Deck 11: Long-Term Liabilities

Question 1

The call feature of bonds is useful if a company wants to retire a bond issue.

Answer 1

True

Question 2

The callable feature of a bond can be exercised by the bondholder.

Answer 2

False

Question 3

An $80,000 bond issue priced at 97 is sold for $77,600.

Answer 3

True

Question 4

Market interest rate is another term for effective interest rate.

Question 5

Unamortized Bond Discount is a contra-liability account.

Question 6

Promises to pay employees pensions after they retire are difficult to identify and value and therefore need not be recognized in the financial statements until cash payment is made.

Question 7

The call price of bonds is usually above face value.

Question 8

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the bond will probably be sold at a discount.

Question 9

Deferred income taxes are a type of long-term liability that result from using different accounting methods to calculate income taxes on the income statement and income tax liability on the income tax return.

Question 10

Unsecured bonds are also known as debentures.

Question 11

If the face interest rate at the date of bond issuance exceeds the market interest rate,the bond will probably be sold at a premium.

Question 12

Long-term notes and bonds have similar effects on the financial statements.

Question 13

Unamortized Bond Premium is subtracted from Bonds Payable on the balance sheet.

Question 14

The distinction between current and long-term liabilities affects the evaluation of a company's solvency.

Question 15

The convertibility feature of a bond can be exercised by the issuing corporation.

Question 16

Contributed capital by owners is one source of long-term funds and is considered a type of long-term liability.

Question 17

Bondholders are creditors of the issuing corporation.

Question 18

Term bonds are of shorter duration than serial bonds.

Question 19

A bond agreement is referred to as the bond indenture.

Question 20

A corporation probably does not know who owns its registered bonds.

Question 21

Interest on bonds usually is paid monthly.

Question 22

When the board of directors decides to issue bonds,it is necessary to make an entry to record the SEC's authorization of the bond issue.

Question 23

The carrying value of a bond is also referred to as its present value.

Question 24

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970,the market interest rate at the date of issuance must have been less than 7 percent.

Question 25

The present value of a bond is always less than the face value of the bond.

Question 26

The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.

Question 27

A bond sells at the face value when the face interest rate of the bond is identical to the market interest rate for similar bonds on the date of the issue.

Question 28

When all the bonds of an issue mature at the same time,they are called term bonds.

Question 29

Bond issue costs have the effect of increasing a premium,or reducing a discount,on bonds issued.

Question 30

The par value of a bond is equal to its face value.

Question 31

If a bond has a face interest rate of 6 percent,a face value of $40,000,and pays interest semiannually,each interest payment will amount to $1,200.

Question 32

The market interest rate is also called the face interest rate.

Question 33

The entry to record the issuance of bonds at a premium includes a credit to the Unamortized Bond Premium account.

Question 34

When the present value of a bond issue is calculated,both the present value of a single sum and the present value of an annuity must be calculated.

Question 35

If a 20-year bond pays interest of 8 percent semiannually,the present value of the bond is calculated based upon 4 percent and 20 periods.

Question 36

Most bonds issued today are registered bonds rather than coupon bonds.

Question 37

If a 20-year bond pays interest of 8 percent semiannually,the present value of the bond is calculated based upon (1)4 percent and 40 periods for the interest,and (2)8 percent and 20 periods for the face amount of the bond.

Question 38

The entry to record the issuance of bonds at a discount includes a credit to the Unamortized Bond Discount account.

Question 39

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the present value of the face value plus the present value of all the future interest payments will equal an amount less than the face value of the bond.

Question 40

Bond certificates are issued to creditors of the issuing corporation.

Question 41

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization,the effective interest method should be used.

Question 42

When bonds are converted to stock,no gain or loss is recognized.

Question 43

The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period.

Question 44

The market interest rate is the rate that an issuer of bonds actually will have to bear and that an investor (purchaser)actually will earn over the bond's life.

Question 45

It is the issuer rather than the bond holder who may exercise the call feature of a callable bond.

Question 46

When a bond issue is converted into common stock,total contributed capital is increased by the fair market value of the bonds converted.

Question 47

When the effective interest method of amortization is used,the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Question 48

Regardless of whether the straight-line method or the effective interest method is used,the carrying value of a term bond issued at a discount will increase continually over the life of the bond.

Question 49

When a bond has been issued at a discount,the carrying value at the end of one period is equal to the carrying value at the beginning of the period minus the amount of discount that was amortized during the period.

Question 50

The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period.

Question 51

When bonds are called for retirement,any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Question 52

The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium to the bond's face value.

Question 53

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value,a loss will result.

Question 54

When the effective interest method of amortization is used for a bond premium,the amount of premium to be amortized for a period is calculated by subtracting the amount of bond interest expense for the period from the amount of cash to be paid for interest for the same period.

Question 55

Issuing bonds at a discount has the effect of increasing interest expense above the face amount of interest.

Question 56

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Question 57

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.

Question 58

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments plus the premium.

Question 59

Under the effective interest method of amortizing a bond discount,the bond interest expense recorded for each period decreases over the life of the bond.

Question 60

The calculation of cash for interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Question 61

Under a capital lease,the lessee,not the lessor,should record depreciation.

Question 62

Under a capital lease,each monthly payment is debited by the lessee to Rent Expense.

Question 63

The debt to equity ratio is a measure of financial leverage.

Question 64

Interest on debt is tax-deductible to the issuing corporation,whereas dividends on stock are not.

Question 65

The interest coverage ratio is expressed as a percentage.

Question 66

Accounting for capital leases can be thought of as similar to accounting for mortgage payments.

Question 67

Under a defined benefit pension plan,retirement benefits are based entirely on the annual contribution to the fund plus earnings thereon.

Question 68

When the terms of a lease require that the lessee record an asset and a liability,the two accounts are recorded at the present value of the total lease payments required.

Question 69

Issuing bonds between interest payment dates will have the effect of decreasing a bond issuance discount or increasing a bond issuance premium.

Question 70

Accounting for a defined contribution pension plan is simpler than accounting for a defined benefit plan.

Question 71

When bonds are sold between interest dates,the interest collected when the bonds are sold is returned to investors on the next interest payment date.

Question 72

Financial leverage is also known as trading on the equity.

Question 73

A capital lease represents both an asset and a liability.

Question 74

When bonds are sold between the interest payment dates,the issuing corporation pays to investors the interest that has accrued since the last interest payment date.

Question 75

The entry to record the issuance of bonds between interest payment dates will include a debit to Bond Interest Expense.

Question 76

Leases of short-term assets are operating leases,and leases of long-term assets are capital leases.

Question 77

A capital lease is a lease of property,plant,or equipment that is in effect an installment purchase.

Question 78

An adjustment must be made at the end of an accounting period to accrue the interest expense on bonds payable and to amortize any related premium or discount from the last interest payment date to the end of the fiscal year.

Question 79

Under a capital lease,the lessee records both an asset and a liability.

Question 80

The matching rule dictates that both the accrued interest and the amortization of a premium or discount be recorded at the year end.