Deck 14: Financing Liabilities: Bonds and Notes Payable

Question 1

Interest expense is less than the interest paid when a bond is issued for a premium.

Answer 1

True

Question 2

When fair value is chosen for the reporting of a debt instrument this determination can be made after the bonds have been issued but prior to the issuance of the financial statements.

Answer 2

False

Question 3

Interest expense is more than interest paid when bonds are issued at par.

Answer 3

False

Question 4

A company could decide to call its bonds because it will eliminate any restrictions on operations from certain debt covenants.

Question 5

In the event of a debt restructuring the required disclosures are only for the related income tax effects associated with the debt.

Question 6

Debt financing typically has a higher cost of capital than equity.

Question 7

At the time of the issuance of a note payable the incremental interest rate is what one would pay for similar financing.

Question 8

As a requirement of GAAP the interest expense associated with a note payable is recorded in the operating activities of the cash flow statement.

Question 9

A company may want to increase its equity capital at a later date in time, in order to accomplish this goal the company decides to issue convertible debt.

Question 10

Serial bonds come due in installments in periodic future dates.

Question 11

If a company is having trouble paying its obligations a modification of terms can be granted in the form of interest rate reduction, maturity date extension, and even a reduction in the amount owed.

Question 12

When computing the amortization for a discount or premium for a bond issue only the effective amortization method is permissible under IFRS. Under GAAP however, the straight line or the effective interest method can be used with no regard to materiality.

Question 13

Debenture Bonds are only issued to companies with an excellent credit rating.

Question 14

If the contract rate of interest is less than the effective interest rate the issuer of the bonds will record a premium.

Question 15

GAAP considers debt extinguished if one of the following occurs:
* the creditor has been paid in full and has released the company from any further obligations.
* the debtor is legally released from being the primary responsible party to the debt.

Question 16

Companies report cash flows associated with long term liability transactions in the investing section of the statement of cash flows, because the money was an investment in the future of the company.

Question 17

A company looking to issue debt instead of equity may want to consider debt due to favorable tax benefits.

Question 18

When a zero coupon bond is issued, interest is remitted periodically over the life of the bonds. The interest remitted is the present value of the face value of the bonds.

Question 19

When the contract rate of interest is greater than the market rate of interest the issuer will record a premium on bonds payable.

Question 20

Notes payable can be structured in various ways, but GAAP recognizes the underlying economics therefore requiring the borrowers to record the note at its present value and to record interest based upon the straight line method of amortization.

Question 21

Serial bonds cannot be sold at a premium or discount.

Question 22

In which of the following situations will the book value of a bond be equal to its maturity value?

A) The effective rate exceeds the stated rate.
B) The nominal rate exceeds the yield rate.
C) The yield rate equals the contract rate.
D) The effective rate equals the yield rate.

Question 23

Which of the following is always equal to the face rate of interest?

A) effective rate
B) yield rate
C) market rate
D) nominal rate

Question 24

When the market rate of interest is greater than the contract rate of interest, the bonds should sell at

A) a premium
B) par value
C) a discount
D) face value

Question 25

Which of the following bonds pay no interest until maturity?

A) zero-coupon bonds
B) registered bonds
C) serial bonds
D) debenture bonds

Question 26

Which of the following statements is not true?

A) Debt may be the only available source of funds to a company.
B) Historically, debt financing has a higher cost than equity financing.
C) Debt financing offers an income tax advantage.
D) Debt does not dilute ownership interests.

Question 27

Which of the following may not be equal to the contract rate of interest?

A) stated rate
B) nominal rate
C) face rate
D) effective rate

Question 28

An unsecured bond is called a

A) debenture bond
B) mortgage bond
C) registered bond
D) serial bond

Question 29

For which of the following types of bonds is interest expense recognized each year even though no interest is paid?

A) debenture bonds
B) zero-coupon bonds
C) serial bonds
D) mortgage bonds

Question 30

When the market rate of interest is equal to the contract rate of interest, the bonds should sell at

A) a premium
B) par
C) an inflation-adjusted discount
D) a discount

Question 31

Which of the following is not a reason for the issuance of long-term liabilities?

A) Debt financing offers an income tax advantage.
B) Ownership interest is diluted.
C) Debt may be the only available source of funds.
D) Debt financing may have a lower cost.

Question 32

Leverage occurs when a company's

A) interest payment exceed its rate of return
B) rate of return equals its interest payments
C) rate of return exceeds its interest payments
D) interest payments are made on time

Question 33

Why do companies issue long term liabilities?

A) The company desires the income tax advantages
B) Increase the company's leverage
C) Debt is less costly than issuing equity
D) All of these choices

Question 34

The serial bond interest rate fluctuates due to the periodic installments. After each payment the current prevailing rate is used to calculate the next periods interest.

Question 35

If a company sells its bonds at less than face value, the effective interest rate is

A) lower than the contract interest rate
B) higher than the contract interest rate
C) equal to the contract interest rate
D) higher than the market interest rate

Question 36

If a company sells its bonds at face value, the effective interest rate is

A) lower than the contract interest rate
B) higher than the contract interest rate
C) equal to the contract interest rate
D) higher than the market interest rate

Question 37

When the market rate of interest is less than the contract rate of interest, the bonds should sell at

A) face value
B) a discount
C) par value
D) a premium

Question 38

Which of the following characteristics of a bond would an investor look for if they are wanting to become a shareholder at a later date in time?

A) Callable Bond
B) Mortgage Bond
C) Convertible Bond
D) Serial Bond

Question 39

Which of the following is not true?

A) Debenture bonds are secured liabilities
B) Debenture bonds are issued based upon the credit rating of the company
C) Your company must have a long history of cash flows to issue debenture bonds.
D) Must have strong positive cash flows to issue debenture bonds.

Question 40

When is interest expense less than interest paid?

A) when bonds are sold at a premium
B) when bonds are sold at par
C) when bonds are sold at a discount
D) when bonds are sold at a yield

Question 41

When is interest expense more than interest paid?

A) when bonds are sold at a premium
B) when bonds are sold at par
C) when bonds are sold at a discount
D) when bonds are sold at a yield

Question 42

On January 1, 2013, Medley Corporation sold $100,000 of its 14%, five-year bonds dated January 1, 2013, for $103,000 total cash. The bonds sold at

A) 98
B) 100
C) 103
D) a quoted price that cannot be determined from the information given

Question 43

Premium on Bonds Payable is a(n)

A) valuation account
B) contra account
C) accumulation account
D) adjunct account

Question 44

Exhibit 14-1 A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: Refer to Exhibit 14-1. At date of issuance cash received would be

A) $280,747
B) $293,820
C) $299,904
D) $300,000

Question 45

Exhibit 14-2 Joseph issued 9%, ten-year bonds dated January 1, 2014, with a face value of $100,000 at 102 plus accrued interest on March 1, 2014. Joseph amortizes premiums and discounts using the straight-line method. Expenses connected with the issue totaled $5,000 and were deducted in arriving at the net proceeds.


-Refer to Exhibit 14-2. The entry to record the issue would include a debit to Cash for

A) $ 99,500
B) $ 98,500
C) $102,000
D) $103,500

Question 46

On May 1, 2013, Plotter, Inc., issued $30,000 of ten-year, 12% bonds payable dated January 1, 2013. The cash received amounted to $29,808. The bonds pay interest semiannually. Potter's fiscal year ends on June 30, 2013. What amount of interest expense should be reported on the income statement prepared on June 30, 2013, assuming straight-line amortization?

A) $603.20
B) $669.60
C) $549.60
D) $609.60

Question 47

On April 1, 2013, Bond Corporation issued 8% debentures dated January 1, 2013. The debentures had a face value of $3,000,000 and interest was payable on January 1 and July 1. The debentures were sold at par plus accrued interest. To record this event on April 1, 2013, Everly should debit cash for

A) $3,080,000
B) $3,060,000
C) $3,000,000
D) $2,920,000

Question 48

Exhibit 14-3 Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2013, at face value plus accrued interest on May 1, 2013. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
Refer to Exhibit 14-3. The entry to record the sale would include a

A) credit to Interest Expense for $10,667
B) debit to Cash for $400,000
C) credit to Bonds Payable for $410,667
D) credit to Premium on Bonds Payable for $10,667

Question 49

Discount on Bonds Payable is a(n)

A) contra account
B) valuation account
C) accumulation account
D) adjunct account

Question 50

Exhibit 14-3 Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2013, at face value plus accrued interest on May 1, 2013. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
Refer to Exhibit 14-3. The entry to record the payment of interest on July 1, 2013, would include a

A) credit to Bond Interest Expense for $10,667
B) debit to Premium on Bonds Payable for $154
C) credit to Cash for $16,000
D) debit to Bond Interest Payable for $16,000

Question 51

If a company sells its 20-year bonds at a discount, the discount account should be reported on the balance sheet as a(n)

A) unearned liability
B) addition to the bonds payable
C) accrued expense
D) deduction from bonds payable

Question 52

If a company sells its bonds at more than face value, the effective interest rate is

A) less than the contract interest rate
B) more than the contract interest rate
C) equal to the contract interest rate
D) more than the market interest rate

Question 53

Exhibit 14-3 Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2013, at face value plus accrued interest on May 1, 2013. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
Refer to Exhibit 14-3. The amount of bond interest expense reported on the year-end 2013 income statement would be

A) $17,538
B) $21,333
C) $21,384
D) $32,000

Question 54

When a company sells a bond at a discount, the book value of the bond is

A) more than the face value of the bond
B) less than the face value of the bond
C) equal to the face value of the bond
D) all of the above

Question 55

Interest expense recognized each period on zero-coupon bonds sold at a discount is equal to the

A) credit to Cash
B) difference between the cash payment and the discount amortization
C) credit to Discount on Bonds Payable
D) sum of the cash payment and the discount amortization

Question 56

Exhibit 14-1 A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: Refer to Exhibit 14-1. These bonds sold at

A) a premium
B) a discount
C) par
D) cannot be determined from the information given

Question 57

On May 1, 2013, Legacy Corporation sold $250,000 of its 15%, five-year bonds dated January 1, 2013, for 100 plus accrued interest. How much cash was received?

A) $237,500
B) $250,000
C) $262,500
D) $268,750

Question 58

When a company amortizes a premium, the interest expense recorded is

A) more than the cash paid
B) less than the cash paid
C) equal to the cash paid
D) all of the above can be correct

Question 59

Exhibit 14-1 A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: Refer to Exhibit 14-1. The discount at the date of bond issuance would be

A) $ 0
B) $ 96
C) $ 6,180
D) $19,253

Question 60

The proper procedure for computing the issuance price of a bond includes adding the

A) maturity value of the bonds to the accrued interest
B) maturity value of the bonds to the present value of the interest
C) present value of the principal to the accrued interest
D) present value of the principal to the present value of the interest

Question 61

Exhibit 14-4 Piazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2013, on May 1, 2013, for $393,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-4. The balance of Discount on Bonds Payable after the December 31, 2013, adjusting entry has been posted would be

A) $5,600
B) $6,000
C) $7,000
D) $8,400

Question 62

Exhibit 14-4 Piazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2013, on May 1, 2013, for $393,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-4. The net liability for the bonds after recording the sale would be

A) $408,000
B) $407,700
C) $400,000
D) $393,000

Question 63

Bond issue costs

A) should be amortized by the straight-line method to interest expense
B) should be included in bond discount or subtracted from bond premium and amortized by the effective interest method
C) should be subtracted from bonds payable on the balance sheet
D) should not be amortized and should be written off at bond retirement

Question 64

Bonds with a face value of $100,000 that are issued for $102,400 have a stated interest rate

A) that is more than the yield rate
B) that is less than the yield rate
C) that is equal to the yield rate
D) that may be more or less than the yield rate, but there is not enough information given to determine which

Question 65

The bond interest expense reflected on the income statement should reflect an amount based on the

A) effective interest rate
B) stated interest rate
C) nominal interest rate
D) face interest rate

Question 66

Exhibit 14-5 Hawk issued $200,000 of its ten-year 10% bonds for $224,924 on October 1, 2014. The effective rate on the bonds was 8% and interest is paid each October 1 and April 1.
Refer to Exhibit 14-5. Assuming Hawk uses the effective interest method and reversing entries, the entry to record the payment of interest on April 1, 2015, would include a

A) debit to Interest Expense for $4,498
B) credit to Premium on Bonds Payable for $502
C) credit to Bonds Payable for $10,000
D) credit to Cash for $8,000

Question 67

On January 1, 2013, the Keller Co. issued $140,000 of 20-year 8% bonds for $172,000. Interest was payable annually. The effective yield was 6%. The effective interest method was used to amortize the premium. What amount of premium would be amortized for the year ended December 31, 2013?

A) $ 827.20
B) $1,804.80
C) $ 880.00
D) $ 453.20

Question 68

The effective interest method of amortization assumes a stable

A) interest expense
B) interest rate
C) book value
D) amortization amount

Question 69

Under the straight-line amortization method, interest expense on a bond sold at a discount is equal to the

A) interest paid plus bond discount amortization
B) interest rate times the book value of the bonds
C) interest rate times the face value of the bonds
D) interest paid minus bond discount amortization

Question 70

The straight-line method of amortization assumes a stable

A) interest expense
B) interest rate
C) book value
D) premium or discount balance

Question 71

The proper procedure for computing the amortization of a premium using the effective interest method includes multiplying

A) the market rate of interest times the face value of the bonds
B) the market rate of interest times the carrying value of the bonds
C) the stated rate of interest times the face value of the bonds
D) the stated rate of interest times the carrying value of the bonds

Question 72

Which statement is true?

A) The carrying amount of the bonds will decrease each year if the bonds were issued at a discount.
B) The carrying amount of the bonds will decrease each year if the bonds were issued at a premium.
C) Total interest expense will increase each year if the bonds are issued at a discount and the straight-line method of amortization is used.
D) Total interest expense will increase each year if the bonds are issued at a premium and the effective interest method of amortization is used.

Question 73

Exhibit 14-5 Hawk issued $200,000 of its ten-year 10% bonds for $224,924 on October 1, 2014. The effective rate on the bonds was 8% and interest is paid each October 1 and April 1.
Refer to Exhibit 14-5. Assuming Hawk uses the effective interest method, the adjusting entry on December 31, 2014, would include a

A) credit to Premium on Bonds Payable for $502
B) credit to Interest Payable for $4,498
C) credit to Interest Payable for $5,000
D) debit to Interest Expense for $5,498

Question 74

Which statement is true?

A) The carrying amount of the bonds will increase each year if the bonds were issued at a discount.
B) The carrying amount of the bonds will increase each year if the bonds were issued at a premium.
C) Total interest expense will increase each year if the bonds are issued at a discount and the straight-line method of amortization is used.
D) Total interest expense will increase each year if the bonds are issued at a premium and the effective interest method of amortization is used.

Question 75

Under the straight-line amortization method, interest expense on a bond sold at a premium is equal to the

A) interest paid plus bond premium amortization
B) interest rate times the book value of the bonds
C) interest rate times the face value of the bonds
D) interest paid minus bond premium amortization

Question 76

On January 1, 2014, Snow, Inc. issued $50,000 of ten-year 6% bonds for $43,800. Interest was payable semiannually. The effective yield was 8%. The effective interest method of discount amortization was used. What amount of interest expense should be recorded for the six-month period ending December 31, 2014?

A) $1500.
B) $1,752
C) $2,000
D) $1,762

Question 77

The assumption of a stable interest expense per year is inherent under which of the following amortization methods?

A) present-value method
B) effective interest method
C) stated-interest method
D) straight-line method

Question 78

A theoretical difference between the effective interest method and the straight-line amortization method is that

A) the effective interest method is easier to use
B) the effective interest method can be used if there is a material difference in the computation when compared to the straight-line method
C) the effective interest method produces a result that is based on a constant rate of interest
D) the effective interest method produces a result that is based on a constant interest expense

Question 79

Exhibit 14-4 Piazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2013, on May 1, 2013, for $393,000 plus accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-4. Interest expense after the July 1, 2013, interest payment has been posted is

A) $12,500
B) $ 6,250
C) $12,000
D) $18,000

Question 80

Bond issue costs are reported on the financial statements as

A) Other Assets
B) a reduction to Premium on Bonds Payable
C) Deferred Liabilities
D) an addition to Discount on Bonds Payable