CHAPTER 15
LONG-TERM LIABILITIES
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
Item
LO
BT
Item
LO
BT
LO
BT
Item
LO
BT
True-False Statements
1
K
9.
1
K
17.
2
C
25.
4
K
sg
33.
2
K
1
K
10.
2
C
18.
2
AP
26.
4
K
sg
34.
2
K
1
K
11.
2
C
19.
2
C
27.
5
K
sg
35.
3
K
1
K
12.
2
K
20.
2
K
28.
6
K
sg
36.
5
K
1
K
13.
2
C
21.
3
K
a
29.
7
K
sg
37.
5
K
1
C
14.
2
C
22.
3
C
a
30.
8
K
sg
38.
6
K
1
C
15.
2
C
23.
3
K
sg
31.
1
K
1
K
16.
2
C
24.
3
K
sg
32.
1
K
Multiple Choice Questions
1
K
66.
2
K
93.
3
C
a
120.
7
K
a
147.
9
AP
1
C
67.
2
C
94.
3
C
a
121.
7
C
a
148.
9
AP
1
AP
68.
2
AP
95.
3
C
a
122.
8,9
C
a
149.
9
AP
1
K
69.
2
C
96.
3
AP
a
123.
8
AP
a
150.
9
AP
1
K
70.
2
C
97.
3
AP
a
124.
8
K
a
151.
9
C
1
C
71.
2
C
98.
3
AP
a
125.
8
C
a
152.
9
C
1
K
72.
2
AP
99.
4
K
a
126.
8
C
a
153.
9
C
1
K
73.
2
K
100.
4
K
a
127.
8
AP
st
154.
1
K
1
K
74.
2
C
101.
4
C
a
128.
8
AP
sg
155.
2
AP
1
K
75.
2
K
102.
4
C
a
129.
8
AP
sg
156.
2
K
1
K
76.
2
C
103.
4
AP
a
130.
8
AP
st
157.
3
K
1
K
77.
2
C
104.
4
AP
a
131.
8
AP
sg
158.
3
AP
1
K
78.
2
C
105.
4
AP
a
132.
8
AP
st
159.
4
K
1
K
79.
2
K
106.
4
AP
a
133.
8
AP
sg
160.
4
K
1
K
80.
2
AP
107.
5
K
a
134.
8
C
st
161.
5
K
1
K
81.
2
C
108.
5
K
a
135.
9
AP
sg
162.
5
AP
1
K
82.
2
AP
109.
5
K
a
136.
9
AP
st
163.
6
K
1
C
83.
2
AP
110.
5
K
a
137.
9
AP
a,
sg
164.
7
K
1
K
a
84.
9
AP
111.
5
C
a
138.
9
AP
165.
10
K
1
C
a
85.
9
AP
112.
5
K
a
139.
9
AP
166.
10
K
1
K
86.
3
AP
113.
6
K
a
140.
9
AP
167.
10
K
1
K
87.
3
AP
114.
6
K
a
141.
9
AP
168.
10
K
1
K
88.
3
AP
115.
6
K
a
142.
9
AP
169.
10
K
2
C
89.
3
AP
116.
6
AP
a
143.
9
AP
2
K
90.
3
AP
117.
6
AP
a
144.
9
AP
2
AP
91.
3
AP
118.
6
AP
a
145.
9
AP
2
AP
92.
3
C
119.
6
AP
a
146.
9
AP
Brief Exercises
1
AP
172.
2
AP
174.
2,9
AP
176.
4
AP
a
178.
8
AP
2
AP
173.
2
AP
175.
3
AP
177.
6
AP
a
179.
9
AP
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This topic is dealt with in an Appendix to the chapter.
Test Bank for Accounting Principles, Eleventh Edition
FOR INSTRUCTOR USE ONLY
15 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
180.
1
AP
185.
2
AN
190.
3
AN
195.
5
AP
a
200.
8
AN
181.
1
AN
186.
2
AP
191.
4
AP
196.
6
AP
a
201.
9
AN
182.
1
AN
187.
2,3
AP
192.
4
AP
197.
6
AP
a
202.
9
AN
183.
1
AN
188.
3
AP
193.
4
AP
198.
5
AN
a
203.
9
AN
184.
2
AP
189.
3
AP
194.
5
AP
a
199.
7
AP
a
204.
9
AN
Completion Statements
205.
1
K
208.
2
K
211.
2
AP
a
214.
7
K
a
217.
9
K
206.
1
K
209.
2
AP
212.
3
K
a
215.
8
K
207.
1
K
210.
2
K
213.
5
K
a
216.
9
K
Matching
218.
5
N/A
Short-Answer Essay
219.
2
N/A
221.
2
N/A
a223.
7
N/A
225.
5
N/A
220.
5
N/A
222.
3
N/A
a224.
8
N/A
226.
2
N/A
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Type
Type
Item
Type
Type
Type
Type
Learning Objective 1
1.
TF
9.
TF
44.
MC
52.
MC
60.
MC
182.
Ex
2.
TF
31.
TF
45.
MC
53.
MC
61.
MC
183.
Ex
3.
TF
32.
TF
46.
MC
54.
MC
63.
MC
205.
C
4.
TF
39.
MC
47.
MC
55.
MC
64.
MC
207.
C
5.
TF
40.
MC
48.
MC
56.
MC
154.
MC
218.
MA
6.
TF
41.
MC
49.
MC
57.
MC
170.
BE
7.
TF
42.
MC
50.
MC
58.
MC
180.
Ex
8.
TF
43.
MC
51.
MC
59.
MC
181.
Ex
Learning Objective 2
10.
TF
18.
TF
65.
MC
73.
MC
81.
MC
174.
BE
211.
C
11.
TF
19.
TF
66.
MC
74.
MC
82.
MC
184.
Ex
218.
Ma
12.
TF
20.
TF
67.
MC
75.
MC
83.
MC
185.
Ex
219.
S-A
13.
TF
33.
TF
68.
MC
76.
MC
155.
MC
186.
Ex
221.
S-A
14.
TF
34.
TF
69.
MC
77.
MC
156.
MC
187.
Ex
226.
S-A
15.
TF
62.
MC
70.
MC
78.
MC
171.
BE
208.
C
16.
TF
63.
MC
71.
MC
79.
MC
172.
BE
209.
C
17.
TF
64.
MC
72.
MC
80.
MC
173.
BE
210.
C
Learning Objective 3
21.
TF
35.
TF
89.
MC
93.
MC
97.
MC
175.
BE
190.
Ex
22.
TF
86.
MC
90.
MC
94.
MC
98.
MC
187.
Ex
212.
C
23.
TF
87.
MC
91.
MC
95.
MC
157.
MC
188.
Ex
222.
S-A
24.
TF
88.
MC
92.
MC
96.
MC
158.
MC
189.
Ex
Note: TF = True-False BE = Brief Exercise C = Completion
Long-Term Liabilities
FOR INSTRUCTOR USE ONLY
15 – 3
MC = Multiple Choice Ex = Exercise S-A = Short-Answer
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 4
25.
TF
100.
MC
103.
MC
106.
MC
176.
BE
193.
Ex
26.
TF
101.
MC
104.
MC
159.
MC
191.
Ex
99.
MC
102.
MC
105.
MC
160.
MC
192.
Ex
Learning Objective 5
27.
TF
107.
MC
110.
MC
161.
MC
195.
Ex
218.
Ma
36.
TF
108.
MC
111.
MC
162.
MC
198.
Ex
220.
S-A
37.
TF
109.
MC
112.
MC
194.
Ex
213.
C
225.
S-A
Learning Objective 6
28.
TF
113.
MC
115.
MC
117.
MC
119.
MC
177.
BE
197.
Ex
38.
TF
114.
MC
116.
MC
118.
MC
163.
MC
196.
Ex
Learning Objective a7
a
29.
TF
a
120.
MC
a
121.
MC
a
164.
MC
a
199.
Ex
a
214.
C
a
223.
S-A
Learning Objective a
8
a
30.
TF
a
124.
MC
a
127.
MC
a
130.
MC
a
133.
MC
a200.
Ex
a
122.
MC
a
125.
MC
a
128.
MC
a
131.
MC
a
134.
MC
a
215.
C
a
123.
MC
a
126.
MC
a
129.
MC
a
132.
MC
a
178.
BE
a
224.
8
Learning Objective a
9
a
84.
MC
a
137.
MC
a
142.
MC
a
147.
MC
a
152.
MC
a
202.
Ex
a
85.
MC
a
138.
MC
a
143.
MC
a
148.
MC
a
153.
MC
a
203.
Ex
a
122.
MC
a
139.
MC
a
144.
MC
a
149.
MC
a
174
BE
a
204.
Ex
a
135.
MC
a
140.
MC
a
145.
MC
a
150.
MC
a
179.
BE
a
216.
C
a
136.
MC
a
141.
MC
a
146.
MC
a
151.
MC
a201.
Ex
a
217.
C
Learning Objective a
10
a
165.
MC
a
166.
MC
a
167.
MC
a
168.
MC
a
169.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise S-A = Short-Answer
Test Bank for Accounting Principles, Eleventh Edition
FOR INSTRUCTOR USE ONLY
15 – 4
CHAPTER LEARNING OBJECTIVES
1. Explain why bonds are issued. Companies may sell bonds to investors to raise long-term
capital. Bonds offer the following advantages over common stock: (a) stockholder control is
not affected, (b) tax savings result, (c) earnings per share of common stock may be higher.
2. Prepare the entries for the issuance of bonds and interest expense. When companies
issue bonds, they debit Cash for the cash proceeds, and credit Bonds Payable for the face
value of the bonds. The account Premium on Bonds Payable shows the bond premium;
Discount on Bonds Payable shows a bond discount.
3. Describe the entries when bonds are redeemed or converted. When bondholders
redeem bonds at maturity, the issuing company credits Cash and debits Bonds Payable for
the face value of the bonds. When bonds are redeemed before maturity, the issuing
company (a) eliminates the carrying value of the bonds at the redemption date, (b) records
the cash paid, and (c) recognizes the gain or loss on redemption. When bonds are
converted to common stock, the issuing company transfers the carrying (or book) value of
the bonds to appropriate paid-in capital accounts. No gain or loss is recognized.
4. Describe the accounting for long-term notes payable. Each payment consists of (1)
interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest
decreases each period, while the portion applied to the loan principal increases.
5. Contrast the accounting for operating and capital leases. For an operating lease, the
lessee (renter) records lease (rental) payments as an expense. For a capital lease, the
lessee records the asset and related obligation at the present value of the future lease
payments.
6. Identify the methods for the presentation and analysis of long-term liabilities.
Companies should report the nature and amount of each long-term debt in the balance
sheet or in the notes accompanying the financial statements. Stockholders and long-term
creditors are interested in a company’s long-run solvency. Debt to assets and times interest
earned are two ratios that provide information about debt-paying ability and long-run
solvency.
a
7. Compute the market price of a bond. Time value of money concepts are useful for pricing
bonds. The present value (or market price) of a bond is a function of three variables: (1) the
payment amounts, (2) the length of time until the amounts are paid, and (3) the interest rate.
a
8. Apply the effective-interest method of amortizing bond discount and bond premium.
The effective-interest method results in varying amounts of amortization and interest
expense per period but a constant percentage rate of interest. When the difference between
the straight-line and effective-interest method is material, GAAP requires the use of the
effective-interest method.
a
9. Apply the straight-line method of amortizing bond discount and bond premium. The
straight-line method of amortization results in a constant amount of amortization and interest
expense per period.
Long-Term Liabilities
FOR INSTRUCTOR USE ONLY
15 – 5
TRUE-FALSE STATEMENTS
1. Each bondholder may vote for the board of directors in proportion to the number of bonds
held.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2. Bond interest paid by a corporation is an expense, whereas dividends paid are not an
expense of the corporation.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Registered bonds are bonds that are delivered to owners by U.S. registered mail service.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4. A debenture bond is an unsecured bond which is issued against the general credit of the
borrower.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5. Bonds are a form of interest-bearing notes payable.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
6. Neither corporate bond interest nor dividends are deductible for tax purposes.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
7. A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest
of 10%.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving,
IMA: Business Economics
8. The holder of a convertible bond can convert an interest payment received into a cash
dividend paid on common stock if the dividend is greater than the interest payment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business
Economics
9. The board of directors may authorize more bonds than are issued.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
10. The contractual interest rate is always equal to the market interest rate on the date that
bonds are issued.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
11. If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving,
IMA: Business Economics
12. Discount on bonds is an additional cost of borrowing and should be recorded as interest
expense over the life of the bonds.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving,
IMA: Business Economics
13. If a corporation issued bonds at an amount less than face value, it indicates that the
corporation has a weak credit rating.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
Test Bank for Accounting Principles, Eleventh Edition
FOR INSTRUCTOR USE ONLY
15 – 6
14. A corporation that issues bonds at a discount will recognize interest expense at a rate
which is greater than the market interest rate.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
15. If bonds are issued at a discount, the issuing corporation will pay a principal amount less
than the face amount of the bonds on the maturity date.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
16. If bonds are issued at a premium, the carrying value of the bonds will be greater than the
face value of the bonds for all periods prior to the bond maturity date.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
17. If the market interest rate is greater than the contractual interest rate, bonds will sell at a
discount.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
18. If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the
amount of interest paid on July 1 will be $24,000.
Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
19. If bonds sell at a premium, the interest expense recognized each year will be greater than
the contractual interest rate.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
20. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds
Payable account to the balance in the Bonds Payable account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21. The loss on bond redemption is the difference between the cash paid and the carrying
value of the bonds.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss
on redemption will be recorded.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting
23. Gains and losses are not recognized when convertible bonds are converted into common
stock.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24. Generally, convertible bonds do not pay interest.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
25. Each payment on a mortgage note payable consists of interest on the original balance of
the loan and a reduction of the loan principal.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
Long-Term Liabilities
FOR INSTRUCTOR USE ONLY
15 – 7
26. A long-term note that pledges title to specific property as security for a loan is known as a
mortgage payable.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
27. A capital lease requires the lessee to record the lease as a purchase of an asset.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28. The times interest earned is computed by dividing net income by interest expense.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a
29. The present value of a bond is a function of two variables: (1) the payment amounts and
(2) the interest (discount) rate.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
a
30. The effective-interest method of amortization results in varying amounts of amortization
and interest expense per period but a constant interest rate.
Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
31. Bonds that mature at a single specified future date are called term bonds.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32. The terms of the bond issue are set forth in a formal legal document called a bond
indenture.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33. The carrying value of bonds at maturity should be equal to the face value of the bonds.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34. Premium on Bonds Payable is a contra account to Bonds Payable.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35. When bonds are converted into common stock, the carrying value of the bonds is
transferred to paid-in capital accounts.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
36. Operating leases are leases that the lessee must capitalize on its balance sheet as an
asset.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37. Under a capital lease, the lease/asset is reported on the balance sheet under plant
assets.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38. Long-term liabilities are reported in a separate section of the balance sheet immediately
following current liabilities.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Test Bank for Accounting Principles, Eleventh Edition
FOR INSTRUCTOR USE ONLY
15 – 8
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1.
F
7.
F
13.
F
19.
F
25.
F
31.
T
37.
T
2.
T
8.
F
14.
F
20.
F
26.
T
32.
T
38.
T
3.
F
9.
T
15.
F
21.
T
27.
T
33.
T
4.
T
10.
F
16.
T
22.
T
28.
F
34.
F
5.
T
11.
F
17.
T
23.
T
a29.
F
35.
T
6.
F
12.
T
18.
T
24.
F
a30.
T
36.
F
MULTIPLE CHOICE QUESTIONS
39. Each of the following is correct regarding bonds except they are
a. a form of interest-bearing notes payable.
b. attractive to many investors.
c. issued by corporations and governmental agencies.
d. sold in large denominations.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40. From the standpoint of the issuing company, a disadvantage of using bonds as a means
of long-term financing is that
a. bond interest is deductible for tax purposes.
b. interest must be paid on a periodic basis regardless of earnings.
c. income to stockholders may increase as a result of trading on the equity.
d. the bondholders do not have voting rights.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
41. If a corporation issued $3,000,000 in bonds which pay 5% annual interest, what is the
annual net cash cost of this borrowing if the income tax rate is 30%?
a. $3,000,000
b. $45,000
c. $150,000
d. $105,000
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
Solution: $3,000,000 0.05 (1 − .30) = $105,000
42. Secured bonds are bonds that
a. are in the possession of a bank.
b. are registered in the name of the owner.
c. have specific assets of the issuer pledged as collateral.
d. have detachable interest coupons.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43. A legal document which summarizes the rights and privileges of bondholders as well as
the obligations and commitments of the issuing company is called
a. a bond indenture.
b. a bond debenture.
c. trading on the equity.
d. a term bond.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
Long-Term Liabilities
FOR INSTRUCTOR USE ONLY
15 – 9
44. Stockholders of a company may be reluctant to finance expansion through issuing more
equity because
a. leveraging with debt is always a better idea.
b. their earnings per share may decrease.
c. the price of the stock will automatically decrease.
d. dividends must be paid on a periodic basis.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
45. Which of the following is not an advantage of issuing bonds instead of common stock?
a. Stockholder control is not affected.
b. Earnings per share on common stock may be lower.
c. Income to common shareholders may increase.
d. Tax savings result.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
46. Bonds that are secured by real estate are termed
a. mortgage bonds.
b. serial bonds.
c. debentures.
d. bearer bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47. Bonds that mature at a single specified future date are called
a. coupon bonds.
b. term bonds.
c. serial bonds.
d. debentures.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48. Bonds that may be exchanged for common stock at the option of the bondholders are
called
a. options.
b. stock bonds.
c. convertible bonds.
d. callable bonds.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the
option of the issuer are called
a. callable bonds.
b. early retirement bonds.
c. options.
d. debentures.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50. Investors who receive checks in their names for interest paid on bonds must hold
a. registered bonds.
b. coupon bonds.
c. bearer bonds.
d. direct bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Test Bank for Accounting Principles, Eleventh Edition
FOR INSTRUCTOR USE ONLY
15 – 10
51. A bondholder that sends in a coupon to receive interest payments must have a(n)
a. unsecured bond.
b. bearer bond.
c. mortgage bond.
d. serial bond.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52. Bonds that are not registered are
a. bearer bonds.
b. debentures.
c. registered bonds.
d. transportable bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
53. Bonds that are issued in the name of the owner are
a. coupon bonds.
b. bearer bonds.
c. serial bonds.
d. registered bonds.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
54. Corporations are granted the power to issue bonds through
a. tax laws.
b. state laws.
c. federal security laws.
d. bond debentures.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55. The party who has the right to exercise a call option on bonds is the
a. investment banker.
b. bondholder.
c. bearer.
d. issuer.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
56. A major disadvantage resulting from the use of bonds is that
a. earnings per share may be lowered.
b. interest must be paid on a periodic basis.
c. bondholders have voting rights.
d. taxes may increase.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57. Bonds will always fall into all but which one of the following categories?
a. Callable or convertible
b. Term or serial
c. Registered or bearer
d. Secured or unsecured
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Long-Term Liabilities
FOR INSTRUCTOR USE ONLY
15 – 11
58. Which of the following statements concerning bonds is not a true statement?
a. Bonds are generally sold through an investment company.
b. The bond indenture is prepared after the bonds are printed.
c. The bond indenture and bond certificate are separate documents.
d. The trustee keeps records of each bondholder.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
59. A bond trustee does not
a. issue the bonds.
b. keep a record of each bondholder.
c. hold conditional title to pledged property.
d. maintain custody of unsold bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
60. The contractual interest rate is always stated as a(n)
a. monthly rate.
b. daily rate.
c. semiannual rate.
d. annual rate.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61. When authorizing bonds to be issued, the board of directors does not specify the
a. total number of bonds authorized to be sold.
b. contractual interest rate.
c. selling price.
d. total face value of the bonds.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
62. The following exhibit is for Target bonds.
Bonds Close Yield Volume Net Change
Target 8 1/8 17 100¼ 8.2 35 +7/8
The contractual interest rate of the Target bonds is
a. greater than the market interest rate.
b. less than the market interest rate.
c. equal to the market interest rate.
d. not determinable.
Ans: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics
63. The following exhibit is for Target bonds.
Bonds Close Yield Volume Net Change
Target 8 1/8 17 100¼ 8.2 35 +7/8
On the day of trading referred to above,
a. no Target bonds were traded.
b. bonds with market prices of $3,500 were traded.
c. at closing, the selling price of the bond was higher than the previous day’s price.
d. the bond sold for $100.25
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Test Bank for Accounting Principles, Eleventh Edition
15 – 12
64. A $1,000 face value bond with a quoted price of 98 is selling for
a. $1,000.
b. $980.
c. $908.
d. $98.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
Solution: $1,000 .98 = $980
65. A bond with a face value of $200,000 and a quoted price of 102⅛ has a selling price of
a. $240,225.
b. $204,025.
c. $200,225.
d. $204,250.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
Solution: $200,000 1.02125 = $204,250
66. Premium on Bonds Payable
a. has a debit balance.
b. is a contra account.
c. is considered to be a reduction in the cost of borrowing.
d. is deducted from bonds payable on the balance sheet.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting