Deck 4: Long-Term Liabilities

Question 1

4_If the effective rate of interest exceeds the stated rate of interest,bonds will sell for more than their face value.

Answer 1

False

Question 2

12_Which of the following describes a secured bond?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets

Answer 2

B

Question 3

2_Serial bonds mature in installments at regular intervals.

Answer 3

True

Question 4

1_A payment received in the future is worth less today due to the concept called the time value of money.

Question 5

8_Bonds that mature at the same time are called:

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

Question 6

1_Term bonds all mature at the same time.

Question 7

7_The buy-and-sell transactions between investors do not involve the company that issued the bond.

Question 8

2_A bond that sells below its maturity value is said to sell at a premium.

Question 9

10_The interest rate that determines the amount of cash interest the borrower pays each year to the bondholder is the:

A) stated interest rate
B) effective interest rate
C) market interest rate
D) explicit interest rate

Question 10

3_The effective rate of interest is the rate of interest stated on the bond certificate.

Question 11

5_The market rate of interest,or effective interest rate,is the rate that investors demand for lending their money.

Question 12

11_Which of the following describes a serial bond?

A) a bond that repays principal in installments
B) a bond that gives the bondholder a claim for specific assets if the issuer fails to pay
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets

Question 13

9_Bonds that are backed only by the good faith of the borrower are referred to as:

A) mortgage bonds
B) debenture bonds
C) serial bonds
D) registered bonds

Question 14

5_Bonds that are backed only by the good faith of the borrower are referred to serial bonds.

Question 15

8_The journal entry to record selling $200,000 maturity value bonds at 98 will involve a credit to bonds payable for $196,000.

Question 16

6_Alpha Corporation issued $100,000 face value,10-year,8% bonds on October 1.Interest is payable each April 1 and October 1.Accrued interest on December 31 amounts to $2,000.

Question 17

4_Bond interest is generally paid twelve times per year.

Question 18

3_Debentures are secured bonds.

Question 19

6_The bond's principal amount may be referred to as maturity value or par value.

Question 20

7_Another name for the principal amount of a bond is:

A) market value
B) equivalent value
C) maturity value
D) effective value

Question 21

27_Given a contract interest rate of 7.75%,and a market interest rate of 8.5%,the bonds will be issued at:

A) par
B) a premium
C) a discount
D) a premium or a discount, depending on the date

Question 22

11_Discount on Bonds Payable is a contra account to Bonds Payable.

Question 23

20_A $1,000 bond quoted at 97.75 is selling for:

A) $970.75
B) $907.75
C) $977.50
D) $973.40

Question 24

12_A bond originally issued at a discount cannot be subsequently resold at a premium.

Question 25

9_When a bond is issued at a discount,the discount has the effect of raising the interest expense on the bonds to the market rate of interest.

Question 26

26_Given a contract interest rate of 8.5%,and a market interest rate of 7.75%,the bonds will be issued at:

A) par
B) a premium
C) a discount
D) a premium or a discount, depending on the date

Question 27

17_The entry to record the semiannual interest payment on bonds that were issued at par value includes a:

A) debit to Interest Expense
B) credit to Discount on Bonds Payable
C) debit to Bonds Payable
D) credit to Interest Expense

Question 28

19_Lunar Corporation issues 50,$1,000 maturity value,10% bonds at 95.The journal entry includes a:

A) debit to Cash for $50,000
B) credit to Bonds Payable for $47,500
C) debit to Cash for $47,500
D) debit to Premium on Bonds Payable for $2,500

Question 29

15_The interest rate that investors demand for loaning money is the:

A) effective interest rate
B) stated interest rate
C) contract interest rate
D) straight-line rate

Question 30

13_Interest expense on the income statement will exceed the annual interest payment to bondholders if bonds are issued at a premium.

Question 31

16_The entry to record the issuance of bonds at par value includes a:

A) debit to Discount on Bonds Payable
B) credit to Premium on Bonds Payable
C) debit to Cash for the par value of the bonds
D) debit to Bonds Payable for the par value of the bonds

Question 32

14_On January 2,Solar Corporation issues $500,000 face value,6% bonds for $495,000.It may be derived that the effective rate of interest was:

A) more than 6%
B) less than 6%
C) equal to 6%
D) equal to half of 6%

Question 33

23_Laser Corporation issues 50,$1,000 maturity value,10% bonds at 102.5.The journal entry includes a:

A) debit to Cash for $50,000
B) credit to Bonds Payable for $51,250
C) debit to Discount on Bonds Payable for $1,250
D) credit to Premium on Bonds Payable for $1,250

Question 34

28_The premium on bonds payable:

A) represents an increase in interest expense over the life of the bonds
B) represents a decrease in interest expense over the life of the bonds
C) increases interest expense to the effective interest rate
D) has no effect on interest expense over the life of the bonds

Question 35

25_A $1,000 bond quoted at 102.5 is selling for:

A) $1,025.00
B) $1,000.25
C) $1,000.00
D) $1,250.00

Question 36

24_Jones Corporation issues $400,000,10%,five-year bonds at face value.The total interest expense over the life of the bonds is:

A) $40,000
B) $400,000
C) $200,000
D) $8,000

Question 37

21_Discount on bonds payable is a(n):

A) contra asset account
B) adjunct account to Bonds Payable
C) contra shareholders' equity account
D) contra account to Bonds Payable

Question 38

22_The book value of bonds is equal to bonds payable:

A) plus the unamortized premium
B) less the unamortized premium
C) less the amortized premium
D) plus the amortized premium

Question 39

10_The premium on bonds payable represents an increase in interest expense over the life of the bonds.

Question 40

18_Gamble Corporation issues $100,000 of 9%,10-year bonds dated March 1 at par on May 31.The entry to record the issue includes a:

A) debit to Cash for $102,250
B) debit to Interest Payable for $2,250
C) credit to Interest Revenue for $2,250
D) credit to Bonds Payable for $102,250

Question 41

36_Several years ago,Bee Corporation issued $400,000,10% bonds for $380,000.The balance in the discount on bonds payable account at the end of the current year is $8,000.The balance sheet for the current year would show a net liability of:

A) $408,000
B) $380,000
C) $372,000
D) $392,000

Question 42

2_The entry to amortize the premium on bonds payable consists of a debit to interest expense and a debit to premium on bonds payable.

Question 43

37_Several years ago,Campbell Corporation issued $400,000,10% bonds for $430,000.The balance in the premium on bonds payable account at the end of the current year is $18,000.The balance sheet for the current year would show a net liability of:

A) $412,000
B) $418,000
C) $448,000
D) $382,000

Question 44

SVZ Incorporated needs to raise capital for expansion purposes.Management is considering issuing $2,000,000 of 10%,20-year bonds dated June 1,2017 with interest payment dates of December 1 and June 1.SVZ's year end is December 31.
Prepare the journal entry to recognize the bond under the following circumstances:

A) The bond is issued at par value.
B) The bond is sold at 97
C) The bond is sold at 102
D) The bond is sold at par plus accrued interest on August 1, 2017

Question 45

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Nickle's year end is December 31.
32_Refer to Table 15-1.The entry to record the issuance of the bonds on June 1,2017,at 103.375 includes a:

A) debit to Bonds Payable for $1,000,000
B) debit to Cash for $1,033,750
C) credit to Premium on Bonds Payable for $30,375
D) debit to Premium on Bonds Payable for $33,750

Question 46

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Nickle's year end is December 31.
30_Refer to Table 15-1.Assuming the bonds are issued at 98 plus accrued interest on July 1,2017,the semiannual cash payment for interest on December 1,2017,will be:

A) $31,250
B) $43,750
C) $37,500
D) $20,000

Question 47

Table 15-6
Kuhnapfel Industries needs to raise capital for expansion purposes. Management is considering issuing $500,000 of 6%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Kuhnapfel's year end is December 31.
45_Refer to Table 15-6.Assuming the bonds are issued at 98 plus accrued interest on July 1,2017,the cash obtained on the sale will be in what amount?

Question 48

Central Corporation has an opportunity to acquire a company that produces one of the parts it uses in its manufacturing process.After careful analysis,Central has decided to raise the necessary capital for the acquisition by issuing $3,000,000 of 7.5%,10-year bonds dated April 1,2017,with interest payments on October 1 and April 1.Assume the bonds are issued on June 1,2017 at face value plus accrued interest.Central's year end is December 31.
a_Prepare the entry to record the issuance of the bonds on June 1,2017.
b_Prepare the entry on October 1,2017,to record the interest payment.
c_Prepare the entry to record the accrued interest on December 31,2017.
d_Prepare the April 1,2018 entry to record the interest payment.

Question 49

Table 15-6
Kuhnapfel Industries needs to raise capital for expansion purposes. Management is considering issuing $500,000 of 6%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Kuhnapfel's year end is December 31.
43_Refer to Table 15-6.The entry to record the issuance of the bonds on June 1,2017,at 96.5 includes a debit to Cash of what amount?

Question 50

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Nickle's year end is December 31.
31_Refer to Table 15-1.The entry to record the issuance of the bonds on June 1,2017,at 96.5 includes a:

A) credit to Cash for $37,500
B) debit to Discount on Bonds Payable for $35,000
C) credit to Bonds Payable for $965,000
D) credit to Interest Payable for $75,000

Question 51

1_The Straight-Line method of amortization of a bond discount or premium does a better job of matching.

Question 52

On December 31,2017,Peterson Sales has a Bonds payable balance of $40,000 and a Discount on bonds payable of $2,100.On the balance sheet,how will this information be shown?

A) $40,000 less discount of $2,100 for a net balance of $37,900
B) $40,000 plus discount for a total balance of $42,100
C) $40,000 only
D) $40,000 less one-tenth of $2,100 for a net balance of $39,790

Question 53

On December 31,2013,Peterson Sales has a bonds payable balance of $40,000 and a premium on bonds payable of $900.On the balance sheet,how will this information be shown?

A) $40,000 less premium of $900 for a net balance of $39,100
B) $40,000 less one-tenth of $900 for a net balance of $39,910
C) $40,000 only
D) $40,000 plus a premium of $900 for a net balance of $40,900

Question 54

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Nickle's year end is December 31.

-Refer to Table 15-1.The entry to record the issuance of the bonds at maturity value plus accrued interest on August 1,2017,includes a:

A) debit to Cash for $1,000,000
B) credit to Interest Payable for $12,500
C) debit to Interest Expense for $37,500
D) credit to Bonds Payable for $1,012,500

Question 55

33_The proceeds from issuing bonds is equal to the present value of the:

A) maturity value of the bonds plus the present value of the periodic interest payments using the stated rate of interest
B) maturity value of the bonds plus the present value of the periodic interest payments using the effective rate of interest
C) maturity value of the bonds less the present value of the periodic interest payments using the effective rate of interest
D) periodic interest payments less the present value of the maturity value of the bonds using the effective rate of interest

Question 56

Table 15-6
Kuhnapfel Industries needs to raise capital for expansion purposes. Management is considering issuing $500,000 of 6%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Kuhnapfel's year end is December 31.
42_Refer to Table 15-6.The entry to record the issuance of the bonds on June 1,2017 at 96.5 includes a credit to Bonds Payable of what amount?

Question 57

34_The time value of money is based on which of the following concepts?

A) the concept that money becomes obsolete over time
B) the concept that money earns income over time
C) the concept that money loses its purchasing power over time
D) the concept that money can be converted into other currencies over time

Question 58

Table 15-6
Kuhnapfel Industries needs to raise capital for expansion purposes. Management is considering issuing $500,000 of 6%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Kuhnapfel's year end is December 31.
44_Refer to Table 15-6.Assuming the bonds are issued at 98 plus accrued interest on July 1,2017,the semiannual cash payment for interest on December 1,2017,will be in what amount?

Question 59

Table 15-6
Kuhnapfel Industries needs to raise capital for expansion purposes. Management is considering issuing $500,000 of 6%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1 and June 1. Kuhnapfel's year end is December 31.
41_Refer to Table 15-6.The entry to record the issuance of the bond at par plus accrued interest on August,1,2017 will include a credit to interest payable of what amount?

Question 60

On January 1,2012,Davie Services issued $20,000 of 8% bonds that mature in five years.They were sold at discount,for a total of $19,000.On January 1,2017,when the bonds mature,Davie Services will make the final principal payment.That entry will be which of the following?

A) Debit Bond discount for $1,000 and credit Cash for $1,000.
B) Debit Bonds payable for $19,000 and credit Cash for $1,000.
C) Debit Bonds payable for $20,000 and credit Cash for $20,000.
D) Debit Bonds payable for $19,000, debit Bond discount for $1,000 and credit Cash for $19,000.

Question 61

7_Interest expense will increase each period if a company uses the effective-interest method of amortization and the bonds are issued at a premium.

Question 62

15_On January 2,2017,Saturn Corporation issued $200,000,8%,10-year bonds for $220,000.The bonds pay interest each December 31.Saturn Corporation uses the straight-line method to amortize premium or discount.On December 31,2017,Saturn Corporation would record a:

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

Question 63

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1
and June 1. Nickle's year end is December 31.
22_Refer to Table 15-1. Assuming the bonds were issued on June 1,2017,at 103.75 and the company uses the straight-line method of amortization,the adjusting entry on December 31,2017 to accrue interest and record applicable amortization would include a:

A) debit to Discount on Bonds Payable for $156
B) credit to Interest Payable for $6,250
C) debit to Interest Expense for $6,250
D) credit to Cash for $6,250

Question 64

9_Smith Corporation issues $400,000,10%,five-year bonds at 95.The total interest expense over the life of the bonds is:

A) $40,000
B) $220,000
C) $180,000
D) $200,000

Question 65

14_Samson Corporation issues $200,000,10%,five-year bonds at 97.The total interest expense over the life of the bonds is:

A) $106,000
B) $26,000
C) $100,000
D) $94,000

Question 66

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1
and June 1. Nickle's year end is December 31.
19_Refer to Table 15-1. Assuming the bonds were issued on June 1,2017,at 92.625 and the company uses the straight-line method of amortization,the semiannual interest payment on December 1,2017,would include a:

A) credit to Cash for $75,000
B) debit to Interest Expense for $39,344
C) credit to Discount on Bonds Payable for $3,687
D) debit to Interest Expense for $35,656

Question 67

4_Amortizing any premium or discount on a bonds payable using the straight-line method will result in a constant amount of interest expense over the term of the bond.

Question 68

17_Amortizing the discount on a bond payable:

A) increases the interest expense for the period
B) decreases the book value of bonds payable
C) decreases the amount of the cash paid to the bondholders
D) has no effect on the book value of the bonds payable

Question 69

16_On January 2,2017,Saturn Corporation issued $200,000,8%,10-year bonds for $220,000.The bonds pay interest each December 31.Saturn Corporation uses the straight-line method to amortize premium or discount.On December 31,2017,Saturn Corporation would record a:

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

Question 70

13_Samson Corporation issues $200,000,10%,five-year bonds at 103.The total interest expense over the life of the bonds is:

A) $106,000
B) $26,000
C) $100,000
D) $94,000

Question 71

12_Jackson Corporation issues $400,000,10%,five-year bonds at 97.The total interest expense over the life of the bonds is:

A) $188,000
B) $212,000
C) $200,000
D) $40,000

Question 72

11_Jackson Corporation issues $400,000,10%,five-year bonds at 103.The total interest expense over the life of the bonds is:

A) $188,000
B) $212,000
C) $200,000
D) $40,000

Question 73

18_Amortizing the premium on a bond payable:

A) increases the interest expense for the period
B) decreases the book value of bonds payable
C) decreases the amount of the cash paid to the bondholders
D) has no effect on the book value of the bonds payable

Question 74

5_The carrying value of bonds will decrease each interest period if the bonds were sold at a discount.

Question 75

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1
and June 1. Nickle's year end is December 31.
21_Refer to Table 15-1. Assuming the bonds were issued on June 1,2017,at 97.5,and the company uses the straight-line method of amortization,the adjusting entry on December 31,2017,to accrue the interest and record applicable amortization would include a:

A) credit to Cash for $6,250
B) debit to Interest Expense for $6,354
C) credit to Discount on Bonds Payable for $625
D) credit to Discount on Bonds Payable for $208

Question 76

3_The effective interest method of amortization keeps each interest expense amount at the same percentage of the bond's carrying value for every interest payment over the bond's life.

Question 77

Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1
and June 1. Nickle's year end is December 31.
20_Refer to Table 15-1. Assuming the bonds were issued on June 1,2017,at 103.875,and the company uses the straight-line method of amortization,the semiannual cash payment for interest on December 1,2017,would include a:

A) debit to Interest Expense for $36,531
B) credit to Cash for $75,000
C) debit to Discount on Bonds Payable for $1,938
D) debit to Interest Expense for $38,469

Question 78

10_On January 2,2017,Carter Corporation issued $200,000,10%,10-year bonds for $160,000.The bonds pay interest each December 31.Carter Corporation uses the straight-line method to amortize premium or discount.On December 31,2017,Carter Corporation would record a:

A) credit to Cash for $16,000
B) debit to Interest Expense for $16,000
C) debit to Interest Expense for $24,000
D) credit Premium on Bonds Payable for $4,000

Question 79

6_Using the effective-interest method,interest expense is based on the carrying amount of the bonds times the effective interest rate for the interest period.

Question 80

8_The amount of accrued interest expense is not affected by a bond discount or premium.