Question 1

If $2,000,000 of 10% bonds are issued at 95, the amount of cash received from the sale is

Accepted Answer

A)  $2,200,000 
B)  $2,000,000 
C)  $2,100,000 
D)  $1,900,000

Question 2

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Accepted Answer

A) True 
 B)False

Question 3

Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?

Accepted Answer

A)  $3,000 loss 
B)  $3,000 gain 
C)  $7,000 loss 
D)  $7,000 gain

Question 4

One potential advantage of financing corporations through the use of bonds rather than common stock is

Accepted Answer

A)  the interest on bonds must be paid when due 
B)  the corporation must pay the bonds at maturity 
C)  the interest expense is deductible for tax purposes by the corporation 
D)  a higher earnings per share is guaranteed for existing common shareholders

Question 5

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

Accepted Answer

A)  enterprise fund 
B)  sinking fund 
C)  special assessments fund 
D)  general fund

Question 6

The unamortized Discount on Bonds Payable account is a contra-liability account.

Accepted Answer

A) True 
 B)False

Question 7

The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.

Accepted Answer

A) True 
 B)False

Question 8

To determine the six month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2011, for $104,200. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2011, is

Accepted Answer

A)  $10,420. 
B)  $5,420. 
C)  $5,000. 
D)  $4,580.

Question 11

When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.

Accepted Answer

A) True 
 B)False

Question 12

If bonds are issued at a discount, it means that the

Accepted Answer

A)  bondholder will receive effectively less interest than the contractual rate of interest. 
B)  market interest rate is lower than the contractual interest rate. 
C)  market interest rate is higher than the contractual interest rate. 
D)  financial strength of the issuer is suspect.

Question 13

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

Accepted Answer

A) True 
 B)False

Question 14

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

Accepted Answer

A) True 
 B)False

Question 15

Sinking Fund Cash would be classified on the balance sheet as

Accepted Answer

A)  a current asset 
B)  a fixed asset 
C)  an intangible asset 
D)  an investment

Question 16

On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year:

Accepted Answer

The answer of On August 1, Clayton Co. issued $1,300,000...

Question 17

If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.

Accepted Answer

A) True 
 B)False

Question 18

When the bonds are sold for more than their face value, the carrying value of the bonds is equal to

Accepted Answer

A)  face value 
B)  face value plus the unamortized discount 
C)  face value minus the unamortized premium 
D)  face value plus the unamortized premium

Question 19

Bondholders are creditors of the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 20

The higher the times interest earned ratio, the better the creditors' protection.

Accepted Answer

A) True 
 B)False

Exam 14: Long-Term Liabilities: Bonds and Notes

If $2,000,000 of 10% bonds are issued at 95, the amount of cash received from the sale is

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?

One potential advantage of financing corporations through the use of bonds rather than common stock is

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

The unamortized Discount on Bonds Payable account is a contra-liability account.

The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.

To determine the six month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond.

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

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2011, for $104,200. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2011, is

When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.

If bonds are issued at a discount, it means that the

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

Sinking Fund Cash would be classified on the balance sheet as

On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year:

When the bonds are sold for more than their face value, the carrying value of the bonds is equal to

Bondholders are creditors of the issuing corporation.

The higher the times interest earned ratio, the better the creditors' protection.