Question 1

A discount on bonds payable:

Accepted Answer

A)   Occurs when a corporation issues bonds with a contract rate less than the market rate.
B)   Occurs when a corporation issues bonds with a contract rate higher than the market rate.
C)   Is recorded as a contra equity account.
D)   Only occurs when unsecured bonds are issued.
E)   Never happens in the real world. A

Question 2

Bino Corp issues $750,000,10%,15-year bonds.The current market rate is 10%.The journal entry to record the semiannual interest payment,assuming the effective interest method is used,is:

Accepted Answer

A)  
B)  
C)  
D)  
E)    A

Question 3

On January 1,2015,Jerry Corporation issued $1,000,000,8%,10-year bonds,and received $875,388 in cash proceeds.The market rate at the date of issuance was 10%.The bonds pay interest semiannually on July 1 and January 1.Jerry Corporation uses the effective interest method for amortization of bond premium or discount.Prepare the general journal entry to record interest expense and the cash payment of interest on July 1,2015.

Accepted Answer

*$875,388 x 5% = $43,769.40

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Seinfeld Corporation issued $500,000,11%,3-year bonds when the market rate was 12%,and received $487,567.50 in proceeds.Prepare the journal entry to record the issuance of the bonds.The bonds pay quarterly interest.

Accepted Answer

The answer of Seinfeld Corporation issued $500,000,11%,3-year bonds when the...

Question 6

Snow and Skates Ltd is planning a $500,000 expansion.The firm has $1,000,000 in equity.Which of the following options would generate the largest return on equity?

Accepted Answer

A)   Plan A-no expansion.
B)   Plan B-raise $500,000 from issuing shares.
C)   Plan C-issue $500,000 worth of 8% bonds.
D)   Both Plan A-no expansion,and Plan B-raise $500,000 from issuing shares,have the same result.
E)   Both Plan A-no expansion,and Plan C-issue $500,000 worth of 8% bonds,have the same result.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

When a bond sells at a premium,it means that:

Accepted Answer

A)   The contract rate is above the market rate.
B)   The contract rate is equal to the market rate.
C)   The contract rate is below the market rate.
D)   The bond is secured by corporation assets.
E)   The bond is always callablE.

Question 13

A corporation may retire bonds by:

Accepted Answer

A)   Exercising a call option.
B)   Exercising a call option or purchasing bonds on the open market.
C)   Purchasing bonds on the open market.
D)   Exercising a call option and a conversion option.
E)   Exercising a conversion option.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Bonds can be issued:

Accepted Answer

A)   At par.
B)   At a premium.
C)   At a discount.
D)   Between interest payment dates.
E)   All of these answers are correct.

Question 17

When the bond contract rate is above the market rate,the bond sells at a(n)_____________.

Accepted Answer

The answer of When the bond contract rate is above...

Question 18

A finance lease obligation is a form of long-term liability.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Poof Corporation recognized the conversion of $75,000 par value bonds into 5,000 common shares.Prepare the journal entry to record the transaction.

Accepted Answer

The answer of Poof Corporation recognized the conversion of $75,000...

Exam 15: Bonds and Long-Term Notes Payable

A discount on bonds payable:

Bino Corp issues $750,000,10%,15-year bonds.The current market rate is 10%.The journal entry to record the semiannual interest payment,assuming the effective interest method is used,is:

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

Seinfeld Corporation issued $500,000,11%,3-year bonds when the market rate was 12%,and received $487,567.50 in proceeds.Prepare the journal entry to record the issuance of the bonds.The bonds pay quarterly interest.

Snow and Skates Ltd is planning a $500,000 expansion.The firm has $1,000,000 in equity.Which of the following options would generate the largest return on equity?

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

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

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

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

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.

When a bond sells at a premium,it means that:

A corporation may retire bonds by:

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

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

Bonds can be issued:

When the bond contract rate is above the market rate,the bond sells at a(n)_____________.

A finance lease obligation is a form of long-term liability.

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

Poof Corporation recognized the conversion of $75,000 par value bonds into 5,000 common shares.Prepare the journal entry to record the transaction.