Deck 14: Bonds and Long-Term Notes

Question 1

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

Answer 1

True

Question 2

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

Answer 2

False

Question 3

The interest rate that is printed on the bond certificate is not referred to as the:

A)Stated rate.
B)Contract rate.
C)Nominal rate.
D)Effective rate.

Answer 3

D

Question 4

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

Question 5

An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest.

Question 6

The method used to pay interest depends on whether the bonds are:

A)Registered or coupon.
B)Mortgaged or unmortgaged.
C)Indentured or debentured.
D)Callable or redeemable.

Question 7

An amortization schedule for bonds issued at a premium:

A)Summarizes the amortization of the premium, a contra-asset account with a credit balance.
B)Is reported in the balance sheet.
C)Is a schedule that reflects the changes in the debt over its term to maturity.
D)All of the above are correct.

Question 8

The interest expense on an installment note decreases with each periodic payment.

Question 9

Bonds usually sell at their:

A)Maturity value.
B)Face value.
C)Present value.
D)Statistical expected value.

Question 10

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

Question 11

The rate of interest that actually is incurred on a bond payable is called the:

A)Face rate.
B)Contract rate.
C)Effective rate.
D)Stated rate.

Question 12

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

Question 13

Most corporate bonds are:

A)Mortgage bonds.
B)Debenture bonds.
C)Secured bonds.
D)Collateral bonds.

Question 14

Premium on bonds payable is a contra liability account.

Question 15

Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

Question 16

Interest expense is:

A)The effective interest rate times the amount of the debt outstanding during the interest period.
B)The stated interest rate times the amount of the debt outstanding during the interest period.
C)The effective interest rate times the face amount of the debt.
D)The stated interest rate times the face amount of the debt.

Question 17

Straight-line amortization of bond discount or premium:

A)Can be used for amortization of discount or premium in all cases and circumstances.
B)Provides the same amount of interest expense each period as does the effective interest method.
C)Is appropriate for deep discount bonds.
D)Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Question 18

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized.

Question 19

The specific provisions of a bond issue are described in a document called a bond indenture.

Question 20

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

Question 21

What is the annual effective interest rate on the bonds?

A)3%
B)3.5%
C)6%
D)7%

Question 22

A $500,000 bond issue sold for 98. Therefore, the bonds:

A)Sold at a discount because the stated rate of interest was lower than the effective rate.
B)Sold for the $500,000 face amount less $10,000 of accrued interest.
C)Sold at a premium because the stated rate of interest was higher than the yield rate.
D)Sold at a discount because the effective interest rate was lower than the face rate.

Question 23

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

A)The face amount of the bond.
B)The total of the face amount plus all interest payments.
C)The present value of the face amount plus the present value of the stream of interest payments.
D)The face amount of the bond plus the present value of the stream of interest payments.

Question 24

When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

A)Six months.
B)Four months.
C)10 months.
D)12 months.

Question 25

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A)More than the effective interest.
B)Less than the effective interest.
C)Equal to the effective interest.
D)More than if the bonds had been sold at a premium.

Question 26

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense:

A)Increases.
B)Decreases.
C)Remains the same.
D)Is equal to the change in book value.

Question 27

LPC issued the bonds:

A)At par.
B)At a premium.
C)At a discount.
D)Cannot be determined from the given information.

Question 28

What is the annual stated interest rate on the bonds?

A)3.5%.
B)6%.
C)7%.
D)None of the above is correct.

Question 29

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.
D)The answer cannot be determined from the information provideD.When the market rate of interest is higher than the bonds' stated rate, the bonds will sell at a discount.

Question 30

For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

A)Option a
B)Option b
C)Option c
D)Option d

Question 31

How would the carrying value of bonds payable be affected by the amortization of each of the following?

A)Option a
B)Option b
C)Option c
D)Option d

Question 32

For a bond issue that sells for more than the bond face amount, the effective interest rate is:

A)The rate printed on the face of the bond.
B)The Wall Street Journal prime rate.
C)More than the rate stated on the face of the bond.
D)Less than the rate stated on the face of the bond.

Question 33

Bonds were issued at a discount. In the bond amortization schedule:

A)The interest expense is less with each successive interest payment.
B)The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.
C)The outstanding balance (book value) of the bonds declines eventually to face value.
D)The reduction in the discount is less with each successive interest payment.

Question 34

When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:

A)Higher than the effective interest amount every year.
B)Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
C)Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
D)Less than the effective interest amount every year.

Question 35

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

A)Remains constant.
B)Is equal to the change in book value.
C)Increases.
D)Decreases.

Question 36

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A)Less than the effective interest.
B)Equal to the effective interest.
C)Greater than the effective interest.
D)More than if the bonds had been sold at a discount.

Question 37

LPC calls the bonds at 103 immediately after the interest payment on 12/31/2014 and retires them. What gain or loss, if any, would LPC record on this date?

A)No gain or loss
B)$3,717 gain
C)$6,000 loss
D)$2,283 loss

Question 38

Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2013, is for a period of:

A)Three months.
B)Four months.
C)Six months.
D)Seven months.

Question 39

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

A)Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
B)Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
C)Higher than the effective interest amount every year.
D)Less than the effective interest amount every year.

Question 40

On January 1, 2013, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2013, in the amount of:

A)$8,850.
B)$10,000.
C)$10,620.
D)$12,000.

Question 41

What is the effective annual rate of interest on the bonds?

A)3%.
B)4%.
C)6%.
D)8%.

Question 42

What is the carrying value of the bonds as of December 31, 2014?

A)$8,834,770.
B)$8,686,606.
C)$8,734,070.
D)$8,783,433.

Question 43

What is the interest expense on the bonds in 2014?

A)$700,700.
B)$600,000.
C)$351,337.
D)$100,700.

Question 44

What is the effective annual rate of interest on the bonds?

A)3%.
B)4%.
C)6%.
D)8%.

Question 45

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2013, rounded up to the nearest thousand?

A)$252,369,000.
B)$256,369,000.
C)$256,200,000.
D)$257,030,070.

Question 46

What is the interest expense on the bonds in 2014?

A)$800,000.
B)$680,759.
C)$342,961.
D)$119,241.

Question 47

Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2013 income statement?

A)$0.
B)$3,830,535.
C)$5,107,380.
D)$7,661,070.

Question 48

What is the carrying value of the bonds as of December 31, 2014?

A)$11,432,379.
B)$11,375,350.
C)$11,316,611.
D)$11,256,109.

Question 49

On January 1, 2013, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2013 (assume annual interest payments and amortization)?

A)$23,280.
B)$29,100.
C)$24,000.
D)$30,000.

Question 50

Zero-coupon bonds:

A)Offer a return in the form of a deep discount off the face value.
B)Result in zero interest expense for the issuer.
C)Result in zero interest revenue for the investor.
D)Are reported as shareholders' equity by the issuer.

Question 51

How much cash interest does Auerbach pay on March 31, 2014?

A)$6.0 million
B)$12.0 million
C)$9.0 million
D)$18.0 million

Question 52

What is the stated annual rate of interest on the bonds?

A)3%.
B)4%.
C)6%.
D)8%.

Question 53

What is the stated annual rate of interest on the bonds?

A)3%.
B)4%.
C)6%.
D)8%.

Question 54

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2014, rounded up to the nearest thousand?

A)$252,369,000.
B)$256,369,000.
C)$256,300,000.
D)$257,030,000.

Question 55

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:

A)Less the present value of all future interest payments at the rate of interest stated on the bond.
B)Plus the present value of all future interest payments at the rate of interest stated on the bond.
C)Plus the present value of all future interest payments at the market (effective) rate of interest.
D)Less the present value of all future interest payments at the market (effective) rate of interest.

Question 56

What would be the total interest cost of the bonds over their full term?

A)$1,359,033.
B)$4,640,967.
C)$6,000,000.
D)$7,359,033.

Question 57

What would be the total interest expense recognized for the bond issue over its full term?

A)$6,512,253.
B)$8,000,000.
C)$9,487,747.
D)$11,487,747.

Question 58

Auerbach issued the bonds:

A)At par.
B)At a premium.
C)At a discount.
D)Cannot be determined from the given information.

Question 59

On January 31, 2013, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2012, and mature on December 31, 2022. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2013, balance sheet?

A)$18,000.
B)$36,000.
C)$54,000.
D)$48,000.

Question 60

On January 1, 2013, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is:

A)$80,000.
B)$82,000.
C)$87,000.
D)$89,000.

Question 61

Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

A)Deducted from bonds payable.
B)Added to bonds payable.
C)Included as an expense in the year of issue.
D)Reported as a deferred charge.

Question 62

On January 1, 2013, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2014 (assume annual interest payments and amortization)?

A)$23,280.
B)$25,140.
C)$29,100.
D)$29,610.

Question 63

Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

A)Reported as an intangible asset.
B)Included in revenue for the year of sale.
C)Deducted from bonds payable.
D)Added to bonds payable.

Question 64

Cramer Company sold five-year, 8% bonds on October 1, 2013. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2013, income statement (assume straight-line amortization)?

A)$2,000.
B)$1,900.
C)$1,778.
D)$2,040.

Question 65

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

A)Both bonds sell for the same amount.
B)Bond X sells for more than bond Y.
C)Bond Y sells for more than bond X.
D)Both bonds sell at a discount.

Question 66

On June 30, 2013, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2013, and mature on June 30, 2020. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2013?

A)$32,000.
B)$40,000.
C)$46,000.
D)$60,000.

Question 67

Red Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n)

A)Option a
B)Option b
C)Option c
D)Option d

Question 68

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:

A)Not be required.
B)Be for six months.
C)Be for four months.
D)Be for 10 months.

Question 69

When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes:

A)Is treated as a current liability at the exchange date.
B)Is recorded as interest revenue at the exchange date.
C)Is recorded as interest receivable at the exchange date.
D)Is credited to sales revenue at the exchange date.

Question 70

In each succeeding payment on an installment note:

A)The amount of interest paid increases.
B)The amount of principal paid increases.
C)The amount of interest paid is unchanged.
D)The amounts paid for both interest and principal increase proportionately.

Question 71

AMC issues a note in exchange for a machine with no stated interest rate. In accounting for the transaction:

A)The machine should be depreciated over the note's term to maturity.
B)If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest.
C)Both the note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable.
D)The note is recorded at its face amount unless the fair value of the machine is readily available.

Question 72

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?

A)Both bonds sell for the same amount.
B)Both bonds sell for more than $100,000.
C)Bond X sells for more than bond Y.
D)Bond Y sells for more than bond X.

Question 73

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:

A)The invoice price.
B)The wholesale price.
C)The present value of cash outflows discounted at the stated rate.
D)The present value of the note payments discounted at the market rate.

Question 74

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

A)Bond ratings provided by financial investment services such as Moody's.
B)Newspaper articles.
C)Bond interest payments.
D)The company's audit report.

Question 75

The unamortized balance of discount on bonds payable is reported in the balance sheet as:

A)A prepaid expense.
B)An expense account.
C)A current liability.
D)A contra-liability.

Question 76

Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond carrying value, respectively?

A)Understated, understated.
B)Understated, overstated.
C)Overstated, understated.
D)Overstated, overstated.

Question 77

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

A)$330,000.
B)$300,000.
C)$120,000.
D)$20,000.

Question 78

On January 1, 2013, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2013, balance sheet?

A)$1,045,000.
B)$1,040,000.
C)$987,000.
D)$982,000.

Question 79

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:

A)Face amount price less any unamortized discount or plus any unamortized premium.
B)Current bond market price.
C)Face amount less any unamortized premium or plus any unamortized discount.
D)Face amount less accrued interest since the last interest payment date.

Question 80

Which of the following indicates the margin of safety provided to creditors?

A)Rate of return on shareholders' equity.
B)Times interest earned ratio.
C)Gross margin.
D)Debt to equity ratio.