Question 1

The present value of any bond payable issued between interest-payment dates will include any interest accrued since the last interest payment date.

Accepted Answer

A) True 
 B)False

Question 2

The rate of interest specified on the face of the debt is called the:

Accepted Answer

A) Stated interest rate. 
B) Effective interest rate. 
C) Market interest rate. 
D) Yield interest rate.

Question 3

All of the following are true with respect to sinking funds except:

Accepted Answer

A) Once the sinking fund is established, the company has no more responsibility to the debt. 
B) A sinking fund is a cash fund that is restricted for retiring the debt of a company. 
C) A sinking fund may be handled by a trustee or by the individual company. 
D) A sinking fund may make the investment more attractive to investors.

Question 4

It is often necessary to compute the book value of a bond issue several years into its term.Rather than compute an amortization schedule for the entire term, it is possible to directly compute the net bond liability at any interest date under either the interest method or straight-line method.Assume that $100,000 of 8% bonds were issued to yield 10% on January 1, 2010, the bond date.The bonds pay interest each December 31 and are scheduled to mature in ten years.Answer the following questions without producing an amortization schedule.
(a)What is the book value of the bonds on January 1, 2016 if the firm uses the straight-line method.
(b)What is the book value of the bonds on January 1, 2016 if the firm uses the interest (effective interest)method.

Accepted Answer

The answer of It is often necessary to compute the...

Question 5

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 6

Straight-line amortization of bond premium or discount:

Accepted Answer

A) is appropriate for deep discount bonds. 
B) is appropriate when the bond term is especially long. 
C) Provides the same total amount of interest expense and interest revenue as the effective interest method over the life of the bonds. 
D) Provides the same amounts of interest expense and interest revenue each interest period as the effective interest method. 
E) Can be used as an optional method of amortization in all situations.

Question 7

In-substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt.In such situations, the debt is always recorded as paid when the trust fund is set up (i.e.removed from the books).

Accepted Answer

A) True 
 B)False

Question 8

The stated rate of interest is the interest rate used to determine the amount of cash interest that will be paid on the principal.

Accepted Answer

A) True 
 B)False

Question 9

On September 1, 2020, ER issued 11%, 10 year bonds dated June 1, 2020, in the face amount of $140,000, with interest payable July 1 and December 31.The bonds were sold for $140,000.How much should ER debit to cash on September 1, 2020?

Accepted Answer

A) $142,567 
B) $147,700 
C) $140,000 
D) Cannot be determined from the information given

Question 10

The cost of any equity financing is included when calculating the cost of generalized borrowings.

Accepted Answer

A) True 
 B)False

Question 11

The principal amount of a debt is the cash or cash equivalent amount borrowed.

Accepted Answer

A) True 
 B)False

Question 12

A $1,000, 6%, 10-year bond purchased as a long-term investment at an effective rate at 7%, will pay the investor $70 cash interest each year.

Accepted Answer

A) True 
 B)False

Question 13

Under the effective interest method, interest expense is calculated by multiplying the market interest rate by the carrying value of the bonds.

Accepted Answer

A) True 
 B)False

Question 14

When the maturity date of a bond issue is within one year or the operating cycle (whichever is longer)of the current balance sheet date, the bond liability should be reclassified as a current liability (assuming the payment will be made out of current assets).

Accepted Answer

A) True 
 B)False

Question 15

If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the early years will be:

Accepted Answer

A) less than if the interest method is used. 
B) The same as if the interest method is used. 
C) more than if the interest method is used. 
D) less than the amount of the interest payments.

Question 16

On January 1, 2014, ER signed a $120,000, 10%, three-year, note payable.The proceeds are to be used to purchase a computer and related software for the company.The lending institution advanced proceeds of $115,800 and took a mortgage on the computer.The note is payable in three equal annual instalments starting on December 31, 2014.The effective interest rate to use for this debt is (rounded to the nearest percent; do not interpolate):

Accepted Answer

A) 12%. 
B) 13%. 
C) 10%. 
D) 11%.

Question 17

$5,000 (face value)of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest)paid to retire the bonds was $4,700.The entry to record the retirement would include:

Accepted Answer

A) dr.bonds payable $5,000 
B) cr.unusual gain $400 
C) dr.bonds payable $4,700 
D) cr.cash $4,300

Question 18

JV issued $10,000, 10% bonds payable (interest payable annually), which mature at the end of six years from issue date.The effective rate of interest at issue date was 12%.The sale price of the bonds was: $ _.

Accepted Answer

The answer of JV issued $10,000, 10% bonds payable (interest...

Question 19

In August 2005, Crown Corporation Inc., a calendar-year corporation that records adjusting entries only once per year, issued bonds with the following characteristics:  Part A: Provide the entries required on 1 August 2007 under the effective interest method of amortization.
Part B: Provide the entries required on 1 August 2007 under the straight line method of amortization.

Accepted Answer

The answer of In August 2005, Crown Corporation Inc., a...

Question 20

The amortization of a bind discount or premium over the life of a bond will be the same under both the straight line and effective interest methods.

Accepted Answer

A) True 
 B)False

Exam 13: Financial Instruments: Long-Term Debt

The present value of any bond payable issued between interest-payment dates will include any interest accrued since the last interest payment date.

The rate of interest specified on the face of the debt is called the:

All of the following are true with respect to sinking funds except:

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Straight-line amortization of bond premium or discount:

In-substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt.In such situations, the debt is always recorded as paid when the trust fund is set up (i.e.removed from the books).

The stated rate of interest is the interest rate used to determine the amount of cash interest that will be paid on the principal.

On September 1, 2020, ER issued 11%, 10 year bonds dated June 1, 2020, in the face amount of $140,000, with interest payable July 1 and December 31.The bonds were sold for $140,000.How much should ER debit to cash on September 1, 2020?

The cost of any equity financing is included when calculating the cost of generalized borrowings.

The principal amount of a debt is the cash or cash equivalent amount borrowed.

A $1,000, 6%, 10-year bond purchased as a long-term investment at an effective rate at 7%, will pay the investor $70 cash interest each year.

Under the effective interest method, interest expense is calculated by multiplying the market interest rate by the carrying value of the bonds.

When the maturity date of a bond issue is within one year or the operating cycle (whichever is longer)of the current balance sheet date, the bond liability should be reclassified as a current liability (assuming the payment will be made out of current assets).

If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the early years will be:

$5,000 (face value) of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest) paid to retire the bonds was $4,700.The entry to record the retirement would include:

JV issued $10,000, 10% bonds payable (interest payable annually), which mature at the end of six years from issue date.The effective rate of interest at issue date was 12%.The sale price of the bonds was: $ _.

The amortization of a bind discount or premium over the life of a bond will be the same under both the straight line and effective interest methods.