Deck 22: Long-Term Bonds

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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 8

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

Question 9

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 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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.

Question 20

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

Question 21

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 22

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 23

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

Question 24

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 25

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

Question 26

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

Question 27

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 28

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 29

Coupon bonds are often referred to as ____________________ bonds.

Question 30

A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized premium 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 31

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 32

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

Question 33

If 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, an extraordinary ____________________ will be reported on the income statement for the period.

Question 34

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 35

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

Question 36

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

Question 37

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 38

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

Question 39

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 40

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

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 Cash account for

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

Question 42

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 43

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 44

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 45

A bond sinking fund investment is started on January 5, 2013, by transferring $12,000 in cash to the fund. This $12,000 is invested and earns $1,500 during 2013. On January 5, 2014, 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 46

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

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

Question 47

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 48

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 49

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 50

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 51

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 bond is issued.

Question 52

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 53

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 54

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 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 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 56

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 57

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

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

Question 58

A bond sinking fund investment is started on January 5, 2013, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2013. 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 59

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 60

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 61

The board of directors of the Merced Corporation authorized the issuance of $200,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 9 of a general journal. Omit descriptions.

Question 62

Lee Corporation has 10-year, 12% bonds payable of $100,000 that were sold on January 2, 2013 at a premium of $15,000. The amortization on the premium is recorded at the end of every year. Determine the Balance Sheet presentation of these bonds at December 31, 2015. (Present only the section of the Balance Sheet in which the bonds appear.)

Question 63

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 64

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 65

The Mammoth Corporation issued $800,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 98. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.

Question 66

Using the following format, compare capital stock and bonds as means of financing. List characteristics and differences.

Question 67

The board of directors of the Costmore Corporation authorized the issuance of $1,200,000 face value of 5-year, 8 percent bonds dated March 1, 2013, and maturing on March 1, 2015. Interest is payable semiannually on September 1 and March 1. Record the following bond transactions on page 6 of a general journal. Omit descriptions.

Question 68

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 contract or the board of directors requires it.
C) Tax law requires it.
D) The buyers require it.

Question 69

On September 1, 2014, a corporation paid $612,000 to retire bonds with a face value of $600,000 and an unamortized bond discount of $20,000. Record the transaction on page 8 of a general journal. Omit the description.

Question 70

When bonds are sold by a company, the company assumes debt. The principal of which is the amount of the face value of the bonds sold. Cash to pay this debt must be available when the bonds become due. Discuss things a company can do in order to have the funds available to pay the bond debt on the due date.

Question 71

On September 1, 2014, a corporation paid $620,000 to retire bonds with a face value of $600,000 and an unamortized bond premium of $10,000. Record the transaction on page 8 of a general journal. Omit the description.

Question 72

The difference between the face value and the selling price of a 10-year discounted bond sold 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 73

Bonds payable and mortgage loans are both long-term debt instruments.
(a) How do bonds payable differ from notes payable?
(b) Define bonds payable. (Include in your definition several characteristics and types of bonds payable.)

Question 74

The adjusting entry for Barstow Corporation on September 30, 2013 (the end of the fiscal year) to accrue three months of bond interest due is as follows. Interest is paid on June 30 and December 31. Make the entry to reverse this accrual. Include the proper date for the entry.

Question 75

The Morris Corporation has outstanding $300,000 face value of 12 percent bonds payable dated January 1, 2013, and maturing 10 years later on January 1, 2023. The corporation is required under the bond contract to transfer $30,000 each year to a bond sinking fund investment. The cash in the sinking fund investment is invested to earn interest. Record the following entries on page 6 of a general journal. Omit descriptions.

Question 76

The board of directors of the Columbus Corporation authorized the issuance of $400,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 8 of a general journal. Omit descriptions.

Question 77

The board of directors of the Lawrence Corporation authorized the issuance of $500,000 face value of 10-year, 12 percent bonds dated May 1, 2013, and maturing on May 1, 2023. Interest is payable semiannually on May 1 and November 1. Record the following bond transactions on page 5 of a general journal. Omit descriptions.

Question 78

Morris Corporation has 10-year, 12% bonds Payable of $100,000 that were sold on January 2, 2013 at a discount of $15,000. Amortization on the discount is recorded at the end of each year. Determine the Balance Sheet presentation of these bonds at December 31, 2014. (Present only the section of the Balance Sheet in which the bonds appear.)

Question 79

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 80

The Crowley Corporation issued $600,000 face value of 10-year, 8 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 103. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.