Question 1

Which of the following statements is not correct?

Accepted Answer

A) The bond principal is the amount due at the maturity date of the bond. 
B) The coupon rate is used to determine the cash interest payments. 
C) The bond principal is used to determine the cash interest payments. 
D) The market rate of interest is used to determine the cash interest payments.

Question 2

A company prepared the following journal entry:  Which of the following statements is correct?

Accepted Answer

A) The book value of the bonds was less than the cash payment. 
B) The increase in stockholders' equity equals the loss on the bond retirement. 
C) The decrease in assets is greater than the decrease in liabilities and, as a result, stockholders' equity decreases. 
D) The net cash flow from financing activities decreases by the book value of the bonds payable.

Question 3

On January 1, 2016, Clintwood Company issued a $1,000, ten-year, 10% bond payable (interest payable each December 31).
Required:
For the three assumptions below, complete the following schedule if the fiscal year end is December 31, and straight-line amortization is used:

Accepted Answer

The answer of On January 1, 2016, Clintwood Company issued...

Question 4

Which of the following statements regarding the effective-interest method of amortization is incorrect?

Accepted Answer

A) The amount of interest expense is different each period. 
B) The amount of discount or premium, on which amortization is calculated, increases each period. 
C) The effective-interest method is one of the options allowed by generally accepted accounting principles for all bond issues. 
D) The total interest expense over the life of a bond is the same as that reported under the straight-line method of amortization.

Question 5

Which of the following statements best describes convertible bonds?

Accepted Answer

A) They can be turned in for early retirement at the option of the bondholder. 
B) They can be converted to common stock at the option of the bondholder. 
C) They can be called for early retirement at the option of the issuer. 
D) They can be converted to common stock at the option of the issuer.

Question 6

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds, the market rate of interest was 10%. Which of the following statements is incorrect?

Accepted Answer

A) The bonds were issued at par. 
B) Annual interest expense will equal the company's annual cash payments for interest. 
C) The book value of the bonds will decrease as cash interest payments are made. 
D) Annual interest expense is the same regardless of whether the effective-interest or straight-line method of amortization is useD.Since the coupon and interest rates were the same at the date of issue, the bonds were issued at par.The payment of interest does not affect the book value of the bond liability because there is no discount or premium to amortize to interest expense.

Question 7

Which of the following statements does not correctly describe the accounting for bonds that were issued at their face (maturity) value?

Accepted Answer

A) The market rate of interest equals the coupon rate. 
B) The interest expense over the life of the bonds will equal the total cash interest payments. 
C) The present value of the bonds' future cash flows equals the bonds' maturity value. 
D) The book value of the bond liability decreases when interest payments are made on the due dates.

Question 8

Which of the following statements does not correctly describe the accounting for bonds that were issued at a discount?

Accepted Answer

A) The interest expense over the life of the bond exceeds the total cash interest payments. 
B) The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used. 
C) The amortization of the discount on bonds payable account decreases as the bonds mature when the effective interest method is used. 
D) The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is useD.When bonds are issued at a discount, their book value increases over time and eventually reach the bonds' maturity value.Interest expense increases because the book value increases.The amortization of discount on bonds payable is the difference between the increasing interest expense and the constant cash interest payment.

Question 9

When a company needs funds to finance the expansion of its operations, which of the following is not an advantage of issuing bonds rather than issuing stock?

Accepted Answer

A) Stockholders remain in control as bondholders cannot vote or share in the company's earnings. 
B) Interest expense is tax deductible but dividends are not. 
C) Bonds can usually be issued at a low interest rate and the proceeds can be invested to earn a higher rate. 
D) The dates for the interest and maturity payments are fixeD.The fixed payment dates create inflexibility and therefore increase bankruptcy risk.

Question 10

A bond issued at a premium will pay periodic cash interest in excess of the amount of interest expense recognized for accounting purposes.

Accepted Answer

A) True 
 B)False

Question 11

On July 1, 2016, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2016, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. What is the net amount of the bond liability to be reported on the December 31, 2016 balance sheet?

Accepted Answer

A) $300,000. 
B) $302,850. 
C) $302,700. 
D) $303,000.

Question 12

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is incorrect?

Accepted Answer

A) The market rate of interest was less than the coupon rate of interest on July 1, 2016. 
B) The interest expense during the life of the bonds is $3,000 less than the cash interest payments during the life of the bonds. 
C) The book value of the bond liability decreases by $300 per year. 
D) The semi-annual interest expense is $300 less than the semi-annual interest payment.

Question 14

On March 31, 2016, Bundy Company retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. What is the amount of the gain or loss on the retirement of the bonds?

Accepted Answer

A) $150,000 loss. 
B) $150,000 gain. 
C) $650,000 gain. 
D) $350,000 loss.

Question 15

On January 1, 2016, Laramie Company issued $500,000, 4%, five-year bonds payable at 92. The market rate at the date of issue is 6%. Interest is payable semi-annually at each June 30 and December 31. Laramie has a December 31 year-end and uses the effective interest method of amortization.
Required:
A.Prepare the journal entry to record the issuance of the bonds on January 1, 2016.
B.Prepare the journal entry to record the first interest payment and interest expense at June 30, 2016.No entries have yet been made for interest on these bonds.
C.Prepare the journal entry to record the second interest payment and interest expense at December 31, 2016.No entries have been made for these bonds since June 30, 2016.
D.What would the carrying value of the bonds be on December 31, 2016?

Accepted Answer

The answer of On January 1, 2016, Laramie Company issued...

Question 16

A company retired $500,000 of bonds, which have an unamortized discount of $10,000, by repurchasing them for $500,000. What is the amount of the gain or loss on the retirement of the bonds?

Accepted Answer

A) There was no gain or loss. 
B) There was a $10,000 loss. 
C) There was a $10,000 gain. 
D) There was a $500,000 loss.

Question 17

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Accepted Answer

A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid. 
B) The amount of interest expense recognized each period increases over time. 
C) The amount of discount amortized each period decreases over time. 
D) The book value of the bonds payable liability decreases.

Question 18

On July 1, 2016, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2016, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. What is the amount of the semi-annual interest expense?

Accepted Answer

A) $14,000. 
B) $14,150. 
C) $10,350. 
D) $11,000.

Question 19

Assuming no adjusting journal entries have been made during the year, the journal entry on the due date of the cash interest payment for bonds issued at a premium has just been prepared. Which of the following is not an effect of the entry?

Accepted Answer

A) An increase in expenses and a decrease in liabilities. 
B) An increase in expenses and an increase in liabilities. 
C) A decrease in both liabilities and stockholders' equity. 
D) A decrease in both assets and liabilities.

Question 20

On January 1, 2016, Tonika Company issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Tonika uses the effective-interest amortization method. The book value of the bonds as of December 31, 2016 is closest to:

Accepted Answer

A) $8,968. 
B) $9,945. 
C) $9,641. 
D) $9,741.

Exam 10: Reporting and Interpreting Bond Securities