Question 1

Twenty-year bonds with a face value of $400,000 are issued on January 1 of the current year at 102.How much premium will be amortized under the straight-line method in the first semi-annual interest period?

Accepted Answer

The premium on the bonds is $8,000 ($400,000 x 102% - $400,000). Under the straight-line method, the premium is amortized over the life of the bonds, which is 20 years. Therefore, the premium amortization for the first semi-annual interest period is $8,000 / 40 = $200.

Question 2

A company issued 10-year,6% bonds with a par value of $1,000,000.The company received $960,000 upon issuance.Using the straight-line method,the amount of interest expense for the first semi-annual interest period is:

Accepted Answer

The bond discount is $40,000 ($1,000,000 - $960,000). Over 10 years, or 20 semi-annual periods, the discount amortization per period is $2,000 ($40,000/20). The cash interest payment is $30,000 (6% of $1,000,000 / 2). Therefore, the interest expense is $32,000 ($30,000 + $2,000).

Question 3

A bond sinking fund investment is started on January 5,2016,by transferring $10,000 in cash to the fund.This $10,000 is invested and earns $1,100 during 2016.The entry to record the earnings made on the sinking fund investment includes

Accepted Answer

The entry should reflect the earnings made on the sinking fund investment, which is a debit to Bond Sinking Fund Investment for $1,100 (reflecting the increase to the asset) and a credit to Income from Sinking Fund Investment for $1,100 (reflecting the earnings made on the investment). Choice A is incorrect because it incorrectly directly reduces cash, whereas the sinking fund investment is a separate asset. Choice B is incorrect as it does not account for the earnings made on the investment. Choice D is incorrect as it incorrectly records the income as Interest Income instead of Income from Sinking Fund Investment.

Question 4

If market interest rates are higher than the rate offered on the bonds being sold,they will be sold at

Accepted Answer

If market interest rates are higher than the rate offered on the bonds being sold, investors will require a higher rate of return than the bond's coupon rate. This means the bond will be less attractive to investors and the bond issuer may need to sell it at a lower price (discount) in order to entice buyers.

Question 5

Retained earnings are often appropriated while the bonds are outstanding.Which of the following is a reason for the appropriation?

Accepted Answer

Appropriating retained earnings helps to protect the bondholders by ensuring that the corporation has enough funds to meet its obligations to bondholders, including interest and principal payments. It demonstrates the corporation's commitment to the financial security of its bondholders and reduces the risk of default. It is not necessarily required by bond underwriters, tax law, or buyers.

Question 6

Corporations with many bondholders will open a separate checking account because

Accepted Answer

The answer of Corporations with many bondholders will open a...

Question 7

The difference between the face value and the selling price of a 10-year discounted bond issued two years after authorization,is amortized for

Accepted Answer

The difference between the face value and the selling price of a discounted bond is called a discount. In this case, since the bond was issued two years after authorization, the discount must be amortized over the remaining 8 years until maturity. This is done by gradually increasing the bond's carrying value on the balance sheet through adjusting entries for the discount amortization. Therefore, option B is the correct answer.

Question 8

A bond sinking fund investment is started on January 5,2016,by transferring $12,000 in cash to the fund.The company intends to accumulate $12,000 each year in the fund.This $12,000 is invested and earns $1,500 during 2016.On January 5,2017,the amount of cash transferred to the sinking fund investment will be

Accepted Answer

The answer of A bond sinking fund investment is started...

Question 9

Bonds issued at a premium are

Accepted Answer

Bonds issued at a premium are sold for more than face value. This means that the bond's price is higher than its nominal or face value. The premium reflects the value that investors place on the bond's features, such as its maturity date or interest rate. Bond issuers typically sell bonds at a premium when market interest rates are lower than the bond's coupon rate, making the bond more appealing to investors.

Question 10

Bonds with a face value of $400,000 were issued at 98.The entry to record the issuance will include a debit to the Cash account for

Accepted Answer

Issuing bonds at 98 means they were issued at 98% of their face value. Therefore, $400,000 * 0.98 = $392,000, which is the amount of cash received.

Question 11

The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are

Accepted Answer

Registered bonds are ones where the corporation maintains a record of bond ownership, so they know who is entitled to receive interest payments.

Question 12

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

Accepted Answer

Retained Earnings Appropriated for Bond Retirement is a part of the equity section of the Balance Sheet, specifically under the retained earnings account. It represents funds that have been set aside for the specific purpose of retiring outstanding bonds.

Question 13

In the interest formula I = Prt,the P stands for

Accepted Answer

In the interest formula, "P" stands for principal, which is the initial amount of money borrowed or invested.

Question 14

On April 1,Fifedom,Inc.repurchased its $100,000 10-year,9% bonds on the open market at 107.The bond's carrying value after accruing interest was $98,000 at the time of repurchase.The gain/loss on early retirement of the bonds is:

Accepted Answer

The repurchase price of the bonds is $107,000 (107% of $100,000). The carrying value of the bonds is $98,000, which means there is a gain of $9,000 ($107,000 - $98,000). However, since the bonds are being retired early, there is also a loss equal to the remaining unamortized premium on the bonds. The premium on the bonds is $2,000 ($100,000 bond issue x 9% coupon rate x 3/12 = $2,250; $107,000 - $2,250 = $104,750 - $98,000 = $6,750). Therefore, the net loss on the early retirement of the bonds is $9,000 - $2,000 = $7,000.

Question 15

Using borrowed funds to earn a profit higher than the interest charged for borrowing is called

Accepted Answer

Leveraging is the practice of using borrowed money (often referred to as leverage) to make an investment and multiply its potential returns. By using leverage, investors can potentially realize higher profits than if they invested using only their own money.

Question 16

The amortization of the bond discount __________ the carrying value of the bond,while the amortization of the bond premium __________ the carrying value of the bond.

Accepted Answer

The amortization of the bond discount increases the carrying value of the bond because it reduces the discount over time, bringing the bond's book value closer to its face value. Conversely, the amortization of the bond premium decreases the carrying value of the bond as it reduces the premium over time, also bringing the bond's book value closer to its face value.

Question 17

A company issued 10-year,6% bonds with a par value of $1,000,000.The company received $1,120,000 upon issuance.Using the straight-line method,the amount of interest expense for the first semi-annual interest period is:

Accepted Answer

The correct answer is A.The amount of interest expense for the first semi-annual interest period is $24,000. This is calculated by multiplying the par value of the bonds by the annual interest rate and dividing by 2 (since the interest is paid semi-annually).

Question 18

When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds,the bonds are referred to as

Accepted Answer

Callable bonds can be redeemed by the issuing corporation prior to the maturity date, giving the corporation the right to require owners to surrender the bonds for payment.

Question 19

The entry to record the issuance of bonds at face value includes

Accepted Answer

When bonds are issued at face value, there is no premium or discount to be recorded. The entry to record the issuance includes a debit to Cash and a credit to Bond Payable, which represents the face value of the bonds. There is no entry required for Bond Interest Payable or Bond Interest Expense at this point. The interest expense will be recorded over the life of the bonds as interest payments are made.

Question 20

If a bond is a registered bond,it can NOT be a ___________ bond.

Accepted Answer

The answer of If a bond is a registered bond,it...

Quiz 22: Long-Term Bonds