Question 1

Bonds are sold at a premium if the

Accepted Answer

Bonds are sold at a premium when the market rate of interest is less than the face rate at the time of issue. This means that investors are willing to pay more for a bond that offers a higher interest rate than what they can currently get in the market, resulting in the bond being sold at a premium.

Question 2

Bennington Corp.issued a $40,000,ten-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?

Accepted Answer

The semiannual interest payment on a $40,000, 8% bond is calculated as follows:

$40,000 x 8% x 6/12 = $1,600

Therefore, bond investors will receive $1,600 in cash at the end of the first interest period.

Question 3

On the issuance date,the Bonds Payable account had a balance of $50,000,000 and Premium on Bonds Payable had a balance of $1,000,000.What was the issue price of the bonds in dollars?

Accepted Answer

The issue price of bonds can be found by adding the Bonds Payable account balance and the Premium on Bonds Payable balance. Therefore, issue price of bonds = Bonds Payable account balance + Premium on Bonds Payable balance = $50,000,000 + $1,000,000 = $51,000,000. Hence, the answer is option C.

Question 4

If bonds are issued at 101.25,this means that

Accepted Answer

When bonds are issued at 101.25, it means that a $1,000 bond is sold for $1,012.50 (101.25% of the face value).

Question 5

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

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

Which of the following terms does not describe an interest rate used to calculate the interest expense on the income statement?

Accepted Answer

The nominal rate, also known as the stated or coupon rate, does not directly describe an interest rate used to calculate the interest expense on the income statement. Instead, the effective rate, market rate, or yield rate, which take into account the actual cost of borrowing, are used for such calculations.

Question 7

When bonds are sold for less than the face amount,this means that the

Accepted Answer

When bonds are sold for less than the face amount, it indicates that the interest rate offered by the bonds is lower than the prevailing market interest rates, leading investors to pay less for these bonds to achieve a yield that is competitive with current market rates.

Question 8

The Premium on Bonds Payable account is shown on the balance sheet as a(n)

Accepted Answer

The Premium on Bonds Payable account represents the amount paid by investors above the face value of the bonds. This amount is added to the long-term liability of the bonds because it increases the amount owed by the company to the bondholders. Therefore, the correct choice is C, addition to a long-term liability.

Question 9

The Discount on Bonds Payable account is shown on the balance sheet as a(n)

Accepted Answer

The Discount on Bonds Payable account is a contra long-term liability account, meaning it reduces the value of the Bonds Payable account. Therefore, it is shown as a deduction from the Bonds Payable account on the balance sheet, which is a long-term liability.

Question 10

Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%.This means that the bonds were issued

Accepted Answer

When the coupon rate is less than the market rate, it means the bonds were issued at a discount. In this case, the coupon rate is 6% and the market rate is 9%, which indicates that the bonds were issued at a discount.

Question 11

Churchill Company planned to raise $100,000 by issuing bonds.The bond certificates were printed bearing an interest rate of 8%,which was equal to the market rate of interest at the time.However,before the bonds could be issued,economic conditions forced the market rate up to 9%.If the life of the bonds is six years and interest is paid annually on December 31,how much will Churchill receive from the sale of the bonds?

Accepted Answer

When the market rate of interest increases above the face rate, the value of the bonds decreases. Therefore, investors would be willing to pay less than the face value of $100,000 in order to receive an 8% return when the market is offering a 9% return. Therefore, Churchill will receive less than $100,000.

Question 12

Which of the following statements about bonds is correct?

Accepted Answer

The cash interest paid on bonds is calculated as the bond face value multiplied by the face rate of interest. The effective rate of interest takes into account any premium or discount on the bonds, whereas the face rate of interest does not. Additionally, choice C is incorrect because the difference between the cash interest paid and the interest expense is subtracted from the carrying value of the bonds if the bonds were sold at a premium, not added. Choice D is incorrect because the difference between the interest expense and the interest paid is added to the carrying value of the bonds if the bonds were sold at a discount, not deducted.

Question 13

Which of the following statements is correct?

Accepted Answer

The actual issue price of a bond represents the present value of all future cash flows related to the bond, including both the principal amount and the periodic interest payments. This calculation is based on the market rate of interest at the time of issuance, not the stated rate of interest on the bond. Therefore, statement A is incorrect. Statement B is also incorrect, as the company can simply adjust the stated rate of interest to align with the market rate without reprinting the certificates. Statement D is incorrect, as the market rate of interest is a major factor in determining the selling price of bonds.

Question 14

Use the information provided in the time value of money tables (Tables 9-1 through 9-4)in the text to answer the question that follows.  
-
Global Company issued $1,000,000,8%,seven-year bonds,interest payable semiannually.The market rate of interest was 6%.The issuance price of the bonds is

Accepted Answer

The answer of Use the information provided in the time...

Question 15

Which of the following trends can be unfavorable from the viewpoint of a bondholder?

Accepted Answer

If market interest rates are steadily rising, the value of existing bonds with lower coupon rates will decrease, resulting in a loss for bondholders if they sell their bonds before maturity. A declining debt ratio, rising interest coverage ratio, and increasing net cash flow from operating activities are usually favorable trends from the viewpoint of a bondholder.

Question 16

Fox Chapel Company wishes to issue $400,000 of five-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?

Accepted Answer

To determine the selling price of bonds, the essential information needed includes the face amount of the bonds ($400,000), the stated rate of interest (6%), the market rate of interest (5%), and the bond life (five years). The bond rating and the purpose of the issue are not required for calculating the selling price.

Question 17

Flagg Company issued $500,000 of bonds for $498,351.Interest is paid semiannually.The bond markets and the financial press are likely to state the bond issue price as

Accepted Answer

The bond was issued for $498,351 which is less than the face value of $500,000. The market price is typically stated as a percentage of the face value. To calculate this percentage, we need to divide the issue price by the face value and multiply by 100.

Market price = issue price / face value * 100

Market price = $498,351 / $500,000 * 100

Market price = 99.67%

Therefore, the bond issue price is likely to be stated as 99.67 in financial press and markets.

Question 18

The bond issue price is determined by calculating the

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 present value represents the discounted value of future cash flows, taking into account the time value of money. By discounting the cash flows back to the present, the bond issue price can be determined.

Question 19

All of the following refer to the face rate of interest on a bond except

Accepted Answer

The stated rate, nominal rate, and coupon rate all refer to the face rate of interest on a bond. The effective rate, however, takes into account any additional fees or costs associated with the bond and reflects the true rate of return for the investor.

Question 20

Which of the following terms does not describe the interest rate printed on the bond certificate?

Accepted Answer

The term "Effective rate" is not used to describe the interest rate printed on the bond certificate. The coupon rate is the interest rate stated on the bond certificate, while the face rate and stated rate are synonyms for the same thing. The effective rate refers to the actual rate earned by the investor, which takes into account factors such as compounding and reinvestment of coupon payments.

Quiz 10: Long-Term Liabilities