Chapter 10 Review
1. The current portion of long-term debt is a balance sheet item for Flavorful Products Company.
How would it most likely be classified on the balance sheet?
a. Current Liability
2. Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it
most likely be classified on the balance sheet?
a. Current liability
3. If a company’s bonds are callable,
a. the issuing company is likely to retire the bonds before maturity if the bonds are
paying 9% interest while the market rate of interest is 6%.
4. Which of the following statements regarding serial bonds is true?
a. The bonds do not all mature on the same date.
5. On January 2, 2016, Roof Master Construction, Inc. issued $500,000, 10-year bonds for
$574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the
market rate is 6%. At the maturity date, besides an interest payment, Roof Master would
repay the bondholders
a. 500,000
6. Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company. If
the face rate is 6% and interest is paid semiannually, what would be the total amount of
interest paid over the life of the bonds?
a. 60,000
7. Bennington Corp. issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually.
How much cash will the bond investors receive at the end of the first interest period?
a. 1,600
8. The bond issue price is determined by calculating the
a. present value of the stream of interest payments and the present value of the
maturity amount.
9. Global Company issued $1,000,000, 8%, 7 year bonds, interest payable semiannually. The
market rate of interest was 6%. The issuance price of the bonds is
a. 1,112,840
10. Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of
interest was 9%. This means that the bonds were issued
a. At a discount
11. If bonds are issued at 101.25, this means that
a. a $1,000 bond sold for $1,012.50.
12. On the issuance date, the Bonds Payable account had a balance of $50,000,000 and Premium
on Bonds Payable had a balance of $1,000,000. What was the issue price of the bonds?
a. 51,000,000
13. The Premium on Bonds Payable account is shown on the balance sheet as
a. An addition to a long-term liability
14. Churchill Company planned to raise $100,000 by issuing bonds. The bond certificates were
printed bearing an interest rate of 8%, which was equal to the market rate of interest.
However, before the bonds could be issued, economic conditions forced the market rate up to
9%. If the life of the bonds is 6 years and interest is paid annually on December 31, how
much will Churchill receive from the sale of the bonds?
a. Less than $100,000 because the market rate of interest at 9% was more than the face
rate.
15. Discount on Bonds Payable is a balance sheet item for Covington Products Company. How
would it most likely be classified on the balance sheet?
a. Contra-liability
16. Weather Corp. issued 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a
$5,200 premium. Which one of the following statements is true?
a. Weather’s annual interest expense on the bonds will be less than the amount of
interest payments to bondholders each year.
17. With the effective interest method of amortization, the amortization of bond premium results
in a(n)
a. Decrease in interest expense
18. If bonds were initially issued at a premium, the carrying value of the bonds on the issuer’s
books will
a. Decrease as the bonds approach their maturity date
19. Under the effective interest method, the cash paid on each interest payment date will
a. Remain constant regardless of the issuance price
20. On January 1, 2016, Sharpsburg, Inc. issued $400,000, 10-year, 10% bonds for $354,200.
The bonds pay interest on June 30 and December 31. The market rate is 12%. What is the
carrying value of the bonds after the first interest payment is made on June 30, 2016?
a. 355,452
21. On January 1, 2016, Sharpsburg, Inc. issued $400,000, 10-year, 10% bonds for $354,200.
The bonds pay interest on June 30 and December 31. The market rate is 12%. What is the
carrying value of the bonds at the end of the ten years?
a. 400,000
22. On January 2, 2016, Hi-Tech Master Construction, Inc. issued $500,000, 10-year bonds for
$574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the
market rate is 6%. The annual cash payment (paid in semiannual payments) on the bonds is
a. 40,000
23. On January 2, 2016, Lawn Master Construction, Inc. issued $500,000, 10-year bonds for
$574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the
market rate is 6%. What is the carrying value of the bonds at the end of ten years before the
final maturity payment is made?
a. 500,000
24. Amortization of bond discount results in a(n)
a. Decrease of stockholders’ equity
25. Neville Company issued $100,000 of 6%, 10 year bonds when the market rate of interest was
5%. The proceeds from this bond issue were $107,732. Using the effective interest method of
amortization, which of the following statements is true? Assume interest is paid annually.
a. Amortization of the premium for the first interest period will be $613.
26. Which of the following statements is true with regard to early retirement of bonds?
a. Any gain or loss resulting from early retirement of bonds would appear on the income
statement of the issuing company.
27. Shuttle Master Airlines has leased an aircraft from Streamline Aircraft Company. The annual
payments are $1,000,000 and the life of the lease is 18 years. It is estimated that the useful
life of the aircraft is 20 years. How would Shuttle Master Airlines record the acquisition of the
aircraft? The effective rate of interest is 9%.
a. The aircraft would be recorded as an asset with a cost of $8,756,000.
28. The current balance sheet of Blawnox Inc. reports total assets of $20 million, total liabilities of
$2 million, and owners’ equity of $18 million. Blawnox Inc. is considering several financing
possibilities in order to expand operations. What is the additional amount that Blawnox Inc.
can borrow and not exceed a debt to equity ratio of 0.3?
a. 3.4 million
29. One way analysts measure the ability of a company to meet its obligations is to calculate the
times interest earned ratio for any outstanding debt the company may have. For Tempo
Solutions Corporation, $10,000 of bonds paying 6.5% annually is outstanding. Income before
interest and taxes is $7,000. How would Tempo Solutions Corporation calculate the times
interest earned ratio?
a. Income before interest and taxes divided by the interest expense.
30. One example of a temporary difference between financial and tax reporting results from
a. Depreciation of long-term assets
31. The deferred income taxes for a corporation represent
a. the dollar amount that arises due to the difference between accounting for financial
statements and accounting for tax purposes.
32. Which of the following statements is false with respect to bonds?
a. Bonds must be held until maturity by the initial investor.
33. Frank Crawford Corporation’s balance sheet showed the following amounts: Current Liabilities,
$15,000; Bonds Payable, $8,000; Lease Obligations, $9,000; and Notes Payable, $5,600.
Total stockholders’ equity was $17,000. The debt-to-equity ratio is:
a. 2.21
34. Cash interest payment is computed annually when a bond is issued for other than its face
value. For a bond issued at a discount, how will this component change as the bond
approaches maturity?
a. Remain constant
35. Amortized discount is computed annually when a bond is issued for other than its face value.
For a bond issued at a discount, how will this component change as the bond approaches
maturity?
a. Increase
