Question 1

An annuity is a series of equal payments at equal time intervals.

Accepted Answer

A) True 
 B)False

Question 2

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

Accepted Answer

A) True 
 B)False

Question 3

The market value (price) of a bond is equal to:

Accepted Answer

A)  The present value of the principal for an interest-bearing bond. 
B)  The future value of all future interest payments provided by a bond. 
C)  The present value of all future cash payments provided by a bond. 
D)  The future value of all future cash payments provided by a bond. 
E)  The present value of all future interest payments provided by a bond.

Question 4

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

Accepted Answer

A) True 
 B)False

Question 5

Sinking fund bonds:

Accepted Answer

A)  Require equal payments of both principal and interest over the life of the bond issue. 
B)  Require the issuer to set aside assets at specified amounts to retire the bonds at maturity. 
C)  Decline in value over time. 
D)  Are bearer bonds. 
E)  Are registered bonds.

Question 6

On July 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par. The bonds pay interest June 30 and December 31. What amount of bond interest expense should the company report on its current year income statement?

Accepted Answer

The answer of On July 1 of the current year...

Question 7

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. 
-The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

A)  Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00. 
B)  Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00. 
C)  Debit Interest Payable $13,500; credit Cash $13,500.00. 
D)  Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00. 
E)  Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash $13,500.00.

Question 8

On January 1, a company issued 10%, 10-year bonds with a par value of $720,000. The bonds pay interest each July 1 and January 1. The bonds were sold for $817,860 cash, based on an annual market rate of 8%. Prepare the issuer's journal entry to record the first semiannual interest payment assuming the effective interest method is used.

Accepted Answer

The answer of On January 1, a company issued 10%,...

Question 9

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

Accepted Answer

A) True 
 B)False

Question 10

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

Accepted Answer

A) True 
 B)False

Question 11

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. 
-The carrying value of the bonds immediately after the second interest payment is:

Accepted Answer

A)  $395,800. 
B)  $400,000. 
C)  $399,800. 
D)  $396,200. 
E)  $396,400.

Question 12

A company issues 6%, 5 year bonds with a par value of $800,000 and semiannual interest payments. On the issue date, the annual market rate of interest is 8%. Compute the issue (selling) price of the bonds. The following information is taken from present value tables:
Present value of an annuity for 10 periods at 3% 8.5302 Present value of an annuity for 10 periods at 4% 8.1109 Present value of 1 due in 10 periods at 3%................... 0.7441
Present value of 1 due in 10 periods at 4% 0.6756

Accepted Answer

The answer of A company issues 6%, 5 year bonds...

Question 13

Explain the amortization of a bond premium. Identify and describe the amortization methods available.

Accepted Answer

The answer of Explain the amortization of a bond premium....

Question 14

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

Accepted Answer

A) True 
 B)False

Question 15

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

Accepted Answer

A) True 
 B)False

Question 16

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Accepted Answer

A) True 
 B)False

Question 17

The contract rate on previously issued bonds changes as the market rate of interest changes.

Accepted Answer

A) True 
 B)False

Question 18

A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?

Accepted Answer

A)  $1,500 loss. 
B)  $3,000 loss. 
C)  $3,000 gain. 
D)  $0 gain or loss. 
E)  $1,500 gain.

Question 19

If an issuer sells bonds at a premium:

Accepted Answer

A)  The carrying value of the bond stays constant over time. 
B)  The carrying value increases from the par value to the issue price over the bond's term. 
C)  The carrying value decreases from the par value to the issue price over the bond's term. 
D)  The carrying value decreases from the issue price to the par value over the bond's term. 
E)  The carrying value increases from the issue price to the par value over the bond's term.

Question 20

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

Accepted Answer

A) True 
 B)False

Exam 14: Long-Term Liabilities

An annuity is a series of equal payments at equal time intervals.

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

The market value (price) of a bond is equal to:

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

Sinking fund bonds:

On July 1 of the current year a corporation issued (sold) $1,000,000 of its 12% bonds at par. The bonds pay interest June 30 and December 31. What amount of bond interest expense should the company report on its current year income statement?

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

Explain the amortization of a bond premium. Identify and describe the amortization methods available.

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

The contract rate on previously issued bonds changes as the market rate of interest changes.

A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?

If an issuer sells bonds at a premium:

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.