Question 1

Each of the following is correct regarding bonds except they are

Accepted Answer

A)  a form of interest-bearing notes payable. 
B)  attractive to many investors. 
C)  issued by corporations and governmental agencies. 
D)  sold in large denominations. 
A)  a form of interest-bearing notes payable. 
B)  attractive to many investors. 
C)  issued by corporations and governmental agencies. 
D)  sold in large denominations.

Question 2

The straight-line method of amortization allocates an increasing amount to interest expense each interest period.

Accepted Answer

A) True 
 B)False

Question 3

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

Accepted Answer

A)  callable bonds. 
B)  early retirement bonds. 
C)  options. 
D)  debentures. 
A)  callable bonds. 
B)  early retirement bonds. 
C)  options. 
D)  debentures.

Question 4

Bonds issued against the general credit of the borrower are called

Accepted Answer

A)  callable bonds. 
B)  debenture bonds. 
C)  mortgage bonds. 
D)  sinking fund bonds. 
A)  callable bonds. 
B)  debenture bonds. 
C)  mortgage bonds. 
D)  sinking fund bonds.

Question 5

A major disadvantage resulting from the use of bonds is that

Accepted Answer

A)  earnings per share may be lowered. 
B)  interest must be paid on a periodic basis. 
C)  bondholders have voting rights. 
D)  taxes may increase. 
A)  earnings per share may be lowered. 
B)  interest must be paid on a periodic basis. 
C)  bondholders have voting rights. 
D)  taxes may increase.

Question 6

When the effective-interest method of bond discount amortization is used

Accepted Answer

A)  the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. 
B)  the carrying value of the bonds will decrease each period. 
C)  interest expense will not be a constant dollar amount over the life of the bond. 
D)  interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued. 
A)  the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. 
B)  the carrying value of the bonds will decrease each period. 
C)  interest expense will not be a constant dollar amount over the life of the bond. 
D)  interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.

Question 7

If bonds are issued at a discount the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Accepted Answer

A) True 
 B)False

Question 8

Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

Accepted Answer

A) True 
 B)False

Question 9

A corporation issued $600000 10% 5-year bonds on January 1 2017 for $648666 which reflects an effective-interest rate of 7%. Interest is paid annually on January 1. If the corporation uses the effective-interest method of amortization of bond premium the amount of bond interest expense to be recognized on December 31 2017 is

Accepted Answer

A)  $60000. 
B)  $42000. 
C)  $64867. 
D)  $45407. 
A)  $60000. 
B)  $42000. 
C)  $64867. 
D)  $45407.

Question 10

In a recent year Luke Corporation had net income of $250000 interest expense of $50000 and a times interest earned of 10. What was Luke Corporation's income before taxes for the year?

Accepted Answer

A)  $550000 
B)  $500000 
C)  $450000 
D)  None of these answer choices are correct. 
A)  $550000 
B)  $500000 
C)  $450000 
D)  None of these answer choices are correct.

Question 11

Operating leases are leases that the lessee must capitalize on its balance sheet as an asset.

Accepted Answer

A) True 
 B)False

Question 12

On January 1 Shade Corporation issued $3000000 7% 5-year bonds with interest payable on December 31. The bonds sold for $3216288. The market rate of interest for these bonds was 6%. On the first interest date using the effective-interest method the debit entry to Interest Expense is for

Accepted Answer

A)  $180000. 
B)  $225140. 
C)  $192977. 
D)  $210000. 
A)  $180000. 
B)  $225140. 
C)  $192977. 
D)  $210000.

Question 13

Generally convertible bonds do not pay interest.

Accepted Answer

A) True 
 B)False

Question 14

Lowe Company has $1500000 of bonds outstanding. The unamortized premium is $19600. If the company redeemed the bonds at 101 what would be the gain or loss on the redemption?

Accepted Answer

A)  $4600 gain 
B)  $4600 loss 
C)  $15000 gain 
D)  $15000 loss 
A)  $4600 gain 
B)  $4600 loss 
C)  $15000 gain 
D)  $15000 loss

Question 15

Presented here is a partial amortization schedule for Graceland Company who sold $100000 five year 10% bonds on January 1 2016 for $108000 and uses annual straight-line amortization. $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { BOND AMORTIZATION SCHEDULE }$
$\begin{array}{|c|c|c|c|c|c|}
\hline\text { Interest Period } & \begin{array}{c}
\text { Interest } \
\text { Paid }
\end{array} & \begin{array}{c}
\text { Interest } \
\text { Expense }
\end{array} & \begin{array}{c}
\text { Premium } \
\text { Amortization }
\end{array} & \begin{array}{c}
\text { Unamortized } \
\text { Premium }
\end{array} & \begin{array}{c}
\text { Bond Carrying } \
\text { Value }
\end{array} \
\hline \text { January 1,2016 } & & & & \$ 8,000 & \$ 108,000 \
\hline \text { January 1,2017 } & \text { (i) } & \text { (ii) } & \text { (iii) } & \text { (iv) } & \text { (v) }\
\hline
\end{array}$ 
-Which of the following amounts should be shown in cell (iii)?

Accepted Answer

A)  $10000 
B)  $12000 
C)  $2000 
D)  $1200 
A)  $10000 
B)  $12000 
C)  $2000 
D)  $1200

Question 16

King Company issued bonds with a face amount of $1600000 in 2012. As of January 1 2017 the balance in Discount on Bonds Payable is $4800. At that time King redeemed the bonds at 102.
Instructions
Assuming that no interest is payable make the entry to record the redemption.

Accepted Answer

None

Question 17

Trooper Corporation reports the following amounts in their 2017 financial statements: $\begin{array}{lc}
& \underline{\text { At December 31,2017}}& \underline{\text { For the Year 2017}}\
\text { Total assets } & \$ 2,000,000 \
\text { Total liabilities } & 1,310,000 \
\text { Total stockholders' equity } & ?\
\text { Interest expense } && \$ 25,000 \
\text { Income tax expense } && 130,000 \
\text { Net income }& & 150,000
\end{array}$ Instructions
(a) Compute the December 31 2017 balance in stockholders' equity.
(b) Compute the debt to assets ratio at December 31 2017.
(c) Compute times interest earned for 2017.

Accepted Answer

<sup> </su

Question 18

If the market interest rate is greater than the contractual interest rate bonds will sell at a discount.

Accepted Answer

A) True 
 B)False

Question 19

The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements concerning leases is true?

Accepted Answer

A)  Capital leases are favored by lessees. 
B)  The appearance of the account Leased Asset on the balance sheet signifies an operating lease. 
C)  The portion of a lease liability expected to be paid in the next year is reported as a current liability. 
D)  Present value is irrelevant in accounting for leases. 
A)  Capital leases are favored by lessees. 
B)  The appearance of the account Leased Asset on the balance sheet signifies an operating lease. 
C)  The portion of a lease liability expected to be paid in the next year is reported as a current liability. 
D)  Present value is irrelevant in accounting for leases.

Exam 15: Long-Term Liabilities

Each of the following is correct regarding bonds except they are

The straight-line method of amortization allocates an increasing amount to interest expense each interest period.

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

Bonds issued against the general credit of the borrower are called

A major disadvantage resulting from the use of bonds is that

When the effective-interest method of bond discount amortization is used

If bonds are issued at a discount the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

In a recent year Luke Corporation had net income of $250000 interest expense of $50000 and a times interest earned of 10. What was Luke Corporation's income before taxes for the year?

Operating leases are leases that the lessee must capitalize on its balance sheet as an asset.

On January 1 Shade Corporation issued $3000000 7% 5-year bonds with interest payable on December 31. The bonds sold for $3216288. The market rate of interest for these bonds was 6%. On the first interest date using the effective-interest method the debit entry to Interest Expense is for

Generally convertible bonds do not pay interest.

Lowe Company has $1500000 of bonds outstanding. The unamortized premium is $19600. If the company redeemed the bonds at 101 what would be the gain or loss on the redemption?

King Company issued bonds with a face amount of $1600000 in 2012. As of January 1 2017 the balance in Discount on Bonds Payable is $4800. At that time King redeemed the bonds at 102. Instructions Assuming that no interest is payable make the entry to record the redemption.

If the market interest rate is greater than the contractual interest rate bonds will sell at a discount.

The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

Which of the following statements concerning leases is true?

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