Question 1

If bonds are issued at a discount, it means that the

Accepted Answer

When bonds are issued at a discount, it means the market interest rate is higher than the contractual interest rate. This causes the bonds to sell for less than their face value to make them more attractive to buyers, who can earn a higher return through the market's prevailing rates.

Question 2

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2011, for $104,200. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2011, is

Accepted Answer

The bond premium of $4,200 is amortized over 10 periods (5 years semiannually), resulting in $420 amortized per period. The semiannual interest payment is $5,000 ($100,000 * 10% / 2). Therefore, the bond interest expense is $5,000 - $420 = $4,580.

Question 3

Sinking Fund Investments would be classified on the balance sheet as

Accepted Answer

Sinking fund investments are long-term investments and should be classified as non-current or long-term investments on the balance sheet.

Question 4

On January 1, 2014, $1,000,000, 5-year, 10% bonds, were issued for $980,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is

Accepted Answer

The answer of On January 1, 2014, $1,000,000, 5-year, 10%...

Question 5

The Victor Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

Accepted Answer

The answer of The Victor Corporation issues 1,000, 10-year, 8%,...

Question 6

If bonds payable are not callable, the issuing corporation

Accepted Answer

If bonds payable are not callable, the issuing corporation cannot exchange them for common stock or repurchase them directly from the bondholders. However, they can repurchase them in the open market like any other investor. The corporation does not need special permission from the SEC to repurchase bonds payable. The interest rates increasing does not necessarily make it more likely for the corporation to repurchase them.

Question 7

Sinking Fund Cash would be classified on the balance sheet as

Accepted Answer

Sinking Fund Cash is classified as an investment on the balance sheet because it is set aside to pay off debt or bonds in the future, rather than being used for current operations.

Question 8

The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should be classified on the balance sheet as

Accepted Answer

Sinking funds are classified as investments on the balance sheet because they are set aside to pay off debt in the future, not for immediate use.

Question 9

If bonds are issued at a premium, the stated interest rate is

Accepted Answer

Bonds are issued at a premium when the stated interest rate is higher than the market rate of interest. This means that investors are willing to pay more than the face value of the bond because they are receiving a higher interest rate than they could get elsewhere.

Question 10

When callable bonds are redeemed below carrying value

Accepted Answer

The answer of When callable bonds are redeemed below carrying...

Question 11

If the market rate of interest is greater than the contractual rate of interest, bonds will sell

Accepted Answer

If the market rate of interest is greater than the contractual rate of interest, investors will demand a higher rate of return, resulting in lower bond prices. This means the bonds will sell at a discount.

Question 12

The interest expense recorded on an interest payment date is increased

Accepted Answer

The interest expense recorded on an interest payment date is increased by the amortization of discount on bonds payable. This is because the bond was sold for less than face value, and the difference between the face value and the issue price is accounted for as a discount. The discount is amortized over the life of the bond, and a portion of it is included in the interest expense recorded on each interest payment date.

Question 13

The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)

Accepted Answer

The special fund set aside for the payment of bonds at maturity is called a sinking fund. This fund is specifically dedicated to paying off the bonds and is kept separate from the issuer's other assets.

Question 14

Bonds with a face amount $1,000,000, are sold at 108. The entry to record the issuance is

Accepted Answer

The face amount of the bond is $1,000,000, but it was sold at a premium (108% of face value), which means the company received $1,080,000 (1,000,000 x 1.08). The entry to record this issuance is to debit Cash for $1,080,000 and credit Bonds Payable for $1,000,000, and credit Premium on Bonds Payable for $80,000 (the difference between the cash received and the face value of the bonds). Therefore, Choice B is the correct entry to record the issuance.

Question 15

The Reagan Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 92. The journal entry to record the issuance will show a

Accepted Answer

The bonds are issued at 92, meaning 92% of the face value. The credit to Bonds Payable should be for the face value of the bonds, which is $1,000,000.

Question 16

Sinking Fund Income is reported in the income statement as

Accepted Answer

Sinking Fund Income is typically reported as "other income" on the income statement, as it is not directly related to the primary operations of the business.

Question 17

Selling the bonds at a premium has the effect of

Accepted Answer

The answer of Selling the bonds at a premium has...

Question 18

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount

Accepted Answer

The bond's coupon rate (12%) is higher than the market rate (10%), so it would sell at a premium, meaning greater than face value.

Question 19

The Miracle Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

Accepted Answer

The bonds are issued at 96, meaning 96% of the face value. The discount is $40,000 (4% of $1,000,000), which is debited to Discount on Bonds Payable.

Question 20

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?

Accepted Answer

The answer of Bonds Payable has a balance of $1,000,000...

Quiz 14: Long-Term Liabilities: Bonds and Notes