss on early retirement of the bonds is:

A) $2,000 gain.
B) $9,000 gain.
C) $9,000 loss.
D) $7,000 loss.

Question 75

Using borrowed funds to earn a profit higher than the interest charged for borrowing is called

A) leveraging.
B) amortizing.
C) investing.
D) secured borrowing.

Question 76

The amortization of the bond discount __________ the carrying value of the bond,while the amortization of the bond premium __________ the carrying value of the bond.

A) decreases;increases
B) increases;decreases
C) increases;increases
D) decreases;decreases

Question 77

A company issued 10-year,6% bonds with a par value of $1,000,000.The company received $1,120,000 upon issuance.Using the straight-line method,the amount of interest expense for the first semi-annual interest period is:

A) $24,000.
B) $30,000.
C) $36,000.
D) $60,000.

Question 78

When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds,the bonds are referred to as

A) serial bonds.
B) convertible bonds.
C) registered bonds.
D) callable bonds.

Question 79

The entry to record the issuance of bonds at face value includes

A) a credit to Bond Interest Payable.
B) a credit to Bond Payable.
C) a debit to Bond Interest Expense.
D) a debit to Bond Interest Payable.

Question 80

If a bond is a registered bond,it can NOT be a ___________ bond.

A) discount
B) callable
C) convertible
D) coupon