Deck 14: Bonds and Long-Term Notes Payable

Question 1

When a company sells its bonds on a date other than an interest payment date, the purchasers always pay the issuer a premium.

Answer 1

False

Question 2

Debentures are secured debt.

Answer 2

False

Question 3

A bond is a written promise to pay an amount identified as the par value of the bond along with interest at a stated annual rate.

Answer 3

True

Question 4

A bond's par value is the same as market value.

Question 5

Both interest paid on bonds and dividends paid on shares are tax-deductible.

Question 6

An advantage of bond financing is that interest does not have to be paid.

Question 7

Bonds with a par value of $100,000, which pay 9% annual interest and pay interest on June 30 and December 31, were sold on July 31 at par value. The issuer will receive$100,750 cash for the sale of the bond.

Question 8

Bonds must be issued on an interest payment date.

Question 9

In the event of bankruptcy, owners of secured bonds receive their share of the firm's assets as payment before the owners of other unsecured debt.

Question 10

An advantage of bond financing is that it does not affect shareholder control.

Question 11

Bond interest rates change as the market rate of interest changes.

Question 12

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Question 13

A corporation can reserve the right to retire bonds early by issuing callable bonds.

Question 14

Interest paid on bonds is not tax-deductible.

Question 15

Owners of coupon bonds are not required to pay income tax on the interest received.

Question 16

Accrued interest is paid on bonds that are issued between interest dates.

Question 17

If a bond's interest period does not coincide with the issuing corporation's accountingperiod, an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Question 18

Bondholders can exchange convertible bonds for a fixed number of the issuing corporation's preferred shares.

Question 19

A bond issue with a $100,000 par value, an 8% annual contract rate, with interestpayable semiannually and a 10-year life means that the issuer must repay $100,000 at the end of 10 years plus make 20 payments of $4,000.

Question 20

Debentures have specific assets of the issuing corporation pledged as collateral.

Question 21

A discount on bonds payable arises when a corporation issues bonds with an issue price less than par value.

Question 22

An annuity is a series of varying payments occurring at different time intervals throughout a bonds life.

Question 23

When graphing the amount of interest paid over time and the amount of interestexpensed over time, the lines are parallel if the effective interest amortization method is used.

Question 24

Two common ways for the issuing corporation to retire bonds before maturity are to 1) exercise a convertible option or 2) purchase them on the open market.

Question 25

If a bond is issued at a premium, interest expense will decrease over the term of the bond.

Question 26

Any discount is added to the par value of bonds to produce the carrying value of bonds payable.

Question 27

When graphing the carrying value of a premium bond vs the par value of a premium bond, the lines intersect at the maturity date of the bond.

Question 28

A corporation must buy back its callable bonds through open market transactions.

Question 29

The effective interest method allocates bond interest expense over the life of the bonds in a way that yields a constant rate of interest.

Question 30

When the contract rate is above the market rate, a bond sells at a discount.

Question 31

The issue price of a bond is equal to the present value of all future cash payments to be received from the bond.

Question 32

For bonds issued at a premium, the effective interest method yields increasing amounts of bond interest expense and decreasing amount of premium amortization over thebond's life.

Question 33

IFRS recommendations require that corporations use the effective interest method for amortization of bond discounts.

Question 34

Tab Skates Ltd issued $100,000 worth of 5-year, 7% bonds and received proceeds of$96,909. The total bond discount would be $10,091.

Question 35

Discount on Bonds Payable is a contra liability account.

Question 36

To determine the discount on a bond the issuing value is deducted from the par value of the bonds.

Question 37

When convertible bonds are converted to common shares, the carrying value of the bonds is transferred to contributed capital.

Question 38

If a bond is issued at a premium, interest expense will increase over the term of the bond.

Question 39

A call option in a bond indenture gives the issuing corporation an option to call the bonds before they mature by paying the par value plus a call premium to thebondholders.

Question 40

The carrying value of a bond issued at a discount decreases over time.

Question 41

For a note requiring equal payments, each payment will consist of decreasing amounts of principal and increasing amounts of interest.

Question 42

SuperBowl Inc retired $200,000 par value) bonds with a carrying value of $203,492.The market value of the bonds was $202,500. The corporation recognized a loss on retirement of $2,500.

Question 43

Mortgage notes are backed by the good faith and credit of the issuing corporation.

Question 44

A finance lease obligation is a form of long-term liability.

Question 45

Computers "R" Us borrowed $40,000 for 2 years at 7%. The face value of the note is$45,600.

Question 46

According to IFRS, the lessee must report a leased asset as well as a lease liability if the lease qualifies as a finance lease.

Question 47

An installment note is an obligation requiring a series of periodic payments to the lender.

Question 48

On January 1, 2015, SuperBowl Inc signed a two-year, 7% $5,000 note payable. The note plus interest is due on December 31, 2016. The amount of interest expense to be recorded for 2015 is $375.

Question 49

In recording a finance lease, the lessee debits Lease Liability and credits Lease Payable.

Question 50

An operating lease is a lease agreement that transfers the risks and benefits associated with ownership to the lessee.

Question 51

For a note requiring equal payments, each payment will consist of increasing amounts of principal and decreasing amounts of interest.

Question 52

A note is initially measured and recorded at its selling price.

Question 53

If Cee Ltd borrows $50,000 by issuing a 6%, three-year note, the total interest to be paid will be $9,000.

Question 54

A common installment note payment pattern is equal interest payments over the life of the loan with the principal of the loan due at maturity.

Question 55

When bonds are issued, the carrying book) value is always the par value of the bond.

Question 56

A premium on bonds payable arises when the bonds carry a contract rate greater than the current market rate.

Question 57

Most mortgage contracts grant the lender the right to foreclose on the property used assecurity for the note if the borrower fails to pay in accordance with the terms of the debt agreement.

Question 58

A note which requires payments of accrued interest plus equal amounts of principal will have cash flows of equal amounts over the life of the note.

Question 59

Notes payable usually represent a transaction with a single lender.

Question 60

Payments on installment notes normally include interest accruing to the date of the payment plus a portion of the principal.

Question 61

Scott Corporation issued $1,000,000, 8% bonds, receiving a $30,000 premium. On the interest payment date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the openmarket at 95 and retired the issue. As a result, the gain on retirement was:

A) $18,000.
B) $12,000.
C) $13,000.
D) $130,000.
E) $68,000.

Question 62

Willa Inc issued $110,000, 9%, 5-year bonds. The current market rate was 9.5%. Willa received $106,000 for the bonds. Using the effective interest method, the amount ofinterest expense to be recorded for the first semiannual payment was:

A) $6,500,00.
B) $7,000.00.
C) $3,910.60.
D) $3,750.00.
E) $5,035.00.

Question 63

Kent Corporation has $100,000 in bonds outstanding. The unamortized premium on these bonds is $2,700. If the corporation redeems these bonds at 99, what is the gain loss) on retirement?

A) $1,000.
B) $2,700.
C) $2,700).
D) $1,000).
E) $3,700.

Question 64

Toopy Corp issues $650,000, 9%, 10-year bonds. The bonds trade at 105.5. The total amount of interest to be paid to the bondholders for the semiannual interest payments, assuming the effective interest method is used, is

A) $516,425.
B) $63,750.
C) $58,500.
D) $585,000.
E) $68,575.

Question 65

Prof Inc borrowed $200,000 from the bank and signed a 6-year note at 8%. The present value of an annuity factor for 6 years at 8% is 4.6229. To the nearest dollar, the annual payment is:

A) $33,333.
B) $45,827.
C) $41,960.
D) $28,599.
E) $43,263.

Question 66

Roarie Inc issued $200,000, 7%, 5-year bonds. The current market rate was 7.5%.Roarie received $197,947 for the bonds. Using the effective interest method, the amount of interest expense to be recorded for the first semiannual payment was:

A) $7,423.01.
B) $7,000.00.
C) $6,673.01.
D) $6,500.00.
E) $6,705.30.

Question 67

Sami Corporation borrowed $300,000 from the bank by signing a 5-year, 8%installment note. The present value of an annuity factor at 8% for 5 years is 3.9927. To the nearest dollar, the annual payment is:

A) $60,000.
B) $19,964.
C) $24,000.
D) $37,500.
E) $75,137.

Question 68

Mike Limited issues $200,000 of its 9% bonds at par on April 1, which is 4 months after the original issue date. How much interest should Mike collect from the buyer?

A) $3,000.
B) $1,500.
C) $5,250.
D) $750.
E) $6,000.

Question 69

On January 1, Gary Corporation signs a 6-year lease, which requires annual payments of $51,000 on December 31. The lease meets the requirements of a finance lease.Assuming an interest rate of 5%, calculate the value of the Lease Liability after the first payment.

A) $258,861.
B) $220,804.
C) $138,543.
D) $106,941.
E) $110,834.

Question 70

Cheryl Inc issued $100,000, 8%, 5-year bonds. The current market rate was 7.5%. Cheryl received $101,136.80 for the bonds. Using the effective interest method of amortizing bond premium or discount, the amount of interest expense for the first semiannual payment was:

A) $3,386,32.
B) $3,500.00.
C) $4,250.00.
D) $3,136.32.
E) $3,792.63.

Question 71

Amortization of a bond discount:

A) Increases the Bonds Payable account.
B) Decreases the Bonds Payable account.
C) Allocates the amount of the discount over the life of the bond.
D) Creates a Discount Payable account.
E) None of these answers is correct.

Question 72

A lease:

A) May be operating or finance.
B) Gives the lessee exclusive control over an asset's usefulness.
C) Is a series of payments to property owners in exchange for use of the property.
D) Allows a lessor to earn revenues from a rental property.
E) All of these answers are correct.

Question 73

How much interest expense should DuMont report for the lease on its 2018 income statement?

A) $19,000
B) $14,000
C) $1,900
D) $15,900
E) NONE

Question 74

How much depreciation expense should DuMont report for the lease on its 2018 income statement?

A) $15,900
B) $8,833
C) $8,722
D) $7,476
E) $7,850

Question 75

Majeau Tri Ltd bought display racks with a fair market value of $150,000. The corporation signed a 3-year interest-bearing note at 8%. The entry to record the transaction would include:

A) A debit to Interest Expense for $12,000.
B) A credit to Notes Payable for $39,692.
C) A credit to Notes Payable for $150,000.
D) A credit to Interest Payable for $400.
E) A debit to Notes Payable for $150,000.

Question 76

Jackson Corporation leased machinery under a finance lease arrangement with itslessee. At January 1, 2018, the first day of the lease, the asset and lease obligation were recorded for $68,000. The first lease payment of $13,276 was due December 31, 2018 and the interest rate they used in their calculations was 7%. The lease term was 10years. Which of the following best describes what would be reported on Jackson's statement of income for the year ending December 31, 2018?

A) $4,760 interest expense, $2,040 depreciation expense
B) $4,760 interest expense, $5,472 depreciation expense
C) $13,276 lease expense
D) $13,276 lease expense, $6,800 depreciation expense
E) $4,760 interest expense, $6,800 depreciation expense

Question 77

Jerrod Limited reported the following items on their Balance Sheet:

A) 1.96
B) 2.08
C) 1.78
D) 1.22
E) 1.98

Question 78

Paul Corporation has $100,000 in bonds outstanding. The unamortized discount on these bonds is $4,500. If the corporation redeems these bonds at 97, what is the gain loss) on retirement?

A) $1,500).
B) $3,000).
C) $1,500.
D) $3,000.
E) $4,500).

Question 79

On January 1, 2015, a $60,000, 6%, 6-year installment note payable is issued by the Terry Corporation. The note requires that $10,000 of principal plus accrued interest be paid at the end of each year December 31). The journal entry to record the secondannual payment would include:

A) A debit to Interest Expense for $3,000.
B) A debit to Notes Payable for $3,600.
C) A credit to Cash for $3,000.
D) A debit to Interest Expense for $3,600.
E) A credit to Cash for $3,600.

Question 80

The effective interest rate method:

A) Allocates bond interest expense using a constant interest rate.
B) Allocates a decreasing amount of interest expense over the life of a bond originally sold at a discount.
C) Allocates interest expense using the contract rate.
D) Allocates bond interest expense using a changing interest rate.
E) Allocates interest expense based on a constant carrying value.