Deck 10: Reporting and Interpreting Bonds

Question 1

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

Answer 1

False
Explanation: Bondholders do not have voting rights.

Question 2

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

Answer 2

False
Explanation: A callable bond can be called for early retirement at the option of the issuing company. A convertible bond is convertible into common stock at the option of the investor.

Question 3

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

Answer 3

False
Explanation: The straight-line method can only be used when the amounts involved aren't material.

Question 4

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 5

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.

Question 6

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

Question 7

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

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.

Question 9

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.

Question 10

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.

Question 11

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

Question 12

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

Question 13

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

Question 14

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.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

A)Dates of each interest payment.
B)The stated interest rate.
C)The maturity date.
D)The market rate of interest.

Question 23

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 24

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

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 25

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

Question 26

Which of the following bonds does not have specific assets pledged to guarantee repayment?

A)Debenture bond
B)Callable bond
C)Discount bond
D)Convertible bond

Question 27

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

Question 28

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 29

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.

Question 30

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

Question 31

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

Question 32

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 33

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

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 34

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

Question 35

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 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 36

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?

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 37

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.

Question 38

Which of the following is not a reason that a corporation 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 may be positive.
D)There is less risk associated with a bond issue.

Question 39

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

Question 40

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 41

Which of the following statements doesn't correctly describe the accounting for bonds that were issued at a discount?

A)The interest expense over the life of the bond exceeds 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 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 42

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?

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

Question 43

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,what is the December 31,2011 book value after the December 31,2011 interest payment was made (to the nearest dollar)?

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

Question 44

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 45

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?

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

Question 46

On January 1,2010,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 .3220 and at 14% is .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 47

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)?

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

Question 48

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?

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

Question 49

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)?

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 50

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%?

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

Question 51

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

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.

Question 52

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 53

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:

$$\begin{array}{lccl }\begin{array} { lccl } \text { Time Period } & \text { Interest } \\10 & 10 \% \\10 & 8 \% \\10 & 12 \%\end{array}\begin{array} { lcc l } \text { PV of } \$ & \text { PV of an } \text { Annuity } \\.386 & 6.145 \\.463 & 6.710 \\.322 & 5.650\end{array}\end{array}$$
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

Question 54

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:

$$\begin{array}{ll }\begin{array} { ll } \text { Time Period } & \text { Interest } \\10 & 10 \% \\10 & 8 \% \\10 & 12 \%\end{array}\begin{array} { l l } \text { PV of } \$ & \text { PV of an } \text { Annuity } \\.386 & 6.145 \\.463 & 6.710 \\.322 & 5.650\end{array}\end{array}$$
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 55

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,what is the 2011 interest expense (to the nearest dollar)?

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

Question 56

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 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 57

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 58

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,what is the book value of the bonds as of December 31,2010 (to the nearest dollar)?

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

Question 59

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.Which of the following is incorrect assuming the straight-line method of amortization is utilized?

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

Question 60

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?

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

Question 61

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?

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 62

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 the straight-line method of amortization.How much is the semi-annual interest expense?

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

Question 63

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?

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 64

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?

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 65

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

A)Interest expense to be calculated by multiplying the market interest rate times the book value of the bonds.
B)Higher premium amortization in the early years and lower interest expense over the life of the bonds.
C)Calculating the constant amount of premium to be amortized and then deducting it from cash interest to calculate interest expense.
D)Lower premium amortization in the early years and higher interest expense over the life of the bonds.

Question 66

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)?

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

Question 67

Which of the following statements regarding the effective-interest method of amortization is incorrect?

A)The amount of interest expense is different each period.
B)The amount of discount or premium that is amortized increases each period.
C)It is one of the options according to generally accepted accounting principles.
D)The total interest expense over the life of a bond is the same as that reported under the straight-line method of amortization.

Question 68

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?

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

Question 69

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)?

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

Question 70

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.Assuming 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 stated rate of interest.
B)The book value of the bond will decrease as the bond matures.
C)The interest expense will decrease as the bond matures.
D)The amortization of the premium on bonds payable will decrease as the bond matures.

Question 71

A company issued bonds when the stated rate of interest was 10% and the market rate 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 72

A company issued bonds when the stated rate of interest was 10% and the market rate 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 was used.

Question 73

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 on December 31,2010 (to the nearest dollar)?

A)$400,000
B)$413,320
C)$406,302
D)$407,432

Question 74

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?

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 75

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 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 76

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?

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 77

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 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 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 78

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?

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 79

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 31,2011 balance sheet?

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

Question 80

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)?

A)$24,000
B)$20,491
C)$20,000
D)$20,825