978-1337276337 Test Bank Chapter 10 Part 2

Chapter 10

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RATIONALE: $100,000 × 0.06 or 6% = $6,000 (Interest for one year)

61. When determining the amount of interest to be paid on a bond, which of the following information is not necessary?

a. The face amount of the bonds

b. The selling price of the bonds

c. The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually

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62. Bennington Corp. issued a $40,000, ten-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. $800

b. $1,600

c. $3,200

d. $4,000

63. Which of the following statements is correct?

a. Bonds are issued at a price calculated by using the present value of the stated rate of interest on the day the bond is

purchased.

b. If the face rate of interest on a bond is not equal to the market rate of interest, then the company desiring to issue

the bonds must reprint its bond certificates.

c. The actual issue price of a bond represents the present value of all future cash flows related to the bond.

d. The market rate of interest has no bearing on the selling price of the bonds.

64. The bond issue price is determined by calculating the

a. present value of the stream of interest payments and the future value of the maturity amount.

b. future value of the stream of interest payments and the future value of the maturity amount.

c. future value of the stream of interest payments and the present value of the maturity amount.

d. present value of the stream of interest payments and the present value of the maturity amount.

65. Fox Chapel Company wishes to issue $400,000 of five-year, 6% bonds, with interest paid annually at the end of the

year. The market rate of interest is currently 5%. What information is needed in order to determine the selling price?

a. The life of the bonds, the market rate of interest, the bond rating, and the face amount of the bonds

b. The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond rating

c. The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life

d. The face amount of the bonds, the market rate of interest, the purpose of the issue, and the bond life

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66. Which of the following statements about bonds is correct?

a. The cash interest paid is calculated as the bond face value × the effective rate of interest.

b. The cash interest paid is calculated as the bond face value × the face rate of interest.

c. The difference between the cash interest paid and the interest expense is added to the carrying value of the bonds if

bonds were sold at a premium.

d. The difference between the interest expense and the interest paid is deducted from the carrying value of the bonds

if bonds were sold at a discount.

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67. Which of the following terms does not describe an interest rate used to calculate the interest expense on the income

statement?

a. Nominal rate

b. Market rate

c. Effective rate

d. Yield rate

68. Use the information provided in the time value of money tables (Tables 9-1 through 9-4) in the text to answer the

question that follows.

Global Company issued $1,000,000, 8%, seven-year bonds, interest payable semiannually. The market rate of interest was

6%. The issuance price of the bonds is

a. $1,111,560.

b. $1,000,000.

c. $1,151,480.

d. $1,112,840.

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69. All of the following refer to the face rate of interest on a bond except

a. stated rate.

b. effective rate.

c. nominal rate.

d. coupon rate.

70. 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 premium.

b. at a discount.

c. at the face value.

d. with an additional three years of interest.

71. Flagg Company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the

financial press are likely to state the bond issue price as

a. 498.35.

b. 100.00.

c. 99.67.

d. 49.84.

72. If bonds are issued at 101.25, this means that

a. a $1,000 bond sold for $101.25.

b. the bonds sold at a discount.

c. a $1,000 bond sold for $1,012.50.

d. the bond rate of interest is 10.13% of the market rate of interest.

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75. Which of the following trends can be unfavorable from the viewpoint of a bondholder?

a. The issuing company’s debt ratio is steadily declining.

b. The issuing company’s interest coverage ratio is steadily rising.

c. Market interest rates are steadily rising.

d. The issuing company’s net cash flow from operating activities is steadily increasing.

76. 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 in dollars?

a. $50,000,000

b. $49,000,000

c. $51,000,000

d. Unable to determine from the information given

77. The Discount on Bonds Payable account is shown on the balance sheet as a(n)

a. asset.

b. expense.

c. long-term liability.

d. contra long-term liability.

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78. The Premium on Bonds Payable account is shown on the balance sheet as a(n)

a. contra asset.

b. reduction of an expense.

c. addition to a long-term liability.

d. subtraction from a long-term liability.

79. Bonds are sold at a premium if the

a. issuing company has a better reputation than other companies in the same business.

b. market rate of interest was less than the face rate at the time of issue.

c. market rate of interest was more than the face rate at the time of issue.

d. company will have to pay a premium to retire the bonds.

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80. 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 at the time. However, before the bonds could be issued,

economic conditions forced the market rate up to 9%. If the life of the bonds is six years and interest is paid annually on

December 31, how much will Churchill receive from the sale of the bonds?

a. Churchill will receive exactly $100,000 because it would still pay interest at the face rate of 8%.

b. Churchill will receive less than $100,000 because the market rate of interest at 9% was more than the face rate.

c. Churchill will receive greater than $100,000 because the face rate of interest at 8% was less than the market rate.

d. The bonds would not be sold at all; Churchill Company would have the certificates reprinted bearing the market

rate of 9%.

81. Bonds will sell at a discount when

a. the credit standing of the issuing company is not as good as other companies in a similar line of business.

b. the face rate of interest is less than the market rate of interest at the time of issue.

c. the face rate of interest is more than the market rate of interest at the time of issue.

d. the issuing company will be able to retire the bonds at less than face at maturity.

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82. 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. Current liability

b. Long-term liability

c. Current asset

d. Contra-liability

83. Premium on Bonds Payable is a balance sheet item for Ohio Products Company. How would it most likely be

classified on the balance sheet?

a. An increase to a long-term liability

b. Revenue

c. Long-term asset

d. Contra liability

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84. Weather Corp. issued ten-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 greater than the amount of interest payments to

bondholders each year.

b. Weather’s annual interest expense on the bonds will be less than the amount of interest payments to bondholders

each year.

c. Weather will receive $94,800 as the issue price.

d. The cash paid to bondholders will be $520 each interest period.

85. With the effective interest method of amortization, the amortization of bond discount results in a(n)

a. increase in interest expense.

b. decrease in stockholders’ equity.

c. increase in stockholders’ equity.

d. decrease in interest expense.

86. With the effective interest method of amortization, the amortization of a bond premium results in

a. an increase in stockholders’ equity.

b. no change in stockholders’ equity.

c. an increase in interest expense.

d. a decrease in interest expense.

87. On January 2, 2017, Wynn Corporation sold $750,000 of bonds for $745,000. The bonds will mature in ten years and

pay interest annually on December 31. Wynn properly recorded the payment of interest and amortization of the discount

using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or

the unamortized discount at the end of 2017?

a. The carrying value will be less than $745,000.

b. The carrying value will be $745,000.

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c. The carrying value will be greater than $745,000.

d. The unamortized premium will be less than $5,000.

88. In 2017, Aspinwall Company issued $200,000 of bonds for $175,000. If the face rate of interest was 9% and the

effective rate of interest was 7.99%, how would Aspinwall calculate the interest expense for the first year on the bonds

using the effective interest method?

a. $175,000 × 7.99%

b. $175,000 × 9%

c. $10,000 × 7.99%

d. $10,000 × 9%

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89. The result of using the effective interest method of amortization of discount on bonds is that the

a. interest expense for each amortization period is constant.

b. effective interest rate for each amortization period is constant.

c. amount of interest expense decreases each period.

d. cash interest payment is greater than the interest expense.

90. 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.

b. increase as the bonds approach their maturity date.

c. remain constant throughout the bonds’ life.

d. fluctuate throughout the bonds’ life.

91. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest

method will

a. decrease as the bonds approach their maturity date.

b. increase as the bonds approach their maturity date.

c. remain constant throughout the bonds’ life.

d. fluctuate throughout the bonds’ life.

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92. Under the effective interest method, the cash paid on each interest payment date will

a. decrease if bonds are issued at a premium.

b. increase if bonds are issued at a premium.

c. remain constant regardless of the issuance price.

d. increase if bonds are issued at a discount.

93. On January 1, 2017, Chain, Inc. issued $400,000, ten-year, 10% bonds for $354,200. The bonds pay interest on June

30 and December 31. The market rate is 12%. The interest expense on the bonds at June 30, 2017 is

a. $20,000.

b. $24,000.

c. $21,252.

d. $17,710.

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94. On January 1, 2017, Sharpsburg, Inc. issued $400,000, ten-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, 2017?

a. $352,960

b. $354,200

c. $355,452

d. $400,000

95. On January 1, 2017, Sharpsburg, Inc. issued $400,000, ten-year, 10% bonds for $354,200. The bonds pay interest on

June 30 and December 31. The market rate is 12%. The cash payment on June 30, 2017, is

a. $20,000.

b. $21,200.

c. $24,000.

d. $17,710.

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96. On January 1, 2017, Sharpsburg, Inc. issued $400,000, ten-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

b. $480,000

c. $380,000

d. $354,200

97. On January 2, 2017, Garage Master Construction, Inc. issued $500,000, ten-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 interest expense on the bonds at

June 30, 2017, is

a. $2,764.

b. $17,236.

c. $20,000.

d. $22,764.

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98. On January 2, 2017, Hi-Tech Master Construction, Inc. issued $500,000, ten-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.

b. $30,000.

c. $20,000.

d. $15,000.

99. On January 2, 2017, Concrete Master Construction, Inc. issued $500,000, ten-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 after the first interest payment is made on June 30, 2017?

a. $574,540

b. $571,776

c. $568,920

d. $500,000

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100. On January 2, 2017, Lawn Master Construction, Inc. issued $500,000, ten-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. $574,540

b. $525,000

c. $500,000

d. $425,460

101. Which of the following statements regarding amortization is true?

a. Amortization of the premium causes the Premium on Bonds Payable account to increase.

b. Amortization of the premium causes the amount of interest expense to increase.

c. Cash interest payments on bonds equals interest expense on the income statement when there is amortization of a

bond premium.

d. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.

102. Amortization of a bond discount results in a(n)

a. decrease in the bonds payable account.

b. decrease in stockholders’ equity.

c. increase in stockholders’ equity.

d. decrease in the Cash account.

103. Amortization of a bond premium results in

a. a decrease of the carrying value of bonds.

b. no change in stockholders’ equity.

c. an increase in interest expense.

d. a decrease in the Cash account.

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105. Because of changing market conditions, Friendly Corporation made the decision to redeem $300,000 of its bonds

prior to maturity. The bonds had been issued at a discount and the balance in the discount account at the time of

redemption was $15,000. The corporation’s bond certificates indicated that the bonds could be retired early at 103.

Friendly’s retirement of the bonds would result in a(n)

a. loss of $24,000.

b. gain of $6,000.

c. decrease in owners’ equity of $9,000.

d. increase in assets of $15,000.

106. Which of the following statements is true with regard to early retirement of bonds?

a. If the carrying value of the bonds is higher than the redemption price, the issuing firm must record a loss.

b. Firms always find it advantageous to retire bonds issued at lower rates with bonds issued at higher rates.

c. It is always advantageous to carry out early retirement for bonds issued at a premium but not for bonds issued at a

discount.

d. Any gain or loss resulting from early retirement of bonds would appear on the income statement of the issuing

company.