Question 1

On January 2, 2015, Roof Master Construction, Inc.issued $500,000, 10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.At the maturity date, besides an interest payment, Roof Master would repay the bondholders
A)$574,540.
B)$520,000.
C)$500,000.
D)only the last interest payment.

Accepted Answer

At maturity, the bondholders are repaid the face value of the bonds, which is $500,000, regardless of the premium at which the bonds were issued.

Question 2

A convertible bond is one where
A)the issuer can convert from a fixed interest rate to a floating one.
B)the issuer can convert it from long-term to short-term.
C)the issuer can retire the bond before its specified due date.
D)the holder can convert the bond into common stock at a future time.

Accepted Answer

A convertible bond allows the holder to convert the bond into common stock at a future time. This feature provides the holder with the option to benefit from any future increase in the stock price.

Question 3

Convertible bonds are attractive to investors because
A)they usually carry a higher rate of interest than non-convertible bonds.
B)they carry a convertible interest rate that can be increased when the prime rate of interest increases.
C)they can be converted into stock at the issuer's option.
D)the issuing company cannot retire the bonds before maturity.

Accepted Answer

Convertible bonds offer investors the option to convert the bonds into a specified number of shares of the issuer's stock at a predetermined conversion price. This offers investors the potential for capital appreciation if the stock price rises, while also providing downside protection in the form of the bond's guaranteed yield and return of principal at maturity. The other choices (A, B, and D) do not accurately describe the unique features of convertible bonds.

Question 4

Bonds are a popular source of financing because
A)bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
B)financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.
C)a company having cash flow problems can postpone payment of interest to bondholders.
D)the bondholders can always convert their bonds into stock if they choose.

Accepted Answer

Bond interest expense is deductible for tax purposes, which can provide significant savings for the issuing company. On the other hand, dividends paid on stock are not tax-deductible. This makes bonds a more attractive source of financing for companies compared to stock.

Question 5

When determining the amount of interest to be paid on a bond, which of the following information is not necessary?
A)The face amount of the bonds
B)The selling price of the bonds
C)The face rate of interest on the bonds
D)The length of the interest period, annually or semiannually

Accepted Answer

The selling price of the bonds is not necessary to determine the amount of interest to be paid. Interest payments are calculated based on the face amount of the bond and the face rate of interest, not the selling price.

Question 6

Micro Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year.The market rate of interest is currently 5%.What information is needed in order to determine the selling price?
A)The market rate of interest, the stated rate of interest, the bond rating, and the bond life.
B)The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
C)The life of the bonds, the market rate of interest, the bond rating, and the face amount of the bonds.
D)The face amount of the bonds, the market rate of interest, the purpose of the issue, and the bond life.

Accepted Answer

The face amount of the bonds is needed as it represents the amount of principal being borrowed, the stated rate of interest is needed as it determines the amount of interest payments to be made annually, the market rate of interest is needed as it determines the present value of future cash flows, and the bond life is needed as it determines the number of interest payments to be made. The bond rating and purpose of the issue are not relevant in determining the selling price.

Question 7

Which of the following statements is correct?
A)Bonds are issued at a price that reflects the stated rate of interest on the day the bond is purchased.
B)If the face rate of interest on a bond is not equal to the market rate of interest, then the company desiring to issue the bonds must reprint its bond certificates.
C)The actual issue price of a bond represents the present value of all future cash flows related to the bond.
D)The market rate of interest has no bearing on the selling price of the bonds.

Accepted Answer

The issue price of a bond is determined by calculating the present value of all future cash flows related to the bond, using the market rate of interest as the discount rate. Therefore, statement A is incorrect as the stated rate of interest on the bond is just one factor that determines the issue price. Statement B is incorrect as the company does not need to reprint the bond certificates; they can simply sell the bonds at a price that reflects the market rate of interest. Statement D is incorrect as the market rate of interest is a key factor in determining the issue price of the bond.

Question 8

Which of the following statements regarding serial bonds is true?
A)They are likely to be issued by food companies.
B)They have shorter lives than term bonds.
C)They are strongly backed by the issuer's collateral.
D)The bonds do not all mature on the same date.

Accepted Answer

Serial bonds do not all mature on the same date. Instead, they are issued with staggered maturities so that a portion of the bond issue matures at different intervals, usually annually or semi-annually. This allows the issuer to pay off smaller portions of the debt over time rather than one large lump sum at the end of the bond term.

Question 9

If a company's bonds are callable,
A)the investor or buyer of the bonds has the right to retire the bonds.
B)the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the market rate of interest is 6%.
C)the bonds are never allowed to remain outstanding until the maturity date.
D)the investor never knows what the redemption price will be until the bonds are actually called.

Accepted Answer

If a company's bonds are callable, it means that the issuing company has the right to retire the bonds before maturity. This is usually done when the bonds are paying a higher interest rate than the prevailing market rate of interest. In such a scenario, it makes sense for the company to retire the bonds and issue new bonds at a lower interest rate. Therefore, if the bonds are paying 9% interest while the market rate of interest is 6%, the issuing company is likely to retire the bonds before maturity.

Question 10

When bonds are issued by a company, the accounting entry shows an
A)increase in liabilities and a decrease in stockholders' equity.
B)increase in liabilities and an increase in stockholders' equity.
C)increase in assets and an increase in liabilities.
D)increase in assets and an increase in stockholders' equity.

Accepted Answer

When a company issues bonds, it receives cash (an asset) in exchange for taking on the obligation to pay back the bondholders in the future, which is recorded as a liability. This transaction increases both assets and liabilities on the balance sheet.

Question 11

Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company.If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
A)$ 60,000
B)$120,000
C)$ 30,000
D)$ 6,000

Accepted Answer

The total interest paid over the life of the bonds is calculated by multiplying the face value ($100,000) by the annual interest rate (6%), and then by the number of years (10). Since interest is paid semiannually, the annual interest of $6,000 is paid twice a year, resulting in $12,000 paid annually for 10 years, totaling $120,000. However, the question asks for the total amount of interest, not the total payments, which includes the principal. The correct calculation for just the interest is $6,000 * 10 = $60,000.

Question 12

A ten-year lease obligation appears on the balance sheet of Generic Products Company.How would it most likely be classified on the balance sheet?
A)Current asset
B)Long-term liability
C)Long-term asset
D)Contra-liability

Accepted Answer

A ten-year lease obligation is a long-term liability because it represents a debt that will not be paid off within the current year or operating cycle.

Question 13

Crystal, Inc.issued $41,000,000 of bonds.Assuming the most common denomination of bonds, the number of bonds sold was
A)41,000.
B)410,000.
C)4,100,000.
D)41,000,000.

Accepted Answer

The most common denomination of bonds is $1,000. Therefore, the number of bonds sold would be $41,000,000/$1,000 = 41,000.

Question 14

Rent owed to the landlord is a balance sheet item for Generic Products Company.How would it most likely be classified on the balance sheet?
A)Current liability
B)Long-term liability
C)Current asset
D)Owners' equity

Accepted Answer

Rent owed to the landlord represents a current liability since it is a debt that must be paid within one year. Current liabilities are listed under the liabilities section of the balance sheet.

Question 15

Bennington Corp.issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually.How much cash will the bond investors receive at the end of the first interest period?
A)$ 800
B)$1,600
C)$3,200
D)$4,000

Accepted Answer

The semiannual interest payment on a $40,000, 8% bond is:
($40,000 x 8%)/2 = $1,600
Therefore, the bond investors will receive $1,600 in cash at the end of the first interest period. Answer B is correct.

Question 16

Which of the following items should not appear in the long-term liability section of the balance sheet?
A)Accrued income taxes
B)Deferred income taxes
C)Bonds payable
D)Pension obligations

Accepted Answer

Accrued income taxes are a current liability and should not appear in the long-term liability section of the balance sheet.

Question 17

The current portion of long-term debt is a balance sheet item for Flavorful Products Company.How would it most likely be classified on the balance sheet?
A)Current liability
B)Long-term liability
C)Current asset
D)long-term liability

Accepted Answer

The current portion of long-term debt is the portion of long-term debt that is due within the next 12 months, so it is considered a current liability on the balance sheet.

Question 18

Which of the following statements is true with respect to long-term liabilities?
A)They are obligations that will be satisfied within one year.
B)An account payable is a good example of a long-term liability because it is interest-bearing.
C)Long-term liabilities include bonds, other long-term liabilities and deferred income taxes.
D)Accrued expenses are considered to be long-term liabilities.

Accepted Answer

Long-term liabilities include obligations that will not be satisfied within one year, such as bonds, other long-term liabilities, and deferred income taxes. An account payable is typically considered a current liability and accrued expenses can be either current or long-term depending on when they will be satisfied.

Question 19

The bond issue price is determined by calculating the
A)present value of the stream of interest payments and the future value of the maturity amount.
B)future value of the stream of interest payments and the future value of the maturity amount.
C)future value of the stream of interest payments and the present value of the maturity amount.
D)present value of the stream of interest payments and the present value of the maturity amount.

Accepted Answer

The bond issue price is determined by calculating the present value of the stream of interest payments and the present value of the maturity amount. This is because the value of the bond represents the present value of the future cash flows (interest payments and maturity amount) discounted at the market rate of interest. Therefore, option D is the correct choice.

Question 20

Which of the following statements regarding bonds payable is true?
A)Generally, bonds are issued in denominations of $100.
B)When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser.
C)A debenture bond is backed by specific assets of the issuing company.
D)Most bonds are term bonds, meaning that the entire principal amount will mature on a single date.

Accepted Answer

Most bonds are term bonds, meaning that the entire principal amount will mature on a single date. Choices A, B, and C are incorrect because bonds can be issued in different denominations, the issuing company does not receive proceeds from secondary market trading, and debenture bonds are not backed by specific assets.

Quiz 10: Long-Term Liabilities

On January 2, 2015, Roof Master Construction, Inc.issued $500,000, 10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.At the maturity date, besides an interest payment, Roof Master would repay the bondholders

A convertible bond is one where

Convertible bonds are attractive to investors because

Bonds are a popular source of financing because

When determining the amount of interest to be paid on a bond, which of the following information is not necessary?

Micro Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year.The market rate of interest is currently 5%.What information is needed in order to determine the selling price?

Which of the following statements is correct?

Which of the following statements regarding serial bonds is true?

If a company's bonds are callable,

When bonds are issued by a company, the accounting entry shows an

Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company.If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

A ten-year lease obligation appears on the balance sheet of Generic Products Company.How would it most likely be classified on the balance sheet?

Crystal, Inc.issued $41,000,000 of bonds.Assuming the most common denomination of bonds, the number of bonds sold was

Rent owed to the landlord is a balance sheet item for Generic Products Company.How would it most likely be classified on the balance sheet?

Bennington Corp.issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually.How much cash will the bond investors receive at the end of the first interest period?

Which of the following items should not appear in the long-term liability section of the balance sheet?

The current portion of long-term debt is a balance sheet item for Flavorful Products Company.How would it most likely be classified on the balance sheet?

Which of the following statements is true with respect to long-term liabilities?

The bond issue price is determined by calculating the

Which of the following statements regarding bonds payable is true?