Deck 14: Financing Liabilities: Bonds and Long-Term Notes Payable

Question 1

Interest expense is less than the interest paid when a bond is issued for a premium.

Answer 1

True

Question 2

Bond interest expense is calculated as the stated rate times the carrying value of the bonds.

Answer 2

False

Question 3

When a company sells bonds between interest dates, the company normally will collect from the investors both the selling price and the interest accrued on the bonds from the interest payment date prior to the date of sale.

Answer 3

True

Question 4

Serial bonds come due in installments in periodic future dates.

Question 5

An advantage of debt financing is that it decreases financial leverage.

Question 6

For bonds, yield rate is another term for nominal rate

Question 7

With the straight-line method of bond amortization, interest expense is the same amount every period.

Question 8

Debenture bonds are only issued by companies with an excellent credit rating.

Question 9

The effective rate is less than the contract rate when bonds are issued at a discount.

Question 10

The nominal rate is greater than the yield rate when bonds are issued at a premium.

Question 11

When bonds are issued to the general public, the company typically does not use the services of an underwriter.

Question 12

Small and medium-size companies typically have more difficulty attracting equity capital than debt capital.

Question 13

The carrying value of a bond issue is the face value of the bonds plus the unamortized discount.

Question 14

For bonds, nominal rate is another term for contract rate.

Question 15

Premium on Bonds Payable is a contra asset account.

Question 16

Bond interest expense is the interest cash payment minus the amount of bond premium amortization.

Question 17

Discount on Bonds Payable is a contra liability account

Question 18

When zero-coupon bonds are issued, a company will record no interest expense until the bonds mature.

Question 19

A company looking to issue debt instead of equity may want to consider debt due to favorable tax benefits.

Question 20

Debt financing typically has a higher cost of capital than equity.

Question 21

Which of the following is always equal to the face rate of interest?

A) effective rate
B) yield rate
C) market rate
D) nominal rate

Question 22

When stock warrants are attached to bonds, they generally result in greater proceeds from the bond issue

Question 23

Companies report cash flows associated with long term liability transactions in the investing section of the statement of cash flows, because the money was an investment in the future of the company.

Question 24

When bonds have a conversion feature, GAAP requires the difference between proceeds with and without the conversion feature should be allocated to additional paid-in-capital at the time of issuance.

Question 25

Which of the following statements is false?

A) Debt may be the only available source of funds to a company.
B) Debt financing typically has a higher cost than equity financing.
C) Debt financing offers an income tax advantage.
D) Debt does not dilute ownership interests.

Question 26

In the event of a debt restructuring, the required disclosures are only for the related income tax effects associated with the debt.

Question 27

On the maturity date after the last interest payment is recorded, any premium or discount on bonds payable is always fully amortized.

Question 28

At the time of the issuance of a note payable the incremental interest rate is what one would pay for similar financing.

Question 29

A company may want to increase its equity capital at a later date in time, in order to accomplish this goal the company decides to issue convertible debt.

Question 30

Leverage occurs when a company's

A) interest payment exceed its rate of return.
B) rate of return equals its interest payments.
C) rate of return exceeds its interest payments.
D) interest payments are made on time.

Question 31

A call provision gives the issuing company the option to recall the debt issue at an effective interest rate less than the contract rate.

Question 32

GAAP requires that cash paid for interest on a note payable is always recorded in the operating activities of the cash flow statement.

Question 33

If a company is having trouble paying its obligations, a modification of terms can be granted in the form of interest rate reduction, maturity date extension, and/or a reduction in the amount owed.

Question 34

The market value method for recording bond conversion to common stock results in no gain or loss at the time of conversion.

Question 35

Which of the following is not a reason for the issuance of long-term liabilities?

A) Debt financing offers an income tax advantage.
B) Debt financing dilutes ownership interest.
C) Debt may be the only available source of funds.
D) Debt financing may have a lower cost.

Question 36

A company could decide to call its bonds because it will eliminate any restrictions on operations from certain debt covenants.

Question 37

Stock warrants allow bond holders to exchange bonds for common equity shares.

Question 38

When a debtor satisfies a liability by exchanging an asset of lesser value, it records the transfer based on the fair value of the asset and recognizes a loss on the debt restructuring.

Question 39

______is a contractual obligation that requires a company to deliver cash or other financial asset to another party.

A) Detachable warrant
B) Capital structure
C) Financial leverage
D) Financial liability

Question 40

GAAP requires the borrowers to record the note payable at its present value and use straight line method to record the interest expense.

Question 41

______are bonds that give bondholders the option to exchange the bonds for a predetermined number of common equity shares of the issuing company.

A) Exchangeable bonds
B) Serial bonds
C) Convertible bonds
D) Callable bonds

Question 42

Which of the following characteristics of a bond would an investor look for if they are wanting to become a shareholder at a later date in time?

A) Callable Bond
B) Mortgage Bond
C) Convertible Bond
D) Serial Bond

Question 43

When is interest expense less than interest paid?

A) when bonds are sold at a premium
B) when bonds are sold at par
C) when bonds are sold at a discount
D) when bonds are sold at a yield

Question 44

Zero-coupon bonds are bonds

A) on which no interest is paid.
B) on which the interest is not paid until the maturity date.
C) on which no interest expense accrues until the maturity date.
D) which have no detachable coupon warrants.

Question 45

If a company sells its bonds at face value, the effective interest rate is

A) lower than the nominal rate.
B) higher than the nominal rate.
C) equal to the contract rate.
D) equal to the warrant rate.

Question 46

For which of the following types of bonds is interest expense recognized each year even though no interest is paid?

A) debenture bonds
B) zero-coupon bonds
C) serial bonds
D) mortgage bonds

Question 47

An unsecured bond is called a

A) debenture bond.
B) mortgage bond.
C) registered bond.
D) serial bond.

Question 48

Exhibit 14-1
A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows:
Refer to Exhibit 14-1. These bonds sold at

A) margin.
B) a discount.
C) par.
D) a premium.

Question 49

Which of the following bonds pay no interest until maturity?

A) zero-coupon bonds
B) registered bonds
C) serial bonds
D) debenture bonds

Question 50

In which of the following situations will the book value of a bond be equal to its maturity value?

A) The effective rate exceeds the stated rate.
B) The nominal rate exceeds the yield rate.
C) The market rate equals the contract rate.
D) The effective rate equals the yield rate.

Question 51

Exhibit 14-1
A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows:
Refer to Exhibit 14-1. At date of issuance cash received would be

A) $280,747.
B) $287,765.
C) $292,998.
D) $299,998.

Question 52

Which of the following statements is false?

A) Debenture bonds are secured liabilities
B) Debenture bonds are issued based upon the credit rating of the company
C) A company must have a long history of profitability to issue debenture bonds.
D) A company must have strong positive cash flows to issue debenture bonds.

Question 53

Discount on Bonds Payable is an)

A) contra account.
B) valuation account.
C) accumulation account.
D) adjunct account.

Question 54

When the market rate of interest is greater than the contract rate of interest, the bonds should sell at

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

Question 55

When the market rate of interest is less than the contract rate of interest, the bonds will sell

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

Question 56

Which of the following may not be equal to the contract rate of interest?

A) stated rate
B) nominal rate
C) face rate
D) effective rate

Question 57

When the market rate of interest is equal to the contract rate of interest, the bonds should sell at

A) a premium.
B) par value.
C) the call price.
D) the conversion price.

Question 58

When a company sells its bonds at less than face value, the effective interest rate is

A) lower than the yield rate.
B) higher than the contract interest rate.
C) lower than the nominal rate.
D) higher than the market interest rate.

Question 59

On January 1, 2016, Medley Corporation sold $200,000 of its 14%, five-year bonds dated January 1, 2016, for $206,000 total cash. The bonds sold at

A) 6.
B) a discount.
C) 103.
D) 206.

Question 60

When a debtor satisfies a liability by exchanging an asset of lesser value, it records the transfer

A) on the basis of the fair value of the asset transferred and recognizes a gain on the debt restructuring.
B) on the basis of the fair value of the asset transferred and recognizes a loss on the debt restructuring.
C) on the basis of the future value of the asset transferred and recognizes a gain on the debt restructuring.
D) on the basis of the future value of the asset transferred and recognizes a loss on the debt restructuring.

Question 61

On May 1, 2013, Legacy Corporation sold $250,000 of its 15%, five-year bonds dated January 1, 2013, for 100 plus accrued interest. How much cash was received?

A) $237,500
B) $250,000
C) $262,500
D) $268,750

Question 62

Exhibit 14-5
Joseph Company had underwriters prepare a bond issue for $100,000 9%, ten-year bonds dated January 1, 2014 The bonds were issued on March 1, 2014 at 102 plus accrued interest on. Expenses connected with the issue totaled
$5,000 and were deducted in arriving at the net proceeds. Joseph amortizes premiums and discounts using the straight-line method.
Refer to Exhibit 14-5. The entry to record the issue would include

A) a debit to Bonds Payable for $100,000.
B) a debit to Interest Expense for $1,500.
C) a credit to Bonds Payable for $102,000.
D) a credit to Interest Expense for $1,500

Question 63

Exhibit 14-4
A $900,000, ten-year, 4% bond issue was sold to yield 5% interest payable annually. Actuarial information for 10 periods is as follows:

-Refer to Exhibit 14-4. The discount or premium at the date of bond issuance would be

A) $3 discount.
B) $69,498 discount.
C) $72,995 premium.
D) $73,004 premium.

Question 64

If a company sells its 20-year bonds at a discount, how is the discount account reported on the balance sheet?

A) unearned liability
B) addition to the bonds payable
C) accrued expense
D) deduction from bonds payable

Question 65

Exhibit 14-1
A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows:
Refer to Exhibit 14-1. The discount at the date of bond issuance would be

A) $2.
B) $7,019.
C) $12,235.
D) $19,253.

Question 66

What type of account is Premium on Bonds Payable?

A) valuation account
B) contra account
C) accumulation account
D) adjunct account

Question 67

Exhibit 14-6
Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2016, at face value plus accrued interest on May 1, 2016. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
Refer to Exhibit 14-6. The entry to record the sale would include a

A) credit to Interest Expense for $10,667.
B) debit to Cash for $400,000.
C) credit to Bonds Payable for $410,667.
D) credit to Premium on Bonds Payable for $10,667.

Question 68

Exhibit 14-3
A $700,000, ten-year, 9% bond issue was sold to yield 10% interest payable annually. Actuarial information for 10 periods is as follows:

-Refer to Exhibit 14-3. The discount or premium at the date of bond issuance would be

A) $44,923 premium.
B) $19,114 premium.
C) $43,015 discount.
D) $17,206 discount.

Question 69

Exhibit 14-4
A $900,000, ten-year, 4% bond issue was sold to yield 5% interest payable annually. Actuarial information for 10 periods is as follows:

-Refer to Exhibit 14-4. At date of issuance cash received would be

A) $973,004.
B) $972,995.
C) $899,997.
D) $830,502.

Question 70

On April 1, 2013, Bond Corporation issued 8% debentures dated January 1, 2013. The debentures had a face value of $3,000,000 and interest was payable on January 1 and July 1. The debentures were sold at par plus accrued interest. To record this event on April 1, 2013, Everly should debit cash for

A) $3,080,000.
B) $3,060,000.
C) $3,000,000.
D) $2,920,000.

Question 71

The proper procedure for computing the issuance price of a bond includes adding the

A) maturity value of the bonds to the accrued interest.
B) maturity value of the bonds to the present value of the interest payments.
C) present value of the principal to the accrued interest.
D) present value of the principal to the present value of the interest payments.

Question 72

When is interest expense more than interest paid?

A) when bonds are sold at a premium
B) when bonds are sold at a margin
C) when bonds are sold at a discount
D) when bonds are sold at a yield

Question 73

On May 1, 2016, Plotter, Inc., issued $30,000 of ten-year, 12% bonds payable dated January 1, 2016. The cash received amounted to $29,808. The bonds pay interest semiannually. Potter's fiscal year ends on June 30, 2016. What amount of interest expense should be reported on the income statement prepared on June 30, 2016, assuming straight-line amortization?

A) $603.20
B) $669.60
C) $549.60
D) $609.60

Question 74

Exhibit 14-6
Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2016, at face value plus accrued interest on May 1, 2016. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
Refer to Exhibit 14-6. The entry to record the payment of interest on July 1, 2016, would include a

A) credit to Bond Interest Expense for $10,667.
B) debit to Premium on Bonds Payable for $154.
C) credit to Cash for $16,000.
D) debit to Bond Interest Payable for $16,000.

Question 75

Exhibit 14-3
A $700,000, ten-year, 9% bond issue was sold to yield 10% interest payable annually. Actuarial information for 10 periods is as follows:

-Refer to Exhibit 14-3. At date of issuance cash received would be

A) $719,114.
B) $744,923.
C) $656,985.
D) $682,794.

Question 76

Exhibit 14-2
A $500,000, ten-year, 7% bond issue was sold to yield 6% interest payable annually. Actuarial information for 10 periods is as follows:
Refer to Exhibit 14-2. At date of issuance cash received would be

A) $489,903.
B) $464,883.
C) $511,778.
D) $536,798.

Question 77

If a company sells its bonds at more than face value, the effective interest rate is

A) less than the contract interest rate.
B) more than the contract interest rate.
C) less than the yield rate.
D) more than the yield rate.

Question 78

When a company amortizes a premium, the interest expense recorded is

A) more than the cash paid.
B) less than the cash paid.
C) equal to the cash paid.
D) all of the above can be correct.

Question 79

Exhibit 14-2
A $500,000, ten-year, 7% bond issue was sold to yield 6% interest payable annually. Actuarial information for 10 periods is as follows:
Refer to Exhibit 14-2. The discount or premium at the date of bond issuance would be

A) $11,778 premium.
B) $36,798 premium.
C) $10,097 discount.
D) $35,117 discount.

Question 80

Exhibit 14-5
Joseph Company had underwriters prepare a bond issue for $100,000 9%, ten-year bonds dated January 1, 2014 The bonds were issued on March 1, 2014 at 102 plus accrued interest on. Expenses connected with the issue totaled
$5,000 and were deducted in arriving at the net proceeds. Joseph amortizes premiums and discounts using the straight-line method.
Refer to Exhibit 14-5. The entry to record the issue would include a debit to Cash for

A) $97,000.
B) $98,500.
C) $99,500.
D) $102,000.