Question 1

If a bond's stated interest rate is higher than the market rate,which of the following is TRUE?

Accepted Answer

When a bond's stated interest rate is higher than the market rate, it is more attractive to investors because it offers a higher return than what is currently available in the market. Therefore, investors are willing to pay more than the face value of the bond, leading to the bond being issued at a premium.

Question 2

If a bond's stated interest rate is lower than the market rate,which of the following is TRUE?

Accepted Answer

If a bond's stated interest rate is lower than the market rate, it means that the bond's yield is lower than the prevailing rate. Therefore, investors will not want to purchase the bond at face value and the bond will be issued at a discount in order to compensate investors for the lower yield.

Question 3

The balance in the Bonds payable account is a credit of $50,000.The balance in the Discount on bonds payable is a debit of $1,500.The balance sheet will report the bond balance as $48,500.

Accepted Answer

The bond balance is calculated by subtracting the discount from the Bonds payable account, which gives us $48,500 ($50,000 - $1,500). Therefore, the balance sheet will report the bond balance as $48,500.

Question 4

Premium on bonds payable is spread over the term of the bonds and reduces total interest expense.

Accepted Answer

Premium on bonds payable is recorded as a liability on the balance sheet and is spread over the term of the bonds. This reduces the effective interest rate on the bonds and lowers the total interest expense over the life of the bonds.

Question 5

If bonds with a face value of $100,000 are sold at par,the amount of cash proceeds is:

Accepted Answer

When bonds are sold at par, the cash proceeds are equal to the face value of the bonds. Therefore, in this case, the amount of cash proceeds is $100,000.

Question 6

Which of the following statements is TRUE about a bond that is issued at a discount?

Accepted Answer

A bond issued at a discount means that it is sold for less than the face value. This is because its interest rate is lower than the prevailing market rate. The bond will still repay principal at the face value at maturity.

Question 7

A bond is sold for an amount higher than face value.Which of the following statements would explain why?

Accepted Answer

When a bond's stated interest rate is higher than the prevailing market interest rate, investors are willing to pay more than the face value to receive the higher interest payments associated with the bond, leading to the bond being sold at a premium.

Question 8

A bond is sold for an amount less than its face value.Which of the following statements would explain why?

Accepted Answer

When a bond's stated interest rate is lower than the prevailing market interest rate, investors are less willing to pay the face value for the bond, leading to the bond being sold at a discount (less than its face value). This compensates investors for the lower interest income they will receive compared to current market rates.

Question 9

The bond carrying amount is the balance in the bond payable account subtracted from or added to the balance in either the discount or premium account.

Accepted Answer

The bond carrying amount is calculated by adding or subtracting the balance in the discount or premium account (depending on the type of bond issued) to the balance in the bond payable account.

Question 10

Which of the following describes a debenture?

Accepted Answer

A debenture is a type of bond that is not backed by specific assets, unlike mortgage bonds or asset-backed securities. Debentures are backed only by the issuer's creditworthiness and ability to repay the bond at maturity.

Question 11

A bond is sold for an amount equal to its face value.Which of the following statements would explain why?

Accepted Answer

When a bond's stated rate is the same as the prevailing market rate at the time of sale, investors are willing to pay the face value of the bond because they can earn a return that is equal to other investments with similar risk and return profiles.

Question 12

If a company issues a bond in-between interest payments,the company can pay a prorated portion of the interest payment on the regular payment date.

Accepted Answer

If a company issues a bond in-between interest payments, the company is not required to pay a prorated portion of the interest payment on the regular payment date. The bond terms and conditions will specify when and how the interest will be paid.

Question 13

Which of the following statements is TRUE about a bond that is issued at a premium?

Accepted Answer

A bond that is issued at a premium means that it is sold above its par value, so option A is true. Option B is incorrect because a bond issued at a premium will have a higher interest rate than the prevailing market rate. Option C is incorrect because the principal will be repaid at the face value, not more than that. Option D is also incorrect since the bond is issued at a premium and not at par.

Question 14

If bonds with a face value of $100,000 are sold at 102,the amount of cash proceeds is:

Accepted Answer

D) Calculations: $100,000 × 1.02 = $102,000

Question 15

If a bond's stated interest rate is the same as the market rate,which of the following is TRUE?

Accepted Answer

A bond that is issued at par means that the market rate and the stated interest rate are the same, resulting in the bond being issued at face value. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because they all suggest that the bond will not be issued at par, which is not true if the market rate and stated interest rate are the same.

Question 16

The balance in the Bonds payable account is a credit of $50,000.The balance in the Discount on bonds payable account is a debit of $1,500.The bond carrying amount is $51,500.

Accepted Answer

The bond carrying amount is calculated by subtracting the discount on bonds payable from the bonds payable account. Therefore, the carrying amount is $50,000 - $1,500 = $48,500.

Question 17

The balance in the Bonds payable account is a credit of $50,000.The balance in the Premium on bonds payable account is a credit of $900.The bond carrying amount is $50,900.

Accepted Answer

The bond carrying amount is calculated by adding the Bonds payable account balance and the Premium on bonds payable account balance. 
$50,000 (Bonds payable) + $900 (Premium on bonds payable) = $50,900 (Bond carrying amount).

Question 18

Which of the following describes a secured bond?

Accepted Answer

A secured bond gives the bondholder a claim for specific assets if the issuer fails to pay. The bond is backed by these assets, making it a secured debt. The other options, A, C, and D, do not describe a secured bond.

Question 19

If bonds with a face value of $100,000 are sold at 88,the amount of cash proceeds is:

Accepted Answer

C) Calculations: $100,000 × 0.88 = $88,000

Question 20

The time value of money is based on which of the following concepts?

Accepted Answer

The time value of money is based on the concept that money earns income over time. This means that money can be invested and earn interest or return, which increases its value over time. Therefore, a dollar today is worth more than a dollar in the future because it can be invested and earn income.

Quiz 11: Long-Term Liabilities, bonds Payable, and Classification of Liabilities on the Balance Sheet