Deck 22: Long-Term Bonds

Question 1

To systematically accumulate cash for the retirement of bonds at maturity, a corporation may set up a bond sinking fund investment.

Answer 1

True

Question 2

The Bond Sinking Fund Investment account is reported as an investment in the Assets section of the balance sheet.

Answer 2

True

Question 3

Amortizing a bond premium over the period from the issue date to the maturity date reduces the amount of bond interest expense shown on the income statement.

Answer 3

True

Question 4

Investors will pay an amount greater than the face amount of a bond if the interest rate on bonds is greater than the market rate of interest.

Question 5

In the case of liquidation, bondholders and other creditors must be paid in full before stockholders can receive monetary distributions.

Question 6

Bonds are often issued as a means of raising capital to pay off short-term debt.

Question 7

When a corporation pays the periodic interest payment on its bonds, Bond Interest Expense is debited.

Question 8

The Bond Interest Expense account is usually listed under Operating Expenses on the income statement.

Question 9

A corporation will pay the face value of its bonds if they are retired prior to the maturity date.

Question 10

Any gain or loss recognized from the early retirement of bonds should be reported on the income statement for the period in which the bonds were retired.

Question 11

If retained earnings are appropriated for bond retirement, a bond retirement sinking fund must be established.

Question 12

When bonds are issued at a price below face value, the Discount on Bonds Payable account is debited for the difference between the issue price and the face value.

Question 13

The adjusting entry to record interest accrued on bonds at the end of the accounting period can be reversed on the first day of the following period.

Question 14

The issuing corporation has the right to require the owner of a convertible bond to surrender the bond for payment before the maturity date of the bond.

Question 15

Bond interest is not deducted from revenue when a corporation calculates its taxable income.

Question 16

The Bonds Payable account would be credited for $104,000 to record the issuance of $100,000 face value, 10 percent bonds at a market price of 104.

Question 17

When bonds are issued at a premium, the annual interest expense reported for the bonds will be greater than the annual cash interest payments for the bonds.

Question 18

The IRS requires companies to issue coupon bonds in order to track taxable interest payments made to the bond holders.

Question 19

Interest on bonds must be paid in full as scheduled in the bond indenture even when the corporation operates at a loss.

Question 20

The face interest is the contractual interest specified on the bond.

Question 21

When bonds are sold at a market price of 105, the cash received for the bonds is 105 percent of the bonds' face value.

Question 22

The issuing corporation amortizes the bond discount from the date of issue to the maturity date, which will the bond interest expense shown on the income statement.

Question 23

Bonds on which a corporation has pledged property to guarantee payment to the bondholders are known as bonds.

Question 24

A bond is if the issuing corporation has the right to require the owner to surrender the bond for payment before the maturity date.

Question 25

The amortization method amortizes an equal amount of the discount or premium each month.

Question 26

The balance of the Bonds Payable account plus the balance of the Premium on Bonds Payable account or minus the balance of the Discount on Bonds Payable account is called the of the bonds.

Question 27

In the interest formula (I = Prt)the Prt stands for .

Question 28

The Discount on Bonds Payable account will have a(n)balance.

Question 29

Using borrowed funds to earn a profit greater than the interest that must be paid on the borrowed funds is called trading on the equity, or .

Question 30

To calculate the gain or loss on the retirement of bonds, the face amount of the bonds is subtracted from the repurchase price.

Question 31

To calculate the gain or loss on the retirement of bonds, the carrying value of the bonds is subtracted from the repurchase price.

Question 32

If bonds with a face value of $100,000 and a carrying value of $103,000 are retired early by paying cash of $101,000, a will be reported on the income statement for the period.

Question 33

The investment banker who acts to protect the bondholders' interests, as in the case of default, is called a .

Question 34

To pay interest on bonds, the corporation must keep a record of the name of each bondholder.

Question 35

Coupon bonds are often referred to as bonds.

Question 36

Bond interest expense usually appears in the

Question 37

If the market rate of interest on the day that bonds are issued is lower than the contract rate of interest, the bonds will sell at a discount.

Question 38

When bonds are issued at a price below face value, the Discount on Bonds Payable account is
for the difference between the issue price and the face value.

Question 39

Retained earnings may be appropriated for bond retirement by order of the board of directors, by the bond contract, or by vote of the shareholders.

Question 40

A planned fund established to accumulate assets to pay off bonds when they mature is called a bond fund investment.

Question 41

A corporation paid $103,000 to retire bonds with a face value of $100,000 and an unamortized discount balance of $2,500. The entry to record the early retirement of the bonds will include the recognition of a loss of

A)$0.
B)$500.
C)$5,500.
D)$3,000.

Question 42

On December 31, 2019, a corporation issued $180,000 face value, 8 percent bonds that mature 10 years from the date of issue. The issue price was 104. If the firm uses the straight-line method of amortization, interest expense for 2020 will be reported at

A)$13,680.
B)$15,120.
C)$14,400.
D)$7,200.

Question 43

When bonds are issued at a premium, the bond premium

A)does not change the amount of interest expense over the life of the bonds.
B)increases the amount of interest expense over the life of the bonds.
C)reduces the amount of interest expense over the life of the bonds.
D)is charged to interest expense when the bonds are issued.

Question 44

When bonds mature, a corporation will pay the bondholders

A)the face amount of the bonds.
B)the face amount plus the original premium or minus the original discount.
C)the face amount plus the interest accrued since the date the bonds were issued.
D)the current market value of the bonds.

Question 45

Bonds with a face value of $400,000 were issued at 102. The entry to record the issuance will include a debit to the Cash account for

A)$392,000.
B)$400,000.
C)$408,000.
D)$402,000.

Question 46

Which of the following is not a disadvantage of raising capital through the issue of bonds payable?

A)the bonds are classified as a long-term liability
B)interest must be paid even if the firm suffers a loss
C)the face amount must be repaid at maturity
D)interest is deductible for income tax purposes

Question 47

Unsecured Bonds:

A)represent a safer investment than secured bonds.
B)are called debentures.
C)are backed by the issuer's bank.
D)are the same as sinking bonds.

Question 48

A bond that trades at 105 ½ means that:

A)the bond pays 5 ½% interest.
B)the market rate of interest is 5 ½%.
C)the bond traded at $1,055 per $1,000 bond.
D)the market rate of interest is 5 ½% higher than the contract rate.

Question 49

A company issued 5%, 10-year bonds with a par value of $500,000. The current market rate of interest is 5%. The journal entry to record each semiannual interest payment is:

A)
B)
C)
D)

Question 50

Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a credit to the Bonds Payable account for

A)$408,000.
B)$400,000.
C)$398,000.
D)$392,000.

Question 51

The entry to record the adjustment for accrued bond interest includes

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

Question 52

If bonds are issued for a price below their face value, the bond discount should be

A)charged to expense on the date the bonds are issued.
B)shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet.
C)amortized over the life of the bond issue.
D)shown as a current liability on the balance sheet.

Question 53

A company issues 9%, 20-year bonds with a face value of $400,000. The current market rate of interest is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is:

A)$36,000.
B)$32,000.
C)$18,000.
D)$16,000.

Question 54

Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a credit to the Bonds Payable account for

A)$206,000.
B)$103,000.
C)$200,000.
D)$230,000.

Question 55

A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized premium balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of

A)$7,000.
B)$4,000.
C)$3,000.
D)$1,000.

Question 56

The Premium on Bonds Payable account is shown

A)in the Current Assets section of the balance sheet.
B)in the Current Liabilities section of the balance sheet.
C)in the Long-Term Liabilities section of the balance sheet.
D)in the Revenue section of the income statement.

Question 57

A company issued 6%, 10 year bonds with a par value of $500,000 on April 1. Interest is payable each Sept. 30 and March 31,2019. The journal entry to accrue interest expense as of December 31,2019, is:

A)

B)

C)

D)

Question 58

A company issues 6%, 10 year bonds with a par value of $500,000 at 98. The current market rate of interest is 7%. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

A)

B)

Question 59

On December 31, 2019, a corporation issued $180,000 face value, 8 percent bonds that mature 10 years from the date of issue. The issue price was 98. If the firm uses the straight-line method of amortization, interest expense for 2020 will be reported at

A)$18,000.
B)$24,000.
C)$14,040.
D)$14,760.
E) $14,400.

Question 60

A company has $500,000 in equity and income before interest and taxes of $50,000. The corporate tax rate is 25 percent. If $200,000 of bonds are issued at 10 percent, what is the rate of profit on stockholders' equity?

A)10.0%.
B)7)7%.
C)6)0%.
D)4)5%.

Question 61

Bonds with a face value of $450,000 were issued at 97. The entry to record the issuance will include a debit to the Discount on Bonds Payable account for

A)$13,500.
B)$9,000.
C)$18,000.
D)$4,500.

Question 62

A bond sinking fund investment is started on January 5, 2019, by transferring $12,000 in cash to the fund. The company intends to accumulate $12,000 each year in the fund. This $12,000 is invested and earns $1,500 during 2019. On January 5, 2020, the amount of cash transferred to the sinking fund investment will be

A)$10,500.
B)$12,000.
C)$13,500.
D)$1,500.

Question 63

The entry to record the issuance of bonds at face value includes
A)a credit to Bond Interest Payable.

A)a debit to Bond Interest Expense.
B)a credit to Bond Payable.
D)a debit to Bond Interest Payable.

Question 64

If the market rate of interest is higher than the contract rate of interest offered on the bonds being sold, they will be sold at

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

Question 65

In the interest formula I = Prt, the P stands for

A)Payment.
B)Premium.
C)Principal.
D)Prime number.

Question 66

When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds, the bonds are referred to as

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

Question 67

If a bond is a registered bond, it can NOT be a bond.

A)discount
B)callable
C)convertible
D)coupon

Question 68

Twenty-year, 6% bonds with a face value of $550,000 are issued at 102 on January 1 of the current year. How much of the premium will be amortized under the straight-line method in the first
Semi-annual interest period?

A)$550.
B)$275.
C)$825.
D)$1,650.

Question 69

Bonds issued at a premium are

A)traded for stock.
B)sold at face value.
C)sold for more than face value.
D)sold at less than face value.

Question 70

Retained earnings are often appropriated while the bonds are outstanding. Which of the following is a reason for the appropriation?

A)Corporation management wants to protect the bondholders.
B)The bond underwriters always require it.
C)Tax law requires it.
D)The buyers require it.

Question 71

A company issued 10-year, 8% bonds with a par value of $1,000,000. The company received
$980,000 upon issuance. Using the straight-line method, the amount of interest expense for the first semi-annual interest period is:

A)$41,000.
B)$42,000.
C)$40,000.
D)$39,000.

Question 72

The difference between the face value and the selling price of a 10-year discounted bond issued two years after authorization, is amortized for

A)10 years.
B)8 years.
C)2 years.
D)The difference is not amortized, only interest is amortized.

Question 73

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

A)on the Income Statement.
B)on the Balance Sheet.
C)on the Bond Interest Reconciliation Schedule.
D)on the Statement of Cash Flows.

Question 74

Corporations with many bondholders will open a separate checking account because

A)it is required by law.
B)the account earns interest.
C)it is easier to do the bookkeeping on the bond interest.
D)it keeps the bond interest records separate for tax purposes.

Question 75

A bond sinking fund investment is started on January 5, 2019, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2019. The entry to record the earnings made on the sinking fund investment includes

A)a debit to Cash for $1,100 and a credit to Income from Sinking Fund Investment for $1,100.
B)a debit to Cash for $1,100 and a credit to Bond Sinking Fund Investment for $1,100.
C)a debit to Bond Sinking Fund Investment for $1,100 and a credit to Income from Sinking Fund Investment for $1,100.
D)a debit to Cash for $1,100 and a credit to Interest Income for $1,100.

Question 76

The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are

A)coupon bonds.
B)bearer bonds.
C)registered bonds.
D)unregistered bonds.

Question 77

Ten-year bonds with a face value of $600,000 were issued at 96 on January 1, 2019. The carrying value of the bond on December 31, 2020, after two years of interest payments and straight-line amortization is:

A)$619,200.
B)$624,000.
C)$576,000.
D)$580,800.

Question 78

A company issued 10-year, 5% bonds with a par value of $1,000,000. The company received
$1,040,000 upon issuance. Using the straight-line method, the amount of interest expense for the first semi-annual interest period is:

A)$25,000.
B)$26,000.
C)$23,000.
D)$21,000.

Question 79

Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Cash account for

A)$408,000.
B)$400,000.
C)$398,000.
D)$392,000.

Question 80

Using borrowed funds to earn a profit higher than the interest charged for borrowing is called

A)secured borrowing.
B)amortizing.
C)investing.
D)leveraging.