Deck 15: Bonds and Long-Term Notes Payable

Question 1

A bond is a written promise to pay an amount identified as the par value of the bond along with interest at a stated annual rate.

Answer 1

True

Question 2

Both interest paid on bonds and dividends paid on shares are tax-deductible.

Answer 2

False

Question 3

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Answer 3

True

Question 4

In the event of bankruptcy,owners of secured bonds receive their share of the firm's assets as payment before the owners of other unsecured debt.

Question 5

Bond interest rates change as the market rate of interest changes.

Question 6

Bondholders can exchange convertible bonds for a fixed number of the issuing corporation's preferred shares.

Question 7

A bond's par value is the same as market value.

Question 8

If a bond's interest period does not coincide with the issuing corporation's accounting period,an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Question 9

Bonds with a par value of $100,000,which pay 9% annual interest and pay interest on June 30 and December 31,were sold on July 31 at par value.The issuer will receive $100,750 cash for the sale of the bond.

Question 10

An advantage of bond financing is that interest does not have to be paid.

Question 11

Debentures have specific assets of the issuing corporation pledged as collateral.

Question 12

Interest paid on bonds is not tax-deductible.

Question 13

A bond issue with a $100,000 par value,an 8% annual contract rate,with interest payable semiannually and a 10-year life means that the issuer must repay $100,000 at the end of 10 years plus make 20 payments of $4,000.

Question 14

An advantage of bond financing is that it does not affect shareholder control.

Question 15

Bonds must be issued on an interest payment date.

Question 16

Debentures are secured debt.

Question 17

When a company sells its bonds on a date other than an interest payment date,the purchasers always pay the issuer a premium.

Question 18

A corporation can reserve the right to retire bonds early by issuing callable bonds.

Question 19

Owners of coupon bonds are not required to pay income tax on the interest received.

Question 20

Accrued interest is paid on bonds that are issued between interest dates.

Question 21

Any discount is added to the par value of bonds to produce the carrying value of bonds payable.

Question 22

A premium on bonds payable arises when the bonds carry a contract rate greater than the current market rate.

Question 23

Tab Skates Ltd issued $100,000 worth of 5-year,7% bonds and received proceeds of $96,909.The total bond discount would be $10,091.

Question 24

The issue price of a bond is equal to the present value of all future cash payments to be received from the bond.

Question 25

The effective interest method allocates bond interest expense over the life of the bonds in a way that yields a constant rate of interest.

Question 26

Two common ways for the issuing corporation to retire bonds before maturity are to (1)exercise a convertible option or (2)purchase them on the open market.

Question 27

IFRS recommendations require that corporations use the effective interest method for amortization of bond discounts.

Question 28

Discount on Bonds Payable is a contra liability account.

Question 29

Over the life of a bond,the maturity value and carrying value converge

Question 30

When the contract rate is above the market rate,a bond sells at a discount.

Question 31

A corporation must buy back its callable bonds through open market transactions.

Question 32

To determine the discount on a bond the issuing value is deducted from the par value of the bonds.

Question 33

When graphing the amount of interest paid over time and the amount of interest expensed over time,the lines are parallel if the effective interest amortization method is used.

Question 34

If a bond is issued at a premium,interest expense will increase over the term of the bond.

Question 35

An annuity is a series of varying payments occurring at different time intervals throughout a bonds life.

Question 36

When graphing the carrying value of a premium bond vs the par value of a premium bond,the lines intersect at the maturity date of the bond.

Question 37

A discount on bonds payable arises when a corporation issues bonds with an issue price less than par value.

Question 38

For bonds issued at a premium,the effective interest method yields increasing amounts of bond interest expense and decreasing amount of premium amortization over the bond's life.

Question 39

When bonds are issued,the carrying (book)value is always the par value of the bond.

Question 40

If a bond is issued at a premium,interest expense will decrease over the term of the bond.

Question 41

According to IFRS,the lessee must report a leased asset as well as a lease liability if the lease qualifies as a finance lease.

Question 42

SuperBowl Inc retired $200,000 (par value)bonds with a carrying value of $203,492.The market value of the bonds was $202,500.The corporation recognized a loss on retirement of $2,500.

Question 43

Notes payable usually represent a transaction with a single lender.

Question 44

A note which requires payments of accrued interest plus equal amounts of principal will have cash flows of equal amounts over the life of the note.

Question 45

A common installment note payment pattern is equal interest payments over the life of the loan with the principal of the loan due at maturity.

Question 46

Most mortgage contracts grant the lender the right to foreclose on the property used as security for the note if the borrower fails to pay in accordance with the terms of the debt agreement.

Question 47

A note is initially measured and recorded at its selling price.

Question 48

A finance lease obligation is a form of long-term liability.

Question 49

An operating lease is a lease agreement that transfers the risks and benefits associated with ownership to the lessee.

Question 50

Computers "R" Us borrowed $40,000 for 2 years at 7%.The face value of the note is $45,600.

Question 51

A call option in a bond indenture gives the issuing corporation an option to call the bonds before they mature by paying the par value plus a call premium to the bondholders.

Question 52

Mortgage notes are backed by the good faith and credit of the issuing corporation.

Question 53

Payments on installment notes normally include interest accruing to the date of the payment plus a portion of the principal.

Question 54

In recording a finance lease,the lessee debits Lease Liability and credits Lease Payable.

Question 55

On January 1,2015,SuperBowl Inc signed a two-year,7% $5,000 note payable.The note plus interest is due on December 31,2016.The amount of interest expense to be recorded for 2015 is $375.

Question 56

If Cee Ltd borrows $50,000 by issuing a 6%,three-year note,the total interest to be paid will be $9,000.

Question 57

For a note requiring equal payments,each payment will consist of increasing amounts of principal and decreasing amounts of interest.

Question 58

For a note requiring equal payments,each payment will consist of decreasing amounts of principal and increasing amounts of interest.

Question 59

When convertible bonds are converted to common shares,the carrying value of the bonds is transferred to contributed capital.

Question 60

An installment note is an obligation requiring a series of periodic payments to the lender.

Question 61

A bond sells at a discount when the:

A) Contract rate is below the market rate.
B) Contract rate is equal to the market rate.
C) Contract rate is above the market rate.
D) Bond is unsecured.
E) Bond is not registered.

Question 62

Which of the following statements is true?

A) Bonds never create financial leverage.
B) Interest on bonds is not tax-deductible.
C) Dividends to shareholders are tax-deductible.
D) Interest on bonds is tax-deductible.
E) Issuing bonds will dilute shareholdings.

Question 63

The contract between the bond issuer and the bondholders,which identifies the rights and obligations of the parties,is called a(n):

A) Bond indenture.
B) Debenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.

Question 64

Debentures are:

A) Bonds secured by collateral agreements.
B) Redeemable bonds.
C) Another name for the bond indenture.
D) Unsecured bonds.
E) Assets used as collateral for bonds.

Question 65

Callable bonds:

A) Can be exchanged for a fixed number of the issuing corporation's common shares.
B) Do not require payment of interest over the life of the bond issue.
C) Have an option whereby the issuing corporation may redeem them under specified conditions.
D) Are usually not registered.
E) Are also called debentures.

Question 66

The contract rate is also called the:

A) Coupon rate.
B) Stated rate.
C) Nominal rate.
D) Interest rate.
E) All of these answers are correct.

Question 67

Bino Corp issues $750,000,10%,15-year bonds.The current market rate is 10%.The journal entry to record the semiannual interest payment,assuming the effective interest method is used,is:

A)

B)

C)

D)

E)

Question 68

When a bond sells at a premium,it means that:

A) The contract rate is above the market rate.
B) The contract rate is equal to the market rate.
C) The contract rate is below the market rate.
D) The bond is secured by corporation assets.
E) The bond is always callablE.

Question 69

Bonds that mature at different dates with the result that the entire debt is repaid gradually over a number of years are called:

A) Registered bonds.
B) Serial bonds.
C) Callable bonds.
D) Coupon bonds.
E) Bearer bonds.

Question 70

Secured bonds:

A) Have specific assets of the issuing corporation pledged as collateral.
B) Are called debentures.
C) Are backed by the issuer's general credit standing.
D) Are second to unsecured liabilities.
E) Are always callablE.

Question 71

Mike Limited issues $200,000 of its 9% bonds at par on April 1,which is 4 months after the original issue date.How much interest should Mike collect from the buyer?

A) $750.
B) $5,250.
C) $1,500.
D) $3,000.
E) $6,000.

Question 72

A disadvantage of bonds is:

A) Bonds require payment of periodic interest.
B) Bonds require payment of principal.
C) Bonds can decrease return on equity.
D) Bonds may not create financial leverage.
E) All of these answers are correct.

Question 73

Snow and Skates Ltd is planning a $500,000 expansion.The firm has $1,000,000 in equity.Which of the following options would generate the largest return on equity?

A) Plan A-no expansion.
B) Plan B-raise $500,000 from issuing shares.
C) Plan C-issue $500,000 worth of 8% bonds.
D) Both Plan A-no expansion,and Plan B-raise $500,000 from issuing shares,have the same result.
E) Both Plan A-no expansion,and Plan C-issue $500,000 worth of 8% bonds,have the same result.

Question 74

An advantage of bond financing is:

A) Issuing bonds does not affect shareholder control.
B) Interest on bonds is tax-deductible.
C) Bonds can increase return on equity.
D) Bonds can create financial leverage.
E) All of these answers are correct.

Question 75

Toopy Corp issues $650,000,9%,10-year bonds.The bonds trade at 105.5.The total amount of interest to be paid to the bondholders for the semiannual interest payments,assuming the effective interest method is used,is

A) $58,500.
B) $63,750.
C) $68,575.
D) $585,000.
E) $516,425.

Question 76

A bondholder who owns a $1,000,10%,10-year bond has the right to:

A) Receive dividends.
B) Receive $10 per year until maturity.
C) Vote.
D) Receive $1,000 at maturity.
E) None of these answers is correct.

Question 77

A bond traded at 102½ means that:

A) The bond pays 2.5% interest.
B) The bonds were issued at $1,025 each.
C) The market rate of interest is 2.5%.
D) The bond is currently traded at $1,025 per $1,000 bond.
E) None of these answers is correct.

Question 78

Bonds can be issued:

A) At par.
B) At a premium.
C) At a discount.
D) Between interest payment dates.
E) All of these answers are correct.

Question 79

Bonds that have interest coupons attached to their certificates,which the bondholders detach when they mature and present to a bank for collection,are called:

A) Serial bonds.
B) Callable bonds.
C) Coupon bonds.
D) Convertible bonds.
E) Registered bonds.

Question 80

Bonds owned by investors whose names and addresses are recorded by the issuing corporation,and for which interest payments are made with cheques to the bondholders,are called:

A) Callable bonds.
B) Serial bonds.
C) Coupon bonds.
D) Registered bonds.
E) Bearer bonds.