Question 1

Johansen Company issued a bond at a discount. Which of the following shows how the issuance of the bonds affects the financial statements?

Accepted Answer

When a bond is issued at a discount, the amount of cash received from the issuance is less than the face value of the bond. This results in a decrease in both the company's assets (cash) and liabilities (bonds payable). Option B correctly shows the decrease in cash and the increase in bonds payable on the balance sheet, as well as the decrease in interest expense on the income statement due to the lower interest payments required on the discount bond. Option A only shows the decrease in cash, but does not reflect the corresponding increase in bonds payable. Option C shows an increase in cash, which is not accurate for a bond issued at a discount, and Option D only shows the decrease in interest expense without reflecting the decrease in cash or increase in bonds payable.

Question 2

North Woods Company has a line of credit with Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows:  What is the amount of interest paid at the end of March?

Accepted Answer

The answer of North Woods Company has a line of...

Question 3

Spokane Company called in bonds at a price that was above the carrying value of the bond liability. Which of the following shows how this event will affect the financial statements?

Accepted Answer

The answer of Spokane Company called in bonds at a...

Question 4

Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

Accepted Answer

Registering the names and addresses of the bondholders with the bond issuer is not a commonly included restrictive covenant in bond indentures. This information may be collected in order to communicate with bondholders or for other administrative purposes, but it does not directly reduce risk to the investor. The other three options are common restrictive covenants that are included in bond indentures to reduce risk to the investor. Restrictions on increases in executive salaries, restrictions on additional borrowing activities, and limitations on the payment of dividends are all common restrictive covenants included in bond indentures to reduce risk to the investor. However, requiring that the names and addresses of the bondholders be registered with the bond issuer is not typically included as a restrictive covenant in bond indentures.

Question 5

Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?

Accepted Answer

When the market rate of interest is lower than the stated rate of interest,bonds will sell at a premium so as to reduce the effective rate to the market rate.On the other hand,when the market rate of interest is higher than the stated rate of interest,bonds will sell at a discount so as to increase the effective rate of interest to the market rate.

Question 6

On January 1, Year 1, Bluestone Company issued bonds with a face value of $500,000 at 90. How will this transaction affect Bluestone Company's cash account?

Accepted Answer

The bonds were issued at 90, meaning 90% of the face value. Therefore, the cash received is 90% of $500,000, which is $450,000.

Question 7

What is another term used to describe unsecured bonds?

Accepted Answer

Debentures are a type of bond that is not backed by any collateral or assets. This makes them unsecured, meaning that if the issuer defaults on the bond, there is no asset for bondholders to seize in order to recover their investment. Therefore, debentures are another term used to describe unsecured bonds. Discount bonds are bonds that are sold at a price below their face value, while coupon bonds have fixed interest payments. Par value bonds are bonds that are issued at their face value. Unsecured bonds are also known as debentures, which are not backed by any collateral or security. Option A, discount bonds, refers to bonds sold below their face value. Option B, coupon bonds, refers to bonds that pay a fixed interest rate at regular intervals. Option D, par value bonds, refers to bonds that are issued and traded at their face value.

Question 8

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

Accepted Answer

A mortgage bond requires a pledge of a designated piece of property as collateral in case of default. A debenture bond is not secured by any specific property, an indenture bond is a legal agreement between the issuer and the bondholders, and a registered bond is one where the issuing company maintains records of the ownership of the bond. Mortgage bonds require a pledge of a designated piece of property, usually land or buildings, as collateral in case of default. Debenture bonds do not have any collateral backing and rely on the issuer's creditworthiness, while indenture bonds refer to the legal agreement between the issuer and the bondholders. Registered bonds are simply bonds that are registered in the name of the holder, rather than being held in bearer form.

Question 9

Which of the following describes the characteristics of a convertible bond?

Accepted Answer

A convertible bond is a type of bond that can be converted into a predetermined number of shares of the issuer's common stock at the discretion of the bondholder. Therefore, choice B correctly describes the characteristics of a convertible bond. Choices A, C, and D describe characteristics of regular bonds, which do not have the option of converting into stock. Convertible bonds are bonds that can be converted into a specific number of shares of stock at the discretion of the bondholder. They typically have a lower interest rate than non-convertible bonds to compensate for the added potential equity value.

Question 10

Franklin Company obtained a $85,000 line of credit from State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 1% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month.  What is the amount of interest expense recognized in March? (Do not round your intermediate calculations. Roundyour final answer to the nearest dollar.)

Accepted Answer

The answer of Franklin Company obtained a $85,000 line of...

Question 11

Franklin Company obtained a $160,000 line of credit from State Bank on January 1, Year 1. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table. Assume that Franklin borrows or repays on the first day of each month.  What is the amount of interest expense recognized in March? (Round your answer to the nearest dollar.)

Accepted Answer

The answer of Franklin Company obtained a $160,000 line of...

Question 12

Which of the following describes a callable bond?

Accepted Answer

A callable bond is a bond that can be called for early retirement at the option of the issuer. This means that the issuer can choose to pay it off early rather than paying out the full amount of interest over time.

Question 13

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

Accepted Answer

Serial bonds are bonds that mature at specified intervals throughout the life of the issuance. This is in contrast to term bonds which have a single maturity date at the end of their term. Registered bonds refer to bonds where ownership is recorded on the issuer's books and the bondholders receive interest payments directly from the issuer, while coupon bonds refer to bonds that pay a fixed interest rate periodically until maturity. Serial bonds are bonds that mature at specified intervals throughout the life of the issuance. This means that a portion of the bonds will mature periodically, rather than all at once at the end of the term. This can provide a more consistent stream of cash flows for the issuer and for investors.

Question 14

On January 1, Year 1, Jones Company issued bonds with a $220,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method. What is the amount of interest expense shown on Jones' income statement for the year ending December 31, Year 1?

Accepted Answer

The bonds were issued at 97, meaning they were issued at a discount. The discount is $220,000 * 3% = $6,600. Using the straight-line method, the annual amortization of the discount is $6,600 / 5 = $1,320. The cash interest payment is $220,000 * 7.5% = $16,500. Therefore, the total interest expense is $16,500 + $1,320 = $17,820.

Question 15

On January 1, Year 1, Williams Corporation issued $200,000 of callable bonds at face value. The bonds carried a 2% call premium. If Williams calls the bonds, how would this event affect the company's accounting equation?

Accepted Answer

If Williams calls the bonds, they will have to pay $200,000 plus a 2% call premium ($4,000), for a total of $204,000. This will decrease both the liabilities (as they will be paying off the bonds) and assets (as they will be using cash to pay off the bonds). Additionally, because the company will have to spend more money than the original face value of the bonds, this will decrease stockholders' equity. Therefore, all three answer choices are correct. If Williams Corporation calls the bonds, it will have to pay the face value of $200,000 plus a 2% call premium of $4,000, which equals $204,000. This will decrease liabilities by $200,000 (the amount of the bonds), decrease stockholders' equity by $4,000 (due to the payment of the call premium), and decrease assets by $204,000 (due to the cash payment). Therefore, all of the answer choices are correct.

Question 16

On January 1, Year 1, Burton Corporation issued bonds with a face value of $200,000 for $196,000 cash.: Which of the following correctly describes the related transaction?

Accepted Answer

The face value of the bonds is $200,000 and the company received $196,000 in cash for the issuance, which means the bonds were issued at a discount. The discount is calculated as the face value ($200,000) minus the cash received ($196,000), which equals $4,000. Therefore, the bonds were issued at 98 ($196,000/$200,000).

Question 17

How are bonds payable usually classified on the balance sheet?

Accepted Answer

Bonds payable are usually classified as long-term liabilities because they are not due for payment within the current operating cycle or fiscal year. Bonds payable are usually long-term liabilities because they have a maturity date of more than one year from the date of the balance sheet. Current liabilities are due within one year, investments and funds are assets, and bonds payable are not classified as other assets.

Question 18

Marvin Company issues $125,000 of bonds at face value on January 1. The bonds carry a 6% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following shows the effect of the first interest payment on the financial statements?

Accepted Answer

The answer of Marvin Company issues $125,000 of bonds at...

Question 19

On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.What is the amount of interest expense shown on Jones' income statement for the year ending December 31, Year 1?

Accepted Answer

The annual interest payment is $15,000 ($200,000 x 7.5%). The bond was issued at 97, so there is a $6,000 discount ($200,000 x 3%). Using straight-line amortization over 5 years, the annual amortization is $1,200 ($6,000 / 5). Therefore, the total interest expense is $16,200 ($15,000 + $1,200).

Question 20

Pace Company issued bonds with a face value of $200,000 at 97. How does the issuance affect the company's accounting equation?

Accepted Answer

Proceeds = Face value of $200,000 × 97% = $194,000
Issue price = $196,000 ÷ $200,000 = 98
Discount = Face value of $200,000 - Issue price of $196,000 = $6,000
Assets (cash)increase by $194,000.Liabilities (bonds payable)increase by $200,000 and liabilities (discount on bonds payable,a contra liability account)increase by $6,000 for a net increase in liabilities of $194,000.

Quiz 10: Accounting for Long-Term Debt