Question 1

The Discount on Bonds Payable account is:
A)a contra account to Bonds Payable.
B)a miscellaneous revenue account.
C)an expense account.
D)expensed only at the bond's maturity.

Accepted Answer

Discount on Bonds Payable is a contra account to Bonds Payable.As a result,the balance in the Discount on Bonds Payable is subtracted from Bonds Payable to arrive at the carrying value of the bonds,which is reported on the balance sheet.

Question 2

The carrying value of bonds payable equals:
A)bonds payable minus any premium on bonds payable.
B)bonds payable minus any discount on bonds payable.
C)bonds payable plus any discount on bonds payable.
D)bonds payable plus accrued interest payable.

Accepted Answer

The carrying value of a bond equals its face value plus any premium or minus any discount.

Question 3

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value,the transaction will be recorded with a:
A)debit to Cash of $100,000 and a credit to Bonds Payable of $100,000.
B)debit to Bonds Payable of $100,000 and a credit to Cash of $100,000.
C)debit to Cash of $100,000 and a credit to Bonds Payable of $99,000 and to Premium on Bonds Payable of $1,000.
D)debit to Bonds Payable of $100,000 and a credit to Cash of $99,000 and to Premium on Bonds Payable of $1,000.

Accepted Answer

The journal entry to record the issuance includes a debit to Cash for $100,000 and a credit to Bonds Payable for $100,000 (or the total face value of the bonds of $1,000 × 100 bonds).

Question 4

Amortizing a bond premium will ________ the premium balance and ________ the carrying value of the bond so that when the bond matures the carrying value will ________ the face value.
A)decrease;increase;be greater than
B)increase;decrease;be greater than
C)decrease;increase;equal
D)decrease;decrease;equal

Accepted Answer

A premium represents the additional cash over the face value that was received at the time the bond was issued.It represents a reduced cost of borrowing,so it is amortized each period,resulting in interest expense that is less than the interest each period.This causes the premium to decrease each period until it reaches zero at the maturity date of the bonds.As a result,amortizing a bond premium will decrease the premium balance and decrease the carrying value of the bond so that when the bond matures the carrying value will equal the face value.

Question 5

When bonds are issued at a premium,the bond issuer receives more cash on the issue date than it repays at maturity.The difference,a premium,is a reduction in the cost of borrowing,which has to be:
A)amortized.
B)depreciated.
C)ignored.
D)capitalized.

Accepted Answer

The premium is amortized over the life of the bond.The premium represents the additional cash over the face value that was received at the time the bond was issued.It represents a reduced cost of borrowing,so it is amortized each period,resulting in interest expense that is less than the interest each period.

Question 6

The stated rate:
A)remains the same throughout the life of the bonds.
B)fluctuates depending on the perceived risk of the bonds.
C)equals the present value of the future interest payments.
D)depends on the price at which the bonds are issued.

Accepted Answer

The stated interest rate is the rate stated on the face of the bond that is used to compute interest payments.It does not change.

Question 7

ABC Company is in the process of issuing bonds.The bonds have a stated interest rate of 6%,which is 2% above the current market rate.What effect will the two interest rates have on the bond issue price?
A)The issue price will be above the bond's face value.
B)The issue price will be below the bond's face value.
C)The issue price will equal the bond's face value.
D)Cannot determine without knowing the face value.

Accepted Answer

The 6% interest rate makes the bond more attractive and investors are willing to pay more than face value.

Question 8

A bond discount is:
A)a result of the interest payments being less than the cost of borrowing.
B)essentially free money.
C)a result of the interest payments being more than the cost of borrowing.
D)reported on the income statement as a loss on the issuance of a bond.

Accepted Answer

The bond sold at a discount because the stated rate is lower than the market rate of interest.The discount represents an extra cost of borrowing,over and above each interest payment.For accounting purposes,we match the extra borrowing cost to the periods in which interest is recorded.This amortization causes the Interest Expense to be more than the interest payment and,at the same time,causes Discount on Bonds Payable to decrease each period.As the Discount on Bonds Payable decreases,the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date.

Question 9

The issue price of a bond is:
A)always equal to $1,000.
B)based on a present value calculation.
C)determined by the company issuing the bonds.
D)determined by the financial advisers.

Accepted Answer

The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond.Theoretically,the issue price is based on a mathematical calculation (called a present value)of both amounts.

Question 10

The Discount on Bonds Payable account is classified as a(n):
A)asset.
B)contra-liability.
C)expense.
D)contra-asset.

Accepted Answer

Discount on Bonds Payable is a contra account to Bonds Payable.As a result,the balance in the Discount on Bonds Payable is subtracted from Bonds Payable to arrive at the carrying value of the bonds,which is reported on the balance sheet.

Question 11

The issue price of each $1,000 bond that pays interest at 5% and has a bond price of 102.10 equals:
A)$1,021.
B)$1,050.
C)$950.
D)$1,000.

Accepted Answer

The bond price is quoted as a percentage of face value.In this case,investors were willing to pay 102.1% of face value,or $1,021 for each $1,000 bond (or $1,000 × 1.021).The stated interest rate does not enter into this calculation.

Question 12

Bondholders are willing to pay a premium to acquire a bond because the:
A)company has a low credit rating.
B)bond's stated interest rate is higher than the market interest rate.
C)bond's stated interest rate is lower than the market interest rate.
D)bond's stated interest rate is equal to the market interest rate.

Accepted Answer

A bond premium is the excess of its issue price over its face value.Buyers are willing to pay a premium for bonds because the features of the bond (e.g. ,a stated interest rate in excess of the market interest rate)are attractive to the buyers.

Question 13

A bond's issue price is the amount of money that a lender pays (and the company receives)when a bond is:
A)repaid.
B)in default.
C)issued.
D)sold from one investor to another investor.

Accepted Answer

The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond.

Question 14

A bond premium:
A)arises when interest payments are higher than the cost of borrowing.
B)is essentially free money.
C)arises when the interest payments are less than the cost of borrowing.
D)is reported on the income statement as a gain on the issuance of a bond.

Accepted Answer

A premium represents the additional cash over the face value that was received at the time the bond was issued.It represents a reduced cost of borrowing,so it is amortized each period,resulting in interest expense that is less than the interest each period.

Question 15

If ABC Company issues 100 of its $1,000 bonds at a price of 110,the journal entry to record the transaction includes a:
A)debit to Cash of $100,000.
B)credit to Premium on Bonds Payable of $10,000.
C)debit to Cash of $90,000.
D)debit to Discount on Bonds Payable of $10,000.

Accepted Answer

The journal entry to record the issuance includes a debit to Cash for $110,000 (or $1,000 × 100 × 110%),a credit to Bonds Payable for $100,000 (the face value of the bonds or $1,000 × 100),and a credit to Premium on Bonds Payable for $10,000 (or $110,000 − $100,000).

Question 16

The discount on a bonds payable becomes:
A)additional interest expense in only the year the bonds are issued.
B)additional interest expense over the life of the bonds.
C)a reduction in interest expense in only the year the bonds mature.
D)a reduction in interest expense over the life of the bonds.

Accepted Answer

If a bond promises to pay interest at a stated rate that is less than the market rate,no one will be willing to acquire the bond unless the company discounts it.The discount reduces the initial bond price for investors without changing the stated interest payments and the face value paid to them at maturity.In effect,a discount increases the return that bondholders earn on their initial investment.Or,in other words,the discount results in additional interest expense over the life of the bonds.

Question 17

The discount on a bond is ________ and ________ the discount each period.
A)depreciated;increases
B)expensed;increases
C)amortized;decreases
D)increased;credited to

Accepted Answer

The bond sold at a discount because the stated rate is lower than the market rate of interest.The discount represents an extra cost of borrowing,over and above each interest payment.For accounting purposes,we match the extra borrowing cost to the periods in which interest is recorded.This amortization causes the Interest Expense to be more than the interest payment and,at the same time,causes Discount on Bonds Payable to decrease each period.As the Discount on Bonds Payable decreases,the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date.

Question 18

On January 1,ABC,Inc. ,issued $100,000 of 10%,5-year bonds on January 1,2018,for $92,280.Interest is due semiannually.When ABC records the first interest payment,which will be greater the debit to Interest Expense or the credit to Cash?
A)The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.
B)The debit to Interest Expense will be less because the market rate is greater than the stated interest rate.
C)The debit to Interest Expense will be greater because the market rate is less than the stated interest rate.
D)The debit to Interest Expense will be lower because the market rate is less than the stated interest rate.

Accepted Answer

The bond sold at a discount because the stated rate is lower than the market rate of interest.The discount represents an extra cost of borrowing,over and above each interest payment.For accounting purposes,we match the extra borrowing cost to the periods in which interest is recorded.This amortization causes the Interest Expense to be more than the interest payment and,at the same time,causes Discount on Bonds Payable to decrease each period.(As a result,the debit to Interest Expense will be greater because it is based on the market rate. )As the Discount on Bonds Payable decreases,the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date.

Question 19

The premium on a bond is ________ and ________ each period.
A)depreciated;increases
B)expensed;increases
C)increased;credited
D)amortized;decreases

Accepted Answer

A premium represents the additional cash over the face value that was received at the time the bond was issued.It represents a reduced cost of borrowing,so it is amortized each period,resulting in interest expense that is less than the interest each period.This causes the premium to decrease each period until it reaches zero at the maturity date of the bonds.

Question 20

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ________ and a credit to ________.
A)Cash;Bonds Payable
B)Notes Payable;Cash
C)Cash;Bonds Receivable
D)Bonds Payable;Cash

Accepted Answer

The journal entry to record the issuance includes a debit to Cash for $100,000 and a credit to Bonds Payable for $100,000 (or the total face value of the bonds of $1,000 × 100 bonds).

Quiz 10: Liabilities

The Discount on Bonds Payable account is:

The carrying value of bonds payable equals:

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value,the transaction will be recorded with a:

Amortizing a bond premium will the premium balance and the carrying value of the bond so that when the bond matures the carrying value will the face value.

When bonds are issued at a premium,the bond issuer receives more cash on the issue date than it repays at maturity.The difference,a premium,is a reduction in the cost of borrowing,which has to be:

The stated rate:

ABC Company is in the process of issuing bonds.The bonds have a stated interest rate of 6%,which is 2% above the current market rate.What effect will the two interest rates have on the bond issue price?

A bond discount is:

The issue price of a bond is:

The Discount on Bonds Payable account is classified as a(n) :

The issue price of each $1,000 bond that pays interest at 5% and has a bond price of 102.10 equals:

Bondholders are willing to pay a premium to acquire a bond because the:

A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is:

A bond premium:

If ABC Company issues 100 of its $1,000 bonds at a price of 110,the journal entry to record the transaction includes a:

The discount on a bonds payable becomes:

The discount on a bond is and the discount each period.

On January 1,ABC,Inc. ,issued $100,000 of 10%,5-year bonds on January 1,2018,for $92,280.Interest is due semiannually.When ABC records the first interest payment,which will be greater the debit to Interest Expense or the credit to Cash?

The premium on a bond is and each period.

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to and a credit to .