Deck 22: Corporations: Bonds

Question 1

A debenture bond is a common type of secured bond.

Answer 1

False

Question 2

Bonds secured by a mortgage on corporate property are called guaranteed bonds.

Answer 2

False

Question 3

Bonds issued in a series so that a specified amount of principal matures each year are called term bonds.

Answer 3

False

Question 4

Usually, there is either a gain or a loss involved in the redemption of bonds before their maturity date.

Question 5

A bond is an obligation of the shareholders.

Question 6

Bonds issued that mature at regular intervals are called serial bonds.

Question 7

While bonds and notes are both formal written promises to pay an amount of money at a specified date, notes generally tend to be for much smaller amounts and for a shorter period of time.

Question 8

Premium on Bonds Payable should be classified as a contra-liability account.

Question 9

Bonds Sinking Fund is reported as a liability on the corporation's balance sheet.

Question 10

Bondholders are the owners of the corporation.

Question 11

A discount amortization effects a gradual reduction of the bonds payable account to zero over time.

Question 12

If the stated interest rate on bonds is less than the current market rate, the bonds will sell at a discount.

Question 13

Loss on Redemption generally is reported as other expense near the bottom of the income statement.

Question 14

The straight-line method of amortizing a bond premium or discount provides for amortizing an equal amount each time period.

Question 15

Bonds payable less the discount on bonds payable is called the carrying value of the bonds.

Question 16

Gain on Redemption is reported as a component of other income on the corporation's income statement.

Question 17

The process of adjusting the bond interest expense account for any premium or discount is called amortization of the premium or discount.

Question 18

When bonds are issued at a discount, both bonds payable on the balance sheet and interest expense on the income statement are affected.

Question 19

A discount amortization does not affect the amount of cash paid for bond interest.

Question 20

The Discount on Bonds Payable balance is subtracted from Bonds Payable on the income statement.

Question 21

When bonds are redeemed at a loss, the journal entry would require a credit to Extraordinary Loss on Early Extinguishment of Debt.

Question 22

If the interest rate on bonds is lower than the current market rate, the bonds will sell at a premium.

Question 23

Convertible bonds give the issuing corporation the option of calling for redemption at a stated price before maturity date.

Question 24

The interest rate specified in a bond contract is known as the market rate.

Question 25

If bonds that originally were sold at a premium are redeemed, the calculation of the gain or loss must take into account the unamortized premium through the date of redemption.

Question 26

If the interest rate on bonds is the same as the current market rate, the bonds will sell for their face value.

Question 27

Bonds issued with a provision that they may be called for redemption before the date of maturity are called convertible bonds.

Question 28

If a corporation issues term bonds, each bond will have the same maturity date.

Question 29

Convertible bonds are

A) bonds that all have the same maturity date.
B) bonds issued in a series so that a specified amount of the bonds matures each year.
C) bonds that give the issuing corporation the option of calling the bonds for redemption before the maturity date.
D) bonds that give the holder the option of exchanging the bonds for capital stock of the corporation.

Question 30

An entry to record the sale and issuance of bonds at a discount will include a credit to Discount on Bonds Payable.

Question 31

Names and addresses of owners of coupon bonds are recorded and kept current in the corporate records.

Question 32

If bonds that originally were sold at face value are redeemed for less than face value, a gain results.

Question 33

The sum of bonds payable and premium on bonds payable is called the carrying value of the bonds.

Question 34

The accumulation and investment of money over a period of years that provides the amount necessary for the redemption of a bond issued at its maturity is called a sinking fund.

Question 35

A $100,000 bond issue sold at 103 has a market price of $100,300.

Question 36

Debenture bonds are backed by specific assets of the corporation.

Question 37

If cash is paid to a trustee who administers a sinking fund, the corporation would credit the Bond Sinking Fund for the amount of cash paid.

Question 38

To determine whether a bond will sell at a price equal to, greater than, or less than face value, compare the stated and market interest rates.

Question 39

Premium on Bonds Payable should be classified as an adjunct-liability account.

Question 40

Bonds Payable is reported as a long-term liability on the corporation's balance sheet.

Question 41

Bonds that are backed solely by specific secured assets are called

A) mortgage bonds.
B) guaranteed bonds.
C) collateral bonds.
D) debenture bonds.

Question 42

Bonds issued at the same time so that they all have the same maturity date are called

A) term bonds.
B) serial bonds.
C) convertible bonds.
D) callable bonds.

Question 43

Usually, there is a gain or loss involved when bonds are redeemed before maturity. The gain or loss is the difference between

A) the amount paid to redeem the bonds and the carrying value of the bonds.
B) the maturity value of the bonds and the market value of the bonds.
C) the carrying value of the bonds and the face value of the bonds.
D) the maturity value of the bonds and the carrying value of the bonds.

Question 44

If the rate of interest on bonds is lower that the current market rate, the bonds will sell at

A) a discount.
B) a premium.
C) face value.
D) maturity value.

Question 45

Bonds issued giving the holder the option of exchanging the bonds for capital stock of the corporation are called

A) term bonds.
B) convertible bonds.
C) capital stock bonds.
D) callable bonds.

Question 46

If the interest rate on bonds is higher than the current market rate, they will sell at

A) a discount.
B) a premium.
C) face value.
D) maturity value.

Question 47

Bond Interest Payable is reported as a(n)

A) current liability on the income statement.
B) current liability on the balance sheet.
C) adjunct-liability on the balance sheet.
D) contra-liability on the income statement.

Question 48

When selling bonds at a premium, the premium received effectively

A) reduces the cost of borrowing.
B) increases the cost of borrowing.
C) does not affect the cost of borrowing.
D) reduces the amount of cash received when bonds are sold.

Question 49

If bonds were originally sold at face value and the corporation pays more than the face amount when the bonds are redeemed, there is a

A) loss.
B) gain.
C) premium.
D) discount.

Question 50

The sale and issuance of $400,000, 8% bonds with a market rate of 8% would involve debiting Cash for

A) $32,000.
B) $368,000.
C) $400,000.
D) $432,000.

Question 51

If bonds were being issued with a stated rate of 8% and the market rate is 9%, the bonds would most likely sell at which of the following?

A) 108
B) 100
C) 95
D) 80

Question 52

The premium on bonds payable account would be classified as a(n)

A) current liability.
B) adjunct-liability.
C) contra-liability.
D) noncurrent liability.

Question 53

Bondholders have which of the following relationships with a corporation?

A) They are creditors.
B) They are owners.
C) They become members of the board.
D) They are silent managers.

Question 54

The discount on bonds payable account would be classified as a(n)

A) current liability.
B) adjunct-liability.
C) contra-liability.
D) noncurrent liability.

Question 55

Bonds secured by a mortgage on corporate property are called

A) mortgage bonds.
B) property bonds.
C) investment bonds.
D) adjustment bonds.

Question 56

When the selling price of a bond is stated at 100, it means that the bonds are selling

A) at a premium.
B) at a discount.
C) below par value.
D) at face value.

Question 57

Two of the main factors in determining the price at which bonds will sell are

A) the contract rate and the coupon rate.
B) the contract rate and the stated rate.
C) the market rate and the discount rate.
D) the stated rate and the market rate.

Question 58

Bonds issued in a series so that a specified amount of the bond matures each year are called

A) term bonds.
B) serial bonds.
C) convertible bonds.
D) callable bonds.

Question 59

The bonds payable account would be classified as a(n)

A) current liability.
B) adjunct-liability.
C) contra-liability.
D) long-term liability.

Question 60

Bonds issued with a provision that they may be called for redemption before the date of maturity are known as

A) convertible bonds.
B) term bonds.
C) debenture bonds.
D) callable bonds.

Question 61

A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The entry to record the first interest payment would include

A) a debit to Cash of $18,000.
B) a debit to Bond Interest Payable of $18,000.
C) a debit to Premium on Bonds Payable of $2,000.
D) a credit to Bond Interest Expense of $16,000.

Question 62

Gia Company had the following bond issue:
Date of issue/sale: April 1, 20-A
Face value: $200,000
Sale price of bonds: 99
Life of bonds: 10 years
Stated interest rate: 6% a year payable semiannually on September 30 and March 31
​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on April 1, 20-A.
b.
The interest payment and premium amortization for first six months.
c.
The redemption of $50,000 worth of bonds on April 1, 20-E, at 102.

Question 63

Fireside, Inc. had the following bond issue: ​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on May 1, 20-A.
b.
The first interest payment for 20-A.
c.
The adjusting entry for December 31, 20-A.
d.
The reversing entry for January 1, 20-B.

Question 64

Baradzi Corporation had the following bond issue: ​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on June 1, 20-A.
b.
The interest payment and premium amortization on the bonds for November 30, 20-A.
c.
The year-end adjusting entry for interest expense and premium amortization, 20-A.
d.
The reversing entry for January 1, 20-B.

Question 65

A $200,000, 8% bond issue was sold at face value and later redeemed at 104% of face value. The corporation would have a

A) loss of $8,000.
B) gain of $8,000.
C) loss of $20,000.
D) gain of $20,000.

Question 66

Omni Video Corporation had the following bond issue: ​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on May 1, 20-A.
b.
The interest payment and discount amortization on the bonds for October 31, 20-A.
c.
The redemption of $100,000 worth of bonds on November 1, 20-F, at 98.

Question 67

Roof Top Corporation had the following bond issue:
Date of issue/sale: May 1, 20-A
Principal: $400,000
Sale price of bonds: 98
Life of bonds: 10 years
Stated rate: 6% a year payable semiannually on October 31 and April 30
​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on May 1, 20-A.
b.
The first interest payment.
c.
The redemption of $100,000 worth of bonds on May 1, 20-D, at 99.

Question 68

A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The bond interest expense for the first interest payment would be

A) $2,000.
B) $16,000.
C) $18,000.
D) $32,000.

Question 69

Match the terms with the definitions.a.amortization
b.bond
c.bond indenture
d.bond sinking fund
e.callable bonds
f.carrying value
g.convertible bonds
h.coupon bonds
i.debenture bonds
j.discount
k.face value
l.market rate
m.mortgage bonds
n.premium
o.principal
p.registered bonds
q.secured bonds
r.serial bonds
s.stated rate
t.term bonds
The difference between the face value and the price of a bond when the current market interest rate is less than the stated rate of that bond.

Question 70

Clearview Corporation had the following bond issue:
Date of issue/sale: March 1, 20-A
Face value: $700,000
Sale price of bonds: 103
Life of bonds: 10 years
Stated rate: 6% a year payable semiannually on August 31 and February 28
​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on March 1, 20-A.
b.
The interest payment and premium amortization on the bonds for the first six months.
c.
The year-end adjusting entry for interest and premium amortization.
d.
The reversing entry for January 1, 20-B.

Question 71

Perez Corporation pays $47,000 into a bond sinking fund each year for the future redemption of bonds. During the first year, the fund earns $3,825. When the bonds mature, there is a balance in the sinking fund of $417,000, of which $400,000 is used to redeem the bonds.
​
Required:
Prepare the following general journal entries.
a.
The initial sinking fund deposit.
b.
The first year's interest for the sinking fund.
c.
The redemption of the bonds.
d.
The return of excess cash to the corporation.

Question 72

City Slicker Corporation pays $55,000 into a bond sinking fund each year for the future redemption of bonds. During the first year, the fund earns $1,475. When the bonds mature, there is a sinking fund balance of $612,000, and $600,000 is needed to redeem the bonds.
​
Required:
Prepare the following general journal entries.
a.
The initial sinking fund deposit.
b.
The first year's earnings.
c.
The redemption of the bonds.
d.
The return of excess cash to the corporation.

Question 73

Match the terms with the definitions.a.amortization
b.bond
c.bond indenture
d.bond sinking fund
e.callable bonds
f.carrying value
g.convertible bonds
h.coupon bonds
i.debenture bonds
j.discount
k.face value
l.market rate
m.mortgage bonds
n.premium
o.principal
p.registered bonds
q.secured bonds
r.serial bonds
s.stated rate
t.term bonds
A written promise to pay a specific sum of money at a specific future date.

Question 74

The year-end adjusting entry required for bonds issued at a discount would require

A) a debit to Bond Interest Expense, a debit to Discount on Bonds Payable, and a credit to Cash.
B) a debit to Bond Interest Expense, a debit to Discount on Bonds Payable, and a credit to Bond Interest Payable.
C) a debit to Bond Interest Expense, a credit to Discount on Bonds Payable, and a credit to Cash.
D) a debit to Bond Interest Expense, a credit to Discount on Bonds Payable, and a credit to Bond Interest Payable.

Question 75

The carrying value of bonds is calculated by

A) subtracting the premium on bonds payable account balance from the bonds payable account balance.
B) adding the premium on bonds payable account balance to the bonds payable account balance.
C) adding the discount on bonds payable account balance to the bonds payable account balance.
D) adding the bonds payable account balance to the bond interest payable account balance.

Question 76

A bond issue of $500,000 selling at 100, would require a journal entry including a

A) credit to Cash of $500,000.
B) credit to Premium on Bonds Payable for $500,000.
C) credit to Bonds Payable of $500,000.
D) debit to Bonds Payable of $500,000.

Question 77

A bond issue of $100,000 selling at 98, would require a journal entry including a

A) debit to Bonds Payable for $98,000.
B) credit to Cash for $98,000.
C) credit to Premium of Bonds Payable for $2,000.
D) debit to Discount on Bonds Payable for $2,000.

Question 78

Bonds classified as to the timing of principal payments include all of the following EXCEPT

A) term bonds.
B) serial bonds.
C) debenture bonds.
D) callable bonds.

Question 79

Island Cove Corporation had the following bond issue:
Date of issue/sale: May 1, 20-A
Principal: $500,000
Sale price of bonds: 104
Life of bonds: 10 years
Stated rate: 6% a year payable semiannually on October 31 and April 30
​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on May 1, 20-A.
b.
The first interest payment for 20-A.
c.
The adjusting entry for December 31, 20-A.
d.
The reversing entry for January 1, 20-B.

Question 80

HiLi Corporation had the following bond issue:
Date of issue/sale: May 1, 20-A
Principal: $500,000
Sale price of bonds: 100
Life of bonds: 10 years
Stated rate: 6% a year payable semiannually on October 31 and April 30
​
Required:
Prepare the following general journal entries.
a.
The issuance of the bonds on May 1, 20-A.
b.
The first interest payment for 20-A.
c.
The adjusting entry for December 31, 20-A.
d.
The reversing entry for January 1, 20-B.