Question 1

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Accepted Answer

This is true. Installment notes are typically paid off over a set period of time with regular payments that consist of both interest and principal. As the borrower makes payments, the amount of principal owed decreases, and the portion of the payment that goes toward interest also decreases.

Question 2

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Accepted Answer

A premium on bonds occurs when their contract rate is higher than the current market rate. This means that investors are willing to pay more for the bonds, which results in a higher selling price than the face value of the bond.

Question 3

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

Accepted Answer

This statement is true as call options give issuers the right to buy back bonds before maturity at a specified price, and they can also repurchase bonds on the open market before their maturity.

Question 4

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Accepted Answer

A discount on bonds payable occurs when the issue price of the bond is less than the face value (par value). This means the bond is sold for less than its face value, resulting in a discount.

Question 5

If a bond's interest period does not coincide with the issuing company's accounting period,an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Accepted Answer

An adjusting entry is necessary to ensure that the bond interest expense is recorded in the correct accounting period, regardless of whether it coincides with the interest payment period. This is done to accurately reflect the company's financial position and performance in its financial statements.

Question 6

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Accepted Answer

The longer the time period to maturity, the higher the risk of adverse events such as inflation, changes in interest rates, and market fluctuations. To compensate for this risk, bond issuers offer higher interest rates, which increases the market rate for bonds.

Question 7

Premium on Bonds Payable is an adjunct or accretion liability account.

Accepted Answer

Premium on Bonds Payable represents the excess amount paid by investors over the par value of bonds, and is recorded as an adjunct or accretion liability account on the balance sheet.

Question 8

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

Accepted Answer

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Question 9

Sinking fund bonds:

Accepted Answer

Sinking fund bonds require the issuer to set aside assets at specified amounts to retire the bonds at maturity, making them different from other types of bonds.

Question 10

A discount reduces the interest expense of a bond over its life.

Accepted Answer

The answer of A discount reduces the interest expense of...

Question 11

The carrying (book)value of a bond at the time when it is issued is always equal to its par value.

Accepted Answer

The answer of The carrying (book)value of a bond at...

Question 12

A premium reduces the interest expense of a bond over its life.

Accepted Answer

A premium reduces the effective interest rate of a bond, therefore reducing the amount of interest expense paid over the life of the bond.

Question 13

When convertible bonds are converted to a company's stock,the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

Accepted Answer

When convertible bonds are converted to stock, there is no gain or loss recognized and the carrying value of the bonds is transferred from the liability account to equity accounts. This is because the initial bond issuance already accounted for both the liability and equity components of the instrument.

Question 14

When the contract rate on a bond issue is less than the market rate,the bonds will generally sell at a discount.

Accepted Answer

When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a discount because investors can earn a higher return by purchasing bonds with a higher interest rate. As a result, the bond issuer must sell the bonds at a discount to make them more attractive to investors.

Question 15

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Accepted Answer

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Question 16

The issue price of bonds is found by computing the future value of the bond's cash payments,discounted at the market rate of interest.

Accepted Answer

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Question 17

A 10-year bond issue with a $100,000 par value,8% annual contract rate,with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

Accepted Answer

This is correct as the semiannual interest payments would be calculated as ($100,000 x 8%)/2 = $4,000. There would be 20 such payments over the 10-year bond period.

Question 18

When the contract rate is above the market rate,a bond sells at a discount.

Accepted Answer

When the contract rate (also known as the coupon rate) is above the market rate, a bond sells at a premium because investors are willing to pay more for the higher interest payments. When the market rate is above the contract rate, the bond sells at a discount because investors will only pay a lower price for the lower interest payments.

Question 19

The market value (issue price)of a bond is equal to the present value of all future cash payments provided by the bond.

Accepted Answer

This is the fundamental principle of bond valuation. The market value of a bond is the sum of the present values of all the future coupon payments and the principal repayment.

Question 20

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

Accepted Answer

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Quiz 14: Long-Term Liabilities