Deck 20: Corporations and Bonds Payable

Question 1

Bonds that may be redeemed at a certain price level are known as:

A) callable bonds.
B) debenture bonds.
C) serial bonds.
D) term bonds.

Answer 1

A

Question 2

Which of the following statements is false?

A) Bondholders would be paid before stockholders in a liquidation.
B) Dividends are not required to be paid to stockholders.
C) Bondholders are owners while stockholders are creditors.
D) Bondholders receive a fixed interest while stockholders are paid only if earnings are sufficient.

Answer 2

C

Question 3

When the contract rate of interest on bonds is equal to the market rate of interest, bonds sell at:

A) a premium.
B) their face value.
C) their maturity value.
D) a discount.

Answer 3

B

Question 4

Barnes Corporation has decided to issue bonds that can be converted into stock at a specified exchange rate. What type of bonds is it offering?

A) Secured bonds
B) Debenture bonds
C) Convertible bonds
D) Serial bonds

Question 5

The contract rate for a bond is:

A) the annual interest rate based on selling price.
B) the annual interest rate based on market value.
C) the annual interest rate based on face value.
D) None of these answers is correct.

Question 6

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at:

A) a premium.
B) their face value.
C) their maturity value.
D) a discount.

Question 7

Bonds payable issued with collateral are called:

A) debenture bonds.
B) serial bonds.
C) term bonds.
D) secured bonds.

Question 8

A $10,000 bond quoted at 97 would sell for:

A) $10,000.
B) $97.
C) $9,700.
D) None of the above

Question 9

For a corporation, a premium on bonds results when:

A) the contract rate is greater than the market rate.
B) the contract rate is less than the market rate.
C) the face value is greater than the effective rate.
D) the rate on the bond certificate is less than the market rate.

Question 10

Bond certificates state the:

A) market value and contract rate.
B) face value and contract rate.
C) market value and current interest rate.
D) face value and current interest rate.

Question 11

The interest rate specified in the bond indenture is called the:

A) market rate.
B) discount rate.
C) contract rate.
D) effective rate.

Question 12

A $10,000 bond quoted at 106 would sell for:

A) $10,106.
B) $10,600.
C) $106.
D) $10,000.

Question 13

When the maturities of a bond issue are spread over a several dates, the bonds are called:

A) term bonds.
B) bearer bonds.
C) debenture bonds.
D) serial bonds.

Question 14

When a bond is bought between interest dates:

A) the buyer pays the interest since the last interest payment.
B) the issuer pays the purchase price of the bonds only.
C) the buyer pays the purchase price plus accrued interest since the last interest payment.
D) A buyer can't buy a bond between interest dates.

Question 15

Bond Indenture:

A) is a special type of long-term secured loan.
B) is the annual interest rate based on face value.
C) is the amount to be paid on the maturity date of a bond.
D) is the information on the bond certificate written by the corporation in a formal agreement.

Question 16

Dividends paid to stockholders are:

A) taxable to the recipient stockholder.
B) taxable to the corporation.
C) treated the same as bond interest.
D) None of these answers is correct.

Question 17

One reason a corporation might issue bonds rather than selling stock is that:

A) bond interest is a tax-deductible expense.
B) interest rates are high.
C) dividends will lower the amount of tax due.
D) bondholders have claims at liquidation.

Question 18

A bond payable is similar to which of the following?

A) Accounts Payable
B) Accounts Receivable
C) Notes Payable
D) Cash

Question 19

The Face Value of a bond:

A) is the sum of the interest earned from issue to maturity date.
B) is the annual interest rate based on face value.
C) is the amount to be paid on the maturity date of a bond.
D) is the information on the bond certificate written by the corporation in a formal agreement.

Question 20

A bond payable:

A) is special type of long-term interest-bearing note payable issued by a corporation to raise capital.
B) is the amount owed for mortgage.
C) is the amount to be paid on the maturity date of a bond.
D) is the information on the bond certificate written by the corporation in a formal agreement.

Question 21

Bonds that are backed solely by the general credit of the corporation issuing the bonds are called:

A) secured bonds.
B) debenture bonds.
C) indenture bonds.
D) convertible bonds.

Question 22

If bonds are sold between interest payment dates, the amount of cash the issuer receives is:

A) more than the market value of the bonds.
B) less than the market value of the bonds.
C) equal to the market value of the bonds.
D) equal to the face value of the bonds.

Question 23

At the time a bond was sold at face value, the entire amount of interest over the life of the bond was recorded as an expense and a liability. This error would cause:

A) the period end assets to be overstated.
B) the period end liabilities to be understated.
C) the period's net income to be understated.
D) None of the above is correct.

Question 24

When interest payments are made on a bond issued at face value, the journal entry would include:

A) a debit to Bond Interest Expense.
B) a credit to Accounts Payable.
C) a debit to Cash.
D) Both A and B

Question 25

When a bond issued at face value is retired, the journal entry would include:

A) debit Bond Interest Expense.
B) debit Bonds Payable.
C) credit Cash.
D) Both B and C

Question 26

The interest rate on which interest payments to bondholders are based is the:

A) market rate.
B) discount rate.
C) contract rate.
D) amortization rate.

Question 27

For a corporation, bond interest:

A) is treated the same as dividends for tax purposes.
B) has no effect on earnings and therefore has no effect on income taxes.
C) increases income tax by reducing earnings.
D) None of the above

Question 28

A bond is issued for an amount equal to its face value. Which of the following statements most likely would explain why?

A) The bond's contract rate is lower than the market rate at the time of the issue.
B) The bond's contract rate is the same as the market rate at the time of the issue.
C) The bond's contract rate is higher than the market rate at the time of the issue.
D) The bond is secured by specific assets of the corporation.

Question 29

A bond is issued for more than its face value. Which of the following statements most likely would explain why?

A) The bond's contract rate is lower than the market rate at the time of the issue.
B) The bond's contract rate is the same as the market rate at the time of the issue.
C) The bond's contract rate is higher than the market rate at the time of the issue.
D) The bond is not secured by specific assets of the corporation.

Question 30

All other factors being equal, issuing stocks rather than issuing bonds will:

A) increase earnings per share.
B) decrease earnings per share.
C) have no effect on earnings per share.
D) Cannot be determined from information given

Question 31

On October 1, Garson Company issued 8%, 10-year, $300,000 bonds at 100. Interest dates are April 1 and October 1. The amount of cash paid out for interest during the current calendar year is:

A) $0.
B) $24,000.
C) $12,000.
D) $6,000.

Question 32

The journal entry to record the payment of semiannual interest on 9%, $90,000 bonds issued at par would be to:

A) debit Bond Interest Expense $4,050; credit Cash $4,050.
B) debit Bond Interest Expense $8,100; credit Cash $8,100.
C) debit Cash $2,025; credit Bond Interest Expense $2,025.
D) debit Bond Interest Expense $2,025; credit Cash $2,025.

Question 33

Which of the following best describes the term maturity date?

A) The date on which each interest payments is made
B) The date on which the bond is issued
C) The date on which the bond is called
D) The date on which the principal is repaid

Question 34

On April 1, Ballentine Corporation issued 10%, 10-year, $800,000 bonds at face value. Interest dates are April 1 and October 1. The amount of cash paid out for interest during the current calendar year is:

A) $0.
B) $20,000.
C) $40,000.
D) $80,000.

Question 35

The sale and issuance of $800,000, 9% bonds with a market rate of 9% would involving debiting Cash for:

A) $872,000.
B) $836,000.
C) $800,000.
D) $72,000.

Question 36

Which of the following statements is true in regards to secured bonds?

A) Secured bonds are paid on the maturity date.
B) Secured bonds are backed with specific assets.
C) Secured bonds are registered with the issuing company.
D) Secured bonds can be converted to stock.

Question 37

Max Corporation sells $700,000, 11%, 10-year bonds at face value on January 1. Interest is paid on January 1 and July 1. The entry to record the issuance of the bonds on January 1 is:

Question 38

The entry to record the issuance of a bond between interest payment dates would include a:

A) debit to Cash.
B) credit to Bonds Payable.
C) credit to Bonds Interest Payable.
D) All of the above

Question 39

Bolan Corporation issued 300, 12%, 10-year, $1,000 bonds on Jan. 1. The annual bond interest date is June 30, and the bonds were issued at face value. The amount of interest expense reported for the current year is:

A) $0.
B) $36,000.
C) $18,000.
D) None of the above is correct.

Question 40

A bond is issued for less than its face value. Which of the following statements most likely would explain why?

A) The bond's contract rate is lower than the market rate at the time of the issue.
B) The bond's contract rate is the same as the market rate at the time of the issue.
C) The bond's contract rate is higher than the market rate at the time of the issue.
D) The bond is secured by specific assets of the corporation.

Question 41

If a corporation issues serial bonds, each bond will have the same maturity dates.

Question 42

Bonds are long-term interest-bearing notes issued to multiple lenders, usually in increments of $1,000.

Question 43

The interest paid to bondholders is determined by:

A) multiplying the bond's contract rate of interest by the face value.
B) multiplying the market rate of interest by the face value.
C) dividing the bond's annual rate of interest by the face value.
D) dividing the face value by the bond's annual rate of interest.

Question 44

If a bond is issued at a discount, the effective interest rate is most likely ________ the contract interest rate.

A) higher than
B) lower than
C) the same as
D) Cannot be determined based on information given.

Question 45

A bond that has a face value of $300,000 with an annual interest rate of 8% paid semiannually and sold at par would have an interest payment of ________ semiannually.

Question 46

On March 1, 20XX, Janes Company issued $200,000, 10-year, 6% bonds at face value. The bonds have semiannual interest payments on June 30 and December 31. Record the 20XX journal entries.

Question 47

What is the difference between a secured bond and a debenture bond?

Question 48

Using the following accounts:
Indicate the account(s) to be debited and credited to record the following transactions.

-Sold bonds at a discount.
Debit ________ & ________ Credit ________

A)Cash
B)Bond Sinking fund
C)Equipment
D)Building
E)Land
F)Accounts payable
G)Notes payable
H)Bond payable
I)Bond interest payable
J)Premium on bonds payable
K)Discount on bonds payable
L)Common stock
M)Retained earnings
N)Sinking fund earned
O)Bond interest expense
P)Gain on retirement
Q)Loss on retirement

Question 49

Bond interest expense is not tax deductible.

Question 50

To determine the interest payment on a bond, multiply the ________ interest rate times the ________ value.

Question 51

Using the following accounts:
Indicate the account(s) to be debited and credited to record the following transactions.

-Issued bonds at a value above face value in exchange for land.
Debit ________ Credit ________ & ________

A)Cash
B)Bond Sinking fund
C)Equipment
D)Building
E)Land
F)Accounts payable
G)Notes payable
H)Bond payable
I)Bond interest payable
J)Premium on bonds payable
K)Discount on bonds payable
L)Common stock
M)Retained earnings
N)Sinking fund earned
O)Bond interest expense
P)Gain on retirement
Q)Loss on retirement

Question 52

On January 1, 20XX, Baker Company issued $200,000, 10-year, 6% bonds at face values. The bonds have semiannual interest payments on June 30 and December 31. Record the 20XX journal entries.

Question 53

The market rate of interest and the contract rate of interest are always the same for a bond sold at a discount.

Question 54

The entry to record the semiannual payment and amortization of the discount using the straight-line method on a 11%, $500,000, 9-year bond issued at 96 would be to:

A) debit Bond Interest Expense $13,750; credit Cash $13,750.
B) debit Bond Interest Expense $28,056; credit Cash $27,500; credit Discount on Bonds Payable $556.
C) debit Bond Interest Expense $28,611; credit Cash $28,611.
D) debit Bond Interest Expense $28,611; credit Cash $27,500; credit Discount on Bonds Payable $1,111.

Question 55

Using the following accounts:
Indicate the account(s) to be debited and credited to record the following transactions.

-Issued bonds at face value in exchange for equipment.
Debit ________ Credit ________

A)Cash
B)Bond Sinking fund
C)Equipment
D)Building
E)Land
F)Accounts payable
G)Notes payable
H)Bond payable
I)Bond interest payable
J)Premium on bonds payable
K)Discount on bonds payable
L)Common stock
M)Retained earnings
N)Sinking fund earned
O)Bond interest expense
P)Gain on retirement
Q)Loss on retirement

Question 56

A piece of paper held by a bondholder showing evidence of a bond issued by a corporation is called a(n) ________.

Question 57

Bonds that are unsecured and are issued only on the general credit of a corporation are called ________ bonds.

Question 58

Stockholder claims for interest and repayment rank ahead of the claims of bondholders.

Question 59

When the total amount of a bond issue matures at a certain date at which time the bondholder can convert into shares of stock, the bonds are called callable bonds.

Question 60

The corporation will repay the principal amount of the bond on the maturity date.

Question 61

Interest expense will be less than the interest payment when bonds are issued at:

A) a premium.
B) face value.
C) a discount.
D) the conversion rate.

Question 62

Cane Corporation issued $800,000, 12% bonds at 97. The entry to record this transaction is:

A) debit Cash $800,000; credit Bonds Payable $776,000; credit Discount on Bonds Payable $24,000.
B) debit Cash $776,000; credit Bonds Payable $776,000.
C) debit Cash $800,000; credit Bonds Payable $800,000.
D) debit Cash $776,000; debit Discount on Bonds Payable $24,000; credit Bonds Payable $800,000.

Question 63

Carrying value is the same thing as:

A) fair market value.
B) discount value.
C) premium value.
D) book value.

Question 64

Using the straight-line method, the semiannual bond interest expense of a 12%, $800,000, 10-year bond issued at 95 is:

A) $96,000.
B) $50,000.
C) $46,000.
D) $94,000.

Question 65

The carrying value for bonds sold at a premium:

A) equals face value at all times.
B) increases as time passes until it matures at face value.
C) decreases as time passes until it matures at face value.
D) equals the cash amount received at the sale less the amount of the premium.

Question 66

Applegate Corporation sells $170,000, 9%, 20-year bonds for 96 on January 1. Interest is paid on January 1 and July 1. Straight-line amortization is used. The amount of interest expense recorded on July 1, six months after issuance, is:

A) $7,820.
B) $7,735.
C) $7,650.
D) $15,470.

Question 67

Using the straight-line method, the semiannual interest expense of a 11%, $500,000 bond for 10 years at 105 would be:

A) $55,000.
B) $27,500.
C) $26,250.
D) $28,750.

Question 68

When interest payments are made on a discounted bond, a portion of the discount is:

A) depreciated.
B) liquidated.
C) amortized.
D) transferred to reduce the interest expense.

Question 69

Marlo Corporation issued $400,000 of 14%, 10-year bonds for $380,000. The entry to record the issuance of the bonds includes a:

A) debit to Bonds Payable for $400,000.
B) credit to Premium on Bonds Payable for $20,000.
C) credit to Bonds Payable for $420,000.
D) debit to Discount on Bonds Payable $20,000.

Question 70

Bond Interest Payable is reported as a:

A) current liability on the balance sheet.
B) current liability on the income statement.
C) contra-liability on the balance sheet.
D) contra-liability on the income statement.

Question 71

Control Corporation issued $390,000 of 10%, 10-year bonds for 102. The entry to record the issuance of the bonds includes a:

A) debit to Discount on Bonds Payable for $7,800.
B) credit to Bonds Payable for $382,200.
C) debit to Bonds Payable for $390,000.
D) credit to Premium on Bonds Payable for $7,800.

Question 72

Discount on Bonds Payable is a:

A) contra-asset account.
B) contra-liability account.
C) liability account.
D) None of these answers is correct.

Question 73

Candi Corporation sells $180,000, 5%, 20-year bonds for 98 on January 1, 2017. Interest is paid on January 1 and July 1. Straight-line amortization is used. The amount of interest paid on July 1, 2017 is:

A) $6,000.
B) $4,590.
C) $4,500.
D) $1,410.

Question 74

The carrying value of bonds is calculated by:

A) subtracting the Premium on Bonds Payable account balance to the Bonds Payable account balance.
B) subtracting the Premium on Bonds Payable account balance from the Bonds Payable account balance.
C) subtracting the Discount on Bonds Payable account balance from the Bonds Payable account balance.
D) adding the Bonds Payable account balance to the Bond Interest Payable account balance.

Question 75

Moab Corporation sells $600,000 of 7%, 20-year bonds for 98 on January 1. Interest is paid on January 1 and July 1. Straight-line amortization is used. What is the amount of the discount at issuance?

A) $30,000
B) $6,000
C) $12,000
D) $42,000

Question 76

The real or actual rate of interest to the borrowing corporation is called the:

A) stated rate of interest.
B) effective rate of interest.
C) discount rate of interest.
D) premium rate of interest.

Question 77

On October 1, 2015, Port Company issued 11%, 10-year, $800,000 bonds at 108. Interest dates are April 1 and October 1. The amount of straight-line amortization for 2015 is:

A) $800.
B) $3,200.
C) $6,400.
D) $1,600.

Question 78

On October 1, Alex Company issued 8%, 10-year, $400,000 bonds at 108. Interest dates are April 1 and October 1. The amount of cash paid out for interest during the current calendar year is:

A) $0.
B) $32,000.
C) $16,000.
D) $8,000.

Question 79

When selling bonds at a discount, the discount received effectively:

A) reduces the cost of borrowing.
B) increases the cost of borrowing.
C) does not affect the cost of borrowing.
D) increases the interest expense over that of bond sold at a premium.

Question 80

Harley Corporation issued a 10%, $800,000 8-year bond at 104. The entry to record the issuance transaction is to:

A) debit Cash $800,000; credit Bonds Payable $800,000.
B) debit Cash $832,000; credit Bonds Payable $832,000.
C) debit Cash $832,000; credit Bonds Payable $800,000 credit Premium on Bonds Payable $32,000.
D) debit Cash $800,000; debit Premium on Bonds Payable $32,000; credit Bonds Payable $832,000.