Question 1

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

Accepted Answer

This is because investors are willing to pay more to earn the higher interest payments offered by the bond compared to the lower market interest rate. The difference between the face amount and the amount paid by the investor is called the premium.

Question 2

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

Accepted Answer

False

Question 3

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

Accepted Answer

This is true as per the priority of claims in the event of liquidation. Bondholders and other creditors have higher priority in receiving payments than stockholders.

Question 4

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

Accepted Answer

When bonds are issued at a premium, the annual interest expense is less than the annual cash interest payments because the premium reduces the effective interest cost over the life of the bond.

Question 5

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

Accepted Answer

The Bond Sinking Fund Investment account is a long-term investment and is reported as an investment in the Assets section of the balance sheet.

Question 6

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

Accepted Answer

The answer of The Bonds Payable account would be credited...

Question 7

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

Accepted Answer

The statement is false. Coupon bonds are issued to pay regular interest payments to bond holders, but the IRS does not require companies to issue coupon bonds specifically to track taxable interest payments. Instead, companies are required to report all interest payments made to bond holders to the IRS.

Question 8

Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement.

Accepted Answer

When bonds are retired before their maturity date, there may be a significant gain or loss from the transaction. This gain or loss is recognized as an extraordinary item on the income statement because it is not considered a part of the company's normal operations.

Question 9

The adjusting entry to record accrued bond interest is reversed on the first day of the following period.

Accepted Answer

Accrued bond interest is an adjusting entry that is made to record interest that has been earned but not yet received or paid. This entry is typically reversed on the first day of the following period so that the interest expense is not overstated in that period.

Question 10

Amortizing bond premiums over the period from the issue date to the maturity date reduces bond interest expense shown on the income statement.

Accepted Answer

Amortizing bond premiums means spreading the premium amount over the term of the bond. This reduces the bond interest expense shown on the income statement as the premium is deducted from the face value of the bond.

Question 11

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

Accepted Answer

Appropriating retained earnings for bond retirement does not necessarily require the establishment of a bond retirement sinking fund. The appropriation is an internal accounting decision to earmark funds for future use, while a sinking fund is a specific type of fund set up to pay off debt or bonds.

Question 12

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

Accepted Answer

Bond Interest Expense is typically listed under Finance Costs or Interest Expense, not under Operating Expenses, because it is related to the cost of borrowing rather than the operational activities of the business.

Question 13

When a corporation pays bond interest,Bond Interest Expense is debited.

Accepted Answer

Bond Interest Expense is an expense account, and according to the rules of accounting, expenses are debited. Therefore, when a corporation pays bond interest, Bond Interest Expense is debited.

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.

Accepted Answer

Convertible bonds give the holder the right to convert the bond into a predetermined number of shares of the issuing company, not the other way around. The issuing corporation cannot force the bondholder to surrender the bond before its maturity.

Question 15

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

Accepted Answer

A corporation may also pay a premium or a discount if they retire their bonds prior to maturity depending on market conditions and the terms of the bond agreement.

Question 16

Bond interest is not deducted when a corporation determines its taxable income.

Accepted Answer

Interest paid on bonds is considered a business expense and is deductible when a corporation calculates its taxable income.

Question 17

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

Accepted Answer

A bond sinking fund investment is commonly used by corporations to systematically accumulate cash for the retirement of bonds at maturity. This involves setting aside a portion of the corporation's earnings or issuing new bonds to invest in a separate account that is used to redeem bonds at their maturity date.

Question 18

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

Accepted Answer

The face interest is the interest rate specified on the bond at the time of issuance.

Question 19

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

Accepted Answer

When bonds are issued at a price below face value, the Discount on Bonds Payable account is debited, not credited, for the difference between the issue price and the face value.

Question 20

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

Accepted Answer

Bondholders have a legal right to receive their interest payments even if the corporation is not making a profit.

Quiz 22: Long-Term Bonds