Question 1

When a bond has been issued at a discount, the carrying value at the end of one period is equal to the carrying value at the beginning of the period plus the amount of discount that was amortized during the period.

Accepted Answer

This statement is correct. When a bond is issued at a discount, the initial carrying value is less than the face value of the bond. Over time, the discount is gradually amortized (reduced) as interest expenses are recognized on the income statement. Therefore, at the end of each period, the carrying value of the bond will increase by the amount of interest expense recognized, which is equal to the amount of discount that was amortized during the period.

Question 2

Regardless of whether the straight-line method or the effective interest method is used, the carrying value of a term bond issued at a discount will decrease continually over the life of the bond.

Accepted Answer

The answer of Regardless of whether the straight-line method or...

Question 3

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization, the effective interest method should be used.

Accepted Answer

The effective interest method is preferred when there are material differences between the two methods because it more accurately reflects the actual interest expense over the life of the bond or loan. The straight-line method can only provide a rough estimate of the interest expense over the life of the bond or loan.

Question 4

When bonds are converted to stock, no gain or loss is recognized.

Accepted Answer

When bonds are converted to stock, it is considered a nontaxable transaction and no gain or loss is recognized.

Question 5

Under the effective interest method of amortizing a bond discount, the bond interest expense recorded for each period increases over the life of the bond.

Accepted Answer

Under the effective interest method, the bond discount is amortized over the life of the bond using a constant interest rate. As the carrying value of the bond increases due to the amortization of the discount, the bond interest expense recorded each period also increases.

Question 6

The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period.

Accepted Answer

The effective interest method produces a varying amount of bond interest expense each period because it applies the market rate of interest at issuance to the outstanding balance of the bond, which changes as the bond is paid down or amortizes.

Question 7

When the effective interest method of amortization is used for a bond premium, the amount of premium to be amortized for a period is calculated by subtracting the amount of bond interest expense for the period from the amount of cash to be paid for interest for the same period.

Accepted Answer

This statement is true. The effective interest method of amortization calculates the amount of premium to be amortized by subtracting the amount of bond interest expense for the period from the amount of cash to be paid for interest for the same period.

Question 8

If a 20-year bond pays interest of 8 percent semiannually, the present value of the bond is calculated based upon 4 percent and 40 periods.

Accepted Answer

The present value of a bond with semiannual interest payments is calculated using the following formula: PV = PMT * [1 - (1 + r/2)^-n]/(r/2) + FV/(1+r/2)^n

Where PV is the present value, PMT is the semiannual payment, r is the semiannual interest rate, n is the number of periods (in this case, 40 periods = 80 semiannual periods), and FV is the face value or principal amount of the bond.

Using a 4 percent semiannual interest rate and 80 semiannual periods, we can solve for the present value of the bond. Therefore, the statement is true.

Question 9

Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest.

Accepted Answer

The answer of Issuing bonds at a discount has the...

Question 10

When the present value of a bond issue is calculated, both the present value of a single sum table and the present value of an annuity table must be used.

Accepted Answer

This is because the present value of a bond includes both a lump sum payment (the principal) and a series of periodic payments (interest payments). Therefore, both tables are needed to calculate the present value of the bond.

Question 11

The carrying value of a bond is also referred to as its present value.

Accepted Answer

The carrying value of a bond is its face value adjusted for any unamortized premium or discount, not its present value. The present value is a calculation that discounts the bond's future cash flows to their value today, which can differ from the carrying value.

Question 12

When the effective interest method of amortization is used, the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Accepted Answer

When the effective interest method of amortization is used, the amount of bond interest expense for a given period is calculated by multiplying the effective interest rate by the bond's carrying value at the beginning of the given period, not the face interest rate.

Question 13

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.

Accepted Answer

The total interest cost for a bond issued at a premium is the total of the periodic interest payments minus the premium because the premium is the amount by which the bond's issue price exceeds its face value. This premium is amortized over the life of the bond, which reduces the total interest cost.

Question 14

When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Accepted Answer

When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a loss, not a gain, on the income statement. Conversely, if the carrying value exceeds the call price, the difference is reported as a gain.

Question 15

The market interest rate is the rate that an issuer of bonds actually will have to bear and that an investor (purchaser) actually will earn over the bond's life.

Accepted Answer

This statement is true. The market interest rate is determined by supply and demand in the bond market and reflects the actual cost of borrowing for the issuer and the actual return on investment for the investor.

Question 16

When a bond issue is converted into common stock, total contributed capital is increased by the carrying value of the bonds converted.

Accepted Answer

When a bond issue is converted into common stock, the carrying value of the bonds is added to the common stock account. This increases the total contributed capital of the company since the bondholders exchange their debt securities for equity securities.

Question 17

The present value of a bond is always less than the face value of the bond.

Accepted Answer

The present value of a bond can be less than, equal to, or greater than the face value of the bond, depending on the relationship between the bond's coupon rate and the market interest rate.

Question 18

The carrying value of a bond issued at a premium is calculated at any given point in time by deducting the balance of the unamortized premium from the bond's face value.

Accepted Answer

The carrying value of a bond issued at a premium is calculated by adding the balance of the unamortized premium to the bond's face value, not deducting it.

Question 19

The calculation of cash for interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Accepted Answer

The calculation of cash for interest to be paid is based on the face value and interest rate of the bond, and is not affected by any premium or discount upon issuance.

Question 20

The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period.

Accepted Answer

This statement is true according to the accounting principles of bond accounting. The unamortized discount is the difference between the face value of the bond and the carrying value of the bond due to the discount applied to it. The discount is amortized over the life of the bond, and the amount of unamortized discount at the end of an interest period is equal to the amount at the beginning of the period minus the amount of discount amortized during the period.

Quiz 13: Long Term Liabilities