Deck 15: Long-Term Liabilities

Question 1

The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

Answer 1

False

Question 2

Bonds are a form of interest-bearing notes payable.

Answer 2

True

Question 3

Gains and losses are not recognized when convertible bonds are converted into common stock.

Answer 3

True

Question 4

If bonds sell at a premium the interest expense recognized each year will be greater than the contractual interest rate.

Question 5

If the market interest rate is greater than the contractual interest rate bonds will sell at a discount.

Question 6

If $150000 face value bonds are issued at 103 the proceeds received will be $103000.

Question 7

If bonds are issued at a discount the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

Question 8

Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

Question 9

The board of directors may authorize more bonds than are issued.

Question 10

A debenture bond is an unsecured bond which is issued against the general credit of the borrower.

Question 11

If a corporation issued bonds at an amount less than face value it indicates that the corporation has a weak credit rating.

Question 12

Each bondholder may vote for the board of directors in proportion to the number of bonds held.

Question 13

The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

Question 14

Bond interest paid by a corporation is an expense whereas dividends paid are not an expense of the corporation.

Question 15

A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

Question 16

The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

Question 17

If bonds are issued at a premium the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

Question 18

Callable bonds are bonds that can be converted into common stock at the bondholder's option.

Question 19

Generally convertible bonds do not pay interest.

Question 20

If $800000 6% bonds are issued on January 1 and pay interest annually the amount of interest paid the following January 1 will be $48000.

Question 21

Under a capital lease the lease/asset is reported on the balance sheet under plant assets.

Question 22

The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

Question 23

A 10% stock dividend is the equivalent of a $1000 par value bond paying annual interest of 10%.

Question 24

A capital lease requires the lessee to record the lease as a purchase of an asset.

Question 25

A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

Question 26

Each of the following is correct regarding bonds except they are

A) a form of interest-bearing notes payable.
B) attractive to many investors.
C) issued by corporations and governmental agencies.
D) sold in large denominations.

Question 27

Operating leases are leases that the lessee must capitalize on its balance sheet as an asset.

Question 28

Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

Question 29

Premium on Bonds Payable is a contra account to Bonds Payable.

Question 30

If $500000 par value bonds with a carrying value of $476000 are redeemed at 97 a loss on redemption will be recorded.

Question 31

The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Question 32

The contractual interest rate is always stated as a(n)

A) monthly rate.
B) daily rate.
C) semiannual rate.
D) annual rate.

Question 33

Bonds that mature at a single specified future date are called term bonds.

Question 34

When bonds are converted into common stock the carrying value of the bonds is transferred to paid-in capital accounts.

Question 35

The terms of the bond issue are set forth in a formal legal document called a bond indenture.

Question 36

The times interest earned is computed by dividing net income by interest expense.

Question 37

The carrying value of bonds at maturity should be equal to the face value of the bonds.

Question 38

The straight-line method of amortization allocates an increasing amount to interest expense each interest period.

Question 39

Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

Question 40

Neither corporate bond interest nor dividends are deductible for tax purposes.

Question 41

If there is a loss on bonds redeemed early the

A) loss is debited directly to Retained Earnings.
B) bonds' carrying value was less than the redemption price.
C) bonds' carrying value was greater than the redemption price.
D) loss is debited to Interest Expense as a cost of financing.

Question 42

Secured bonds are bonds that

A) are in the possession of a bank.
B) are registered in the name of the owner.
C) have specific assets of the issuer pledged as collateral.
D) have detachable interest coupons.

Question 43

When bonds are converted into common stock

A) the market price of the stock on the date of conversion is credited to the Common Stock account.
B) the market price of the bonds on the date of conversion is credited to the Common Stock account.
C) the market price of the stock and the bonds is ignored when recording the conversion.
D) gains or losses on the conversion are recognized.

Question 44

Companies with good credit ratings use ___________________ bonds extensively.

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

Question 45

Bonds will always fall into which one of the following pairs of categories?

A) Secured or unsecured
B) Mortgage or sinking fund
C) Debenture or unsecured
D) Callable or convertible

Question 46

Bonds that have specific assets of the issuer pledged as collateral are

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

Question 47

Which of the following statements concerning bonds is not a true statement?

A) Bonds are generally sold through an investment company.
B) The bond indenture is prepared after the bonds are printed.
C) The bond indenture and bond certificate are separate documents.
D) The trustee keeps records of each bondholder.

Question 48

If bonds can be converted into common stock

A) they will sell at a lower price than comparable bonds without a conversion feature.
B) they will carry a higher interest rate than comparable bonds without the conversion feature.
C) they will be converted only if the issuer calls them in for conversion.
D) the bondholder may benefit if the market price of the common stock increases substantially.

Question 49

A corporation recognizes a gain or loss

A) only when bonds are converted into common stock.
B) only when bonds are redeemed before maturity.
C) when bonds are redeemed at or before maturity.
D) when bonds are converted into common stock and when they are redeemed before maturity.

Question 50

A bond secured by specific assets set aside to redeem the bonds is called a

A) convertible bond.
B) sinking fund bond.
C) mortgage bond.
D) secured bond.

Question 51

When authorizing bonds to be issued the board of directors does not specify the

A) total number of bonds authorized to be sold.
B) contractual interest rate.
C) selling price.
D) total face value of the bonds.

Question 52

Bonds that are secured by real estate are termed

A) mortgage bonds.
B) serial bonds.
C) debentures.
D) bearer bonds.

Question 53

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

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

Question 54

A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called

A) a bond indenture.
B) a bond debenture.
C) trading on the equity.
D) a term bond.

Question 55

Stockholders of a company may be reluctant to finance expansion through issuing more equity because

A) leveraging with debt is always a better idea.
B) their earnings per share may decrease.
C) the price of the stock will automatically decrease.
D) dividends must be paid on a periodic basis.

Question 56

Which of the following is not an advantage of issuing bonds instead of common stock?

A) Stockholder control is not affected.
B) Earnings per share on common stock may be lower.
C) Income to common shareholders may increase.
D) Tax savings result.

Question 57

Corporations are granted the power to issue bonds through

A) tax laws.
B) state laws.
C) federal security laws.
D) bond debentures.

Question 58

Bonds issued against the general credit of the borrower are called

A) callable bonds.
B) debenture bonds.
C) mortgage bonds.
D) sinking fund bonds.

Question 59

The interest rate investors demand for loaning funds is the

A) market interest rate.
B) stated rate.
C) contractual interest rate.
D) bond interest rate.

Question 60

Bonds that may be exchanged for common stock at the option of the bondholders are called

A) options.
B) stock bonds.
C) convertible bonds.
D) callable bonds.

Question 61

If the market interest rate is 5% a $10000 6% 10-year bond that pays interest annually would sell at an amount

A) less than face value.
B) equal to face value.
C) greater than face value.
D) that cannot be determined.

Question 62

On January 1 2017 Meeks Corporation issued $5000000 10-year 4% bonds at 102. Interest is payable annually on January 1. The journal entry to record this transaction on January 1 2017 is a.
$\begin{array}{llr} \text { Cash} &5,000,000\\ \text { Bonds Payable} &&5,000,000\\\end{array}$

b.
$\begin{array}{llr} \text { Cash } &5,100,000\\ \text { Bonds Payable} &&5,100,000\end{array}$

c.
$\begin{array}{llr} \text { Premium on Bonds Payable } &100,000\\ \text { Cash} &5,000,000\\ \text { Bonds Payable } &&5,100,000\end{array}$

d.
$\begin{array}{llr} \text {Cash } &5,100,000\\ \text { Bonds Payable } &&5,000,000\\ \text { Premium on Bonds Payable } &&100,000\end{array}$

Question 63

A bond with a face value of $200000 and a quoted price of 102⅛ has a selling price of

A) $240225.
B) $204025.
C) $200225.
D) $204250.

Question 64

If the market interest rate is greater than the contractual interest rate bonds will sell

A) at a premium.
B) at face value.
C) at a discount.
D) only after the stated interest rate is increased.

Question 65

If bonds are issued at a discount it means that the

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

Question 66

Premium on Bonds Payable

A) has a debit balance.
B) is a contra account.
C) is considered to be a reduction in the cost of borrowing.
D) is deducted from bonds payable on the balance sheet.

Question 67

The carrying value of bonds will equal the market price

A) at the close of every trading day.
B) at the end of the fiscal period.
C) on the date of issuance.
D) every six months on the date interest is paid.

Question 68

The total cost of borrowing is increased only if the

A) bonds were issued at a premium.
B) bonds were issued at a discount.
C) bonds were sold at face value.
D) market interest rate is less than the contractual interest rate on that date.

Question 69

Martinez Corporation issues 2000 10-year 8% $1000 bonds dated January 1 2017 at 98. The journal entry to record the issuance will show a

A) debit to Cash of $2000000.
B) credit to Discount on Bonds Payable for $40000.
C) credit to Bonds Payable for $2040000.
D) debit to Cash for $1960000.

Question 70

The selling price of a $10000 5-year bond will be less than $10000 if the

A) contractual interest rate is less than the market interest rate.
B) contractual interest rate is greater than the market interest rate.
C) bond is convertible.
D) contractual interest rate is equal to the market interest rate.

Question 71

Thirty $1000 bonds with a carrying value of $39600 are converted into 4000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is a.
$\begin{array}{llr} \text {Bonds Payable } &39,600\\ \text { Common Stock } &&20,000\\ \text { Paid-in Capital in Excess of Par } &&19,600\end{array}$

b.
$\begin{array}{llr} \text { Bonds Payable } &30,000\\ \text { Premium on Bonds Payable } &9,600\\ \text { Common Stock} &&30,000\\ \text { Paid-in Capital in Excess of Par } &&9,600\end{array}$

c.
$\begin{array}{llr} \text { Bonds Payable } &30,000\\ \text { Premium on Bonds Payable} &9,600\\ \text { Common Stock} &&20,000\\ \text { Paid-in Capital in Excess of Par } &&19,000\end{array}$

d.
$\begin{array}{llr} \text {Bonds Payable } &39,600\\ \text { Common Stock } &&36,000\\ \text { Paid-in Capital in Excess of Par} &&3,600\end{array}$

Question 72

A $1000 face value bond with a quoted price of 98 is selling for

A) $1000.
B) $980.
C) $908.
D) $98.

Question 73

Each of the following accounts is reported as long-term liabilities except

A) Interest Payable.
B) Bonds Payable.
C) Discount on Bonds Payable.
D) Premium on Bonds Payable.

Question 74

A $600000 bond was retired at 98 when the carrying value of the bond was $590000. The entry to record the retirement would include a

A) gain on bond redemption of $10000.
B) loss on bond redemption of $10000.
C) loss on bond redemption of $2000.
D) gain on bond redemption of $2000.

Question 75

In the balance sheet the account Premium on Bonds Payable is

A) added to bonds payable.
B) deducted from bonds payable.
C) classified as a stockholders' equity account.
D) classified as a revenue account.

Question 76

The market interest rate is often called the

A) stated rate.
B) effective rate.
C) coupon rate.
D) contractual rate.

Question 77

The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the

A) market interest rate increases the contractual interest rate will decrease.
B) contractual interest rate increases then bond prices will go down.
C) market interest rate decreases then bond prices will go up.
D) contractual interest rate increases the market interest rate will decrease.

Question 78

The sale of bonds above face value

A) is a rare occurrence.
B) will cause the total cost of borrowing to be less than the bond interest paid.
C) will cause the total cost of borrowing to be more than the bond interest paid.
D) will have no net effect on Interest Expense by the time the bonds mature.

Question 79

Four thousand bonds with a face value of $1000 each are sold at 105. The entry to record the issuance isa.
$\begin{array}{llr} \text { Cash } &4,200,000\\ \text { Bonds Payable } &&4,200,000\\\end{array}$

b.
$\begin{array}{llr} \text { Cash } &4,000,000\\ \text { Premium on Bonds Payable } 200,000\\ \text { Bonds Payable } &&4,200,000\end{array}$

c.
$\begin{array}{llr} \text { Cash} &4,200,000\\ \text {Premium on Bonds Payable } &&200,000\\ \text { Bonds Payable} &&4,000,000\end{array}$

d.
$\begin{array}{llr} \text {Cash } &4,200,000\\ \text { Discount on Bonds Payable } &&200,000\\ \text { Bonds Payable } &&4,000,000\end{array}$

Question 80

If bonds with a face value of $140000 are converted into common stock when the carrying value of the bonds is $135000 the entry to record the conversion will include a debit to

A) Bonds Payable for $140000.
B) Bonds Payable for $135000.
C) Discount on Bonds Payable for $5000.
D) Bonds Payable equal to the market price of the bonds on the date of conversion.