Deck 6: Bonds and Long-Term Notes Payable

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

Interest paid on bonds is not tax-deductible.

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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.

Question 11

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

Question 12

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

Question 13

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

Question 14

Bonds must be issued on an interest payment date.

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

Debentures are secured debt.

Question 21

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

Question 22

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 23

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

Question 24

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 25

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 26

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 27

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

Question 28

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

Question 29

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 30

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 31

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

Question 32

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

Question 33

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 34

Discount on Bonds Payable is a contra liability account.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

The carrying value of a bond issued at a discount decreases over time

Question 40

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

Question 41

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 42

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

Question 43

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

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

On January 1,2019,SuperBowlInc signed a two-year,7% $5,000 note payable.The note plus interest is due on December 31,2020.The amount of interest expense to be recorded for 2019 is $375.

Question 46

SuperBowlInc 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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

A finance type lease arrangement is a lease agreement that transfers the risks and benefits associated with ownership to the lessee.

Question 52

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

Question 53

Notes payable usually represent a transaction with a single lender.

Question 54

A finance lease arrangement is a type of lease agreement in which the lessee receives ownership of the asset at the end of the lease,the lease duration uses up a major part of the asset's life and the value of the lease contract is close to the fair value of the leased asset.

Question 55

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

Question 56

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

Question 57

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

Question 58

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 59

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

Question 60

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

Question 61

Aflac Corporation leased machinery under a finance lease arrangement with its lessee.At January 1,2021,the first day of the lease,the asset and lease obligation were recorded for $68,000.The first lease payment of $13,276 was due December 31,2021 and the interest rate they used in their calculations was 7%.The lease term was 10 years.Which of the following best describes what would be reported on Aflac's statement of income for the year ending December 31,2021?

A)$13,276 lease expense
B)$4,760 interest expense,$2,040 depreciation expense
C)$4,760 interest expense,$6,800 depreciation expense
D)$13,276 lease expense,$6,800 depreciation expense
E)$4,760 interest expense,$5,472 depreciation expense

Question 62

Abloy Inc issued $100,000,8%,5-year bonds.The current market rate was 7.5%.Cheryl received $101,136.80 for the bonds.Using the effective interest method of amortizing bond premium or discount,the amount of interest expense for the first semiannual payment was

A)$3,500.00
B)$3,136.32
C)$3,386,32
D)$3,792.63
E)$4,250.00

Question 63

On January 1,2019,a $60,000,6%,6-year installment note payable is issued by the Asada Corporation.The note requires that $10,000 of principal plus accrued interest be paid at the end of each year (December 31).The journal entry to record the second annual payment would include

A)A debit to Interest Expense for $3,600
B)A debit to Interest Expense for $3,000
C)A credit to Cash for $3,000
D)A credit to Cash for $3,600
E)A debit to Notes Payable for $3,600

Question 64

On January 1,Getsocio Corporation signs a 6-year lease,which requires annual payments of $51,000 on December 31.The lease meets the requirements of a finance lease.Assuming an effective interest rate of 5%,calculate the value of the Lease Liability after the first payment.

A)$138,543
B)$106,941
C)$110,834
D)$220,804
E)$258,861

Question 65

Arcinet Limited reported the following items on their Balance Sheet: $\begin{array}{|r|r|}\hline \text { Unearned Revenue } & \$ 85,000 \\\hline \text { Prepaid Rent } & 56,200 \\\hline \text { Mortgage liabilities } & 135,000 \\\hline \text { Long-term note payable } & 150,000 \\\hline \text { Bonds payable } & 195,000 \\\hline \text { Other Current Liabilities } & 23,000 \\\hline \text { Share capital } & 125,000 \\\hline \text { Retained earnings } & 157,500 \\\hline\end{array}$ The debt to equity ratio for Arcinet (rounded to two decimal places)is

A)2.08
B)1.78
C)1.22
D)1.98
E)1.96

Question 66

Oberlo Corporation has $50,000 in bonds outstanding.The unamortized discount on these bonds is $2,500.If the corporation redeems these bonds at 97,what is the gain (loss)on retirement?

A)$1,500
B)$3,000
C)$(1,000)
D)$(3,000)
E)$(4,500)

Question 67

Word Lab 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 68

A&M Records Corporation issued $1,000,000,8% bonds,receiving a $30,000 premium.On the interest payment date 5 years later,after the bond interest was paid and after 40% of the premium had been amortized,the corporation purchased the entire issue on the open market at 95 and retired the issue.As a result,the gain on retirement was

A)$12,000
B)$13,000
C)$18,000
D)$68,000
E)$130,000

Question 69

Amortization of a bond discount

A)Decreases the Bonds Payable account
B)Increases the Bonds Payable account
C)Allocates the amount of the discount over the life of the bond
D)Creates a Discount Payable account
E)None of these

Question 70

Amiga Inc issued $100,000,7% semi-annual,5-year bonds.The market rate at the time of issue was 7.5%.Using the effective interest method,the present value of the bond is

A)$97,945
B)$95,568
C)$133,266
D)$130,798
E)$129,108

Question 71

Cannon Ltd bought display racks with a fair market value of $150,000.The corporation signed a 3-year interest-bearing note at 8%.The entry to record the transaction would include

A)A debit to Notes Payable for $150,000
B)A debit to Interest Expense for $12,000
C)A credit to Notes Payable for $150,000
D)A credit to Interest Payable for $400
E)A credit to Notes Payable for $39,692

Question 72

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

Question 73

How much depreciation expense should Freshbooks report for the lease on its 2021 income statement?

A)$7,850
B)$8,833
C)$8,722
D)$15,900
E)$8,722

Question 74

How much interest expense should Freshbooks report for the lease on its 2021 income statement?

A)$19,000
B)$1,900
C)$14,000
D)$15,900
E)NONE

Question 75

Arcelor Corp issues $400,000,6%,10-year bonds.The market rate at the date of issue is 5.5%.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)$318,110
B)$334,298
C)$344,554
D)$391,470
E)$348,819

Question 76

The effective interest rate method

A)Allocates bond interest expense using a changing interest rate
B)Allocates interest expense using the contract rate
C)Allocates a decreasing amount of interest expense over the life of a bond originally sold at a discount
D)Allocates bond interest expense using a constant interest rate
E)Allocates interest expense based on a constant carrying value

Question 77

Shopify Corporation has $200,000 in bonds outstanding.The unamortized premium on these bonds is $3,000.If the corporation redeems these bonds at 99,what is the gain (loss)on retirement?

A)$1,000
B)$(1,000)
C)$(2,700)
D)$2,700
E)$5,000

Question 78

Akai Inc borrowed $200,000 from the bank and signed a 6-year note at 8%.The present value of an annuity factor for 6 years at 8% is 4.6229.To the nearest dollar,the annual payment is

A)$33,333
B)$41,960
C)$45,827
D)$43,263
E)$28,599

Question 79

Accenture Corporation borrowed $300,000 from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.To the nearest dollar,the annual payment is

A)$24,000
B)$19,964
C)$37,500
D)$60,000
E)$75,137

Question 80

Alcoa Inc issued $110,000,9%,5-year bonds.The current market rate was 9.5%.Willa received $106,000 for the bonds.Using the effective interest method,the amount of interest expense to be recorded for the first semiannual payment was

A)$3,750.00
B)$3,910.60
C)$5,035.00
D)$6,500,00
E)$7,000.00