Deck 10: Reporting and Interpreting Bonds

Question 1

A bond's interest payments are determined by multiplying the bond's principal amount by the stated interest rate.

Answer 1

True

Question 2

A convertible bond can be called for early retirement at the option of the issuing company.

Answer 2

False

Question 3

The issuing company and the bond underwriter determine the selling price of a bond.

Answer 3

False

Question 4

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Question 5

A bond will sell at a premium when the market rate of interest is greater than the stated rate of interest.

Question 6

When the market rate of interest is greater than the stated interest rate, the bond will sell at a discount.

Question 7

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

Question 8

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

Question 9

The payment of bond interest on the interest payment date, for bonds issued at par value, reduces both the bond liability and assets, assuming that interest expense is recorded at the time of the cash payment.

Question 10

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Question 11

The journal entry to record the interest cash payment for a bond issued at a discount results in an increase in the book value of the bond liability.

Question 12

A bond issued at a discount will pay total cash payments for interest that are more than the total interest expense recognized over the life of the bond.

Question 13

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

Question 14

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

Question 15

A bond will sell at its par value when the market rate of interest equals the stated rate of interest.

Question 16

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

Question 17

The journal entry to record the interest cash payment for a bond issued at a premium results in an increase in the book value of the bond liability.

Question 18

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted at the stated (coupon) rate.

Question 19

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

Question 20

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

Question 21

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

Question 22

Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

Question 23

If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when the book value is $950,000, a loss of $20,000 will be reported.

Question 24

Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

Question 25

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

Question 26

Which of the following statements best describes convertible bonds?

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 27

Which of the following types of bonds has specific assets pledged to guarantee repayment?

A) Debenture bond.
B) Callable bond.
C)Secured bond.
D)Convertible bonD.A secured bond has specific assets pledged as a guarantee of repayment at maturity.

Question 28

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?

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 29

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?

A) Dates of each interest payment.
B) The stated interest rate.
C)The maturity date.
D)The market rate of interest.

Question 30

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

Question 31

The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

Question 32

The annual interest rate specified within a bond indenture is called which of the following?

A) The stated rate of interest.
B) The market rate of interest.
C)The effective rate of interest.
D)The actual rate of interest.

Question 33

Which of the following is not a reason that a corporation would want to issue bonds instead of stock?

A) Interest payments can be deducted for income tax purposes.
B) Stockholders maintain control.
C)The impact on earnings from using borrowed money may be positive.
D)There is less risk associated with a bond issue.

Question 34

Which of the following statements best describes callable bonds?

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 called for early retirement at the option of the lien holder.

Question 35

When a company purchases and retires its outstanding bonds payable for an amount less than their book value, a decrease in stockholders' equity results.

Question 36

Which of the following statements is correct?

A) A secured bond has specific assets pledged as collateral to secure it.
B) An unsecured bond can be paid at the option of the issuer.
C)A bond trustee is appointed to represent the issuing company.
D)The bond indenture specifies the market rate of interest the investors will earn.

Question 37

The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus stockholders' equity.

Question 38

The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

Question 39

Interest expense increases over time when a bond is initially issued at a premium and the effective-interest method is used.

Question 40

Which of the following statements is not correct?

A) The bond principal is the amount due at the maturity date of the bond.
B) The stated interest 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 41

The journal entry to record the sale of bonds at their par value results in which of the following?

A) An increase in assets and liabilities equal to the par value of the bonds.
B) An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments.
C)An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bonds' future cash flows.
D)An increase in assets and liabilities equal to the bonds' future cash flows.

Question 42

On January 1, 2014, Tonika Corporation 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. Assuming effective-interest amortization is used, the 2015 interest expense is closest to:

A) $779.
B) $796.
C)$677.
D)$700.

Question 43

Halverson's times interest earned ratio was 2.98 in 2014, 2.79 in 2013, and 2.31 in 2012. Which of the following statements about the ratio is possibly correct?

A) The increasing ratio indicates decreasing levels of debt on which interest is incurred.
B) The increasing ratio indicates the strategy of pursuing growth by investment in other companies, which has increased debt, but Halverson's profits have not yet increased from those investments.
C)The increasing ratio implies increased long-term debt financing.
D)The increasing ratio would be considered by creditors to be an indicator of higher risk.

Question 44

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the amount of straight-line discount amortization on each semi-annual interest date?

A) $90.
B) $45.
C)$900.
D)$450.

Question 45

Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2014. On December 31, 2014 the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened to the market rate of interest?

A) The market rate increased.
B) The market rate decreased.
C)The market rate stayed the same.
D)The change in the market rate can not be determineD.The bonds sold for par value on January 1, 2014 so the stated interest rate equaled the market rate of interest. As of December 31, 2014, the bonds were selling at a premium, which means that the stated rate was greater than the market rate on December 31, 2014. Therefore, the market rate of interest decreased.

Question 46

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. Which of the following is incorrect assuming the straight-line method of amortization is utilized?

A) The market rate of interest exceeded the stated rate of interest when the bonds were issued.
B) The semi-annual interest expense is $1,095.
C)The book value of the bonds increases $45 every six months.
D)The semi-annual interest expense is less than the semi-annual cash interest payment.

Question 47

Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 10%. Which of the following statements is incorrect?

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.The cash payment of interest on the due date increases expenses and decreases assets. The payment does not affect the book value of the bond liability.

Question 48

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the book value of the bonds after the November 1, 2014 interest payment was recorded, assuming the straight-line method of amortization is utilized?

A) $29,010.
B) $29,100.
C)$29,190.
D)$29,280.

Question 49

Assuming no adjusting journal entries have been made, the journal entry to record the cash interest payment on the due date for bonds issued at their par value results in which of the following?

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

Question 50

Assuming no adjusting journal entries have been made, the journal entry to record the cash interest payment on the due date for bonds issued at a discount results in which of the following?

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 51

Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was 11%. Which of the following statements is correct?

A) The bonds were issued at a premium.
B) Annual interest expense will exceed the company's actual cash payments for interest.
C)Annual interest expense will be $500,000.
D)The book value of the bond will decrease as the bond matures.

Question 52

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

A) The market rate of interest equals the stated interest rate.
B) The interest expense over the life of the bonds will equal the 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 53

During 2014, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. During 2013, they reported net income of $3,568 million, interest expense of $163 million and income tax expense of $1,424 million. The times interest earned ratios for 2014 and 2013, respectively, are closest to:

A) 32.2 and 29.4 times.
B) 28.4 and 23.8 times.
C)34.4 and 31.6 times.
D)34.1 and 26.6 times.

Question 54

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. How much is the semi-annual interest expense when the straight-line method is utilized?

A) $2,010.
B) $2,190.
C)$1,095.
D)$2,055.

Question 55

Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 8%. Which of the following statements is incorrect?

A) The bonds were issued at a premium.
B) Annual interest expense will be less than the company's annual cash payments for interest.
C)The book value of the bonds will decrease as the bond matures.
D)The annual interest expense will increase if the effective-interest method of amortization was useD.Given that the market rate of interest was less than the stated rate of interest, the bonds sold at a premium. Therefore, the book value decreases as the premium on bond payable account is amortized, as a result interest expense decreases.

Question 56

On January 1, 2014, Tonika Corporation 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. Assuming effective-interest amortization is used, the book value of the bonds as of December 31, 2014 is closest to:

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

Question 57

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

A) The market rate of interest is less than the stated interest rate.
B) The interest expense over the life of the bonds will be less than the cash interest payments.
C)The present value of the bonds' future cash flows is greater than the bonds' maturity value.
D)The book value of the bond liability increases when interest payments are made on the due dates.

Question 58

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

A) The interest expense over the life of the bond exceeds the 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 59

On January 1, 2014, Tonika Corporation 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. Assuming effective-interest amortization is used, the interest expense on the income statement for the year ended December 31, 2014 is closest to:

A) $677.
B) $883.
C)$773.
D)$700.

Question 60

On January 1, 2014, Tonika Corporation 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. Assuming the effective-interest amortization is used, and rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2014 interest expense?

A) Option A
B) Option B
C)Option C
D)Option D

Question 61

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, what is the book value of the bond liability on December 31, 2014 is closest to:

A) $400,000.
B) $413,320.
C)$406,302.
D)$407,432.

Question 62

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method of amortization is used, which of the following statements is incorrect?

A) The market rate of interest on the sale date was less than the stated rate of interest.
B) The book value of the bond will decrease as the bond reaches maturity.
C)The interest expense will decrease as the bond reaches maturity.
D)The amortization of the premium on bonds payable will decrease as the bond matures.

Question 63

On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Calculate the issuance price if the market rate of interest is 12%.
$\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}$

A) $4,427,500.
B) $4,477,500.
C)$4,435,000.
D)$5,000,000.

Question 64

Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method of amortization. Which of the following statements is incorrect?

A) The market rate of interest exceeded the stated rate of interest when the bonds were issued.
B) The annual interest expense exceeds the annual cash interest payment by $200.
C)The annual increase in the bond book value is $200.
D)The annual interest expense is $4,300.

Question 65

On January 1, 2014, Broker Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interest each December 31. If the market rate of interest was 14%, what was the issue price of the bonds? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

A) $3,339,084.
B) $2,843,172.
C)$3,000,000.
D)$2,686,896.

Question 66

On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. How much is the semi-annual interest expense?

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

Question 67

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?

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 68

Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method of amortization. How much is the annual interest expense?

A) $4,700.
B) $4,300.
C)$4,500.
D)$4,680.

Question 69

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

A) The interest expense over the life of the bond is less than the 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 premium 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 premium, interest expense over the life of the bonds equals the total payments for interest minus the premium on bonds payable at the issue date.

Question 70

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, what is the book value of the bond liability as of June 30, 2014 (to the nearest dollar)?

A) $400,000.
B) $416,495.
C)$409,811.
D)$403,342.

Question 71

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, the interest expense for the six-month period ending December 31, 2014 is closest to:

A) $24,000.
B) $20,491.
C)$20,000.
D)$20,825.

Question 72

On January 1, 2014, Tonika Corporation 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. Assuming effective-interest amortization is used, the December 31, 2015 book value after the December 31, 2015 interest payment was made is closest to:

A) $9,662.
B) $9,820.
C)$9,668.
D)$9,723.

Question 73

On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to be reported on the December 31, 2014 balance sheet?

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

Question 74

On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. Assuming the effective-interest method of amortization is used, and rounding all calculations to the nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2014?

A) $24,000.
B) $24,789.
C)$20,000.
D)$20,658.

Question 75

On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: What was the issuance price of the bonds if the market rate of interest was 8%?
$\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}$

A) $5,000,000.
B) $5,670,000.
C)$5,387,500.
D)$5,712,500.

Question 76

Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2013, for $102,360 on April 1, 2013. The bonds pay interest annually on April 1. Straight-line amortization is used by the company. What entry is required at April 1, 2014 for the first interest payment?

A) Option A
B) Option B
C)Option C
D)Option D

Question 77

On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses straight-line amortization. Which of the following statements is incorrect?

A) The market rate of interest was less than the stated rate of interest on July 1, 2014.
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 78

On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: Calculate the issuance price if the market rate of interest was 10%.
$\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}$

A) $5,427,000.
B) $4,477,000.
C)$4,435,000.
D)$5,000,000.

Question 79

On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses straight-line amortization. What is the bond liability to be reported on the December 31, 2015 balance sheet?

A) $300,000.
B) $302,550.
C)$302,700.
D)$303,000.

Question 80

Which of the following statements incorrectly describes the accounting for bonds that were issued at a premium?

A) The market rate of interest is less than the stated interest rate.
B) The interest expense over the life of the bonds will be less than the cash interest payments.
C)The present value of the bonds' future cash flows is less than the bonds' maturity value.
D)The book value of the bond liability decreases when interest payments are made on the due dates.