Question 1

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 each interest period is based on the stated interest rate and the face value of the bond, and is not affected by any premium or discount upon issuance.

Question 2

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

This is because the effective interest method is a more accurate way of amortizing the cost of a debt over its life, taking into account the time value of money and the actual interest rate paid on the debt. Thus, it provides a better representation of the true cost of the debt and the actual interest expense incurred by the borrower. On the other hand, the straight-line method assumes a constant amortization rate over the life of the debt, which may not reflect the actual cash flows and interest expenses associated with the debt.

Question 3

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. The effective interest rate takes into consideration the discount or premium on the bond, which changes the interest expense calculation.

Question 4

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

Accepted Answer

This is true. The carrying value of a bond issued at a premium is the sum of its face value and the unamortized premium. It represents the amount that would need to be paid to retire the bond if the issuer opted to do so at any given point in time.

Question 5

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 accurately reflects the calculation of unamortized discount at the end of an interest period. It is calculated by subtracting the amount of discount that was amortized during the period from the beginning balance of unamortized discount.

Question 6

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

Accepted Answer

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium, because the premium effectively reduces the cost of borrowing over the life of the bond.

Question 7

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value,a loss will result.

Accepted Answer

When bonds are retired by an issuer by purchase on the open market at a price below their carrying value, a gain will result because the issuer is paying less than the amount at which the bonds were recorded on the books.

Question 8

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 9

Issuing bonds at a discount has the effect of increasing interest expense above the face amount of interest.

Accepted Answer

When bonds are issued at a discount, the interest expense is calculated based on the face amount of interest plus the amortized amount of the discount over the life of the bond. This results in a higher interest expense than the face amount of interest.

Question 10

It is the issuer rather than the bond holder who may exercise the call feature of a callable bond.

Accepted Answer

The call feature of a callable bond can only be initiated by the issuer, not by the bond holder.

Question 11

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

Accepted Answer

Under the effective interest method, the bond interest expense actually increases over the life of the bond because it applies a constant interest rate to the carrying amount of the bond, which increases as the discount is amortized.

Question 12

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

Accepted Answer

Total contributed capital is increased by the par value of the common stock issued in the conversion, not by the fair market value of the bonds converted.

Question 13

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 increase continually over the life of the bond.

Accepted Answer

The carrying value of a term bond issued at a discount increases over time because the discount is amortized to interest expense, gradually reducing the discount and increasing the carrying value of the bond to its face value at maturity.

Question 14

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Accepted Answer

The answer of A bond discount is a component of...

Question 15

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 for a bond premium involves amortizing the premium over the life of the bond using a constant interest rate. The amount of premium to be amortized for each period is calculated as the excess of the amount of cash interest paid over the bond interest expense for the period. This ensures that the total interest expense recorded over the life of the bond equals the total cash interest paid.

Question 16

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 minus the amount of discount that was amortized during the period.

Accepted Answer

When a bond is 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. The amortization of the discount increases the carrying value of the bond over time until it reaches its face value at maturity.

Question 17

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 18

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

The market interest rate is the actual rate that is determined by supply and demand in the market for a particular bond. This rate is what investors are willing to earn and what issuers have to pay in order to attract buyers for their bonds.

Question 19

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.

Accepted Answer

This is correct according to accounting rules. When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is recorded as Additional Paid-in Capital. This is because stockholders have paid more than the par value for the stock, and the excess amount represents additional equity invested in the company.

Question 20

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

Accepted Answer

This is because the conversion of bonds to stock does not result in a sale or exchange of property, which is required for a gain or loss to be recognized. Instead, the bondholder is simply exchanging one type of security for another within the same company.

Quiz 14: Long Term Liabilities