Chapter 10 – Reporting and Interpreting Bonds
1. An advantage of issuing a bond relative to stock is that the bond interest payments are tax
deductible.
2. Issuing bonds dilutes the voting power of the common shareholders because bonds have
preferential voting rights.
3. The major disadvantages of issuing a bond are the risk of bankruptcy and the negative
impact on cash flow because debt must be repaid at a specified date in the future.
Chapter 10 – Reporting and Interpreting Bonds
4. A bond’s interest payments are determined by multiplying the bond’s principal amount by
the stated interest rate.
5. A convertible bond can be called for early retirement at the option of the issuing company.
6. The issuing company and the bond underwriter determine the selling price of a bond.
Chapter 10 – Reporting and Interpreting Bonds
7. The issuance price of a bond is the present value of both the principal plus the cash interest
to be received over the life of the bond discounted by the stated (coupon) rate.
8. When the market rate of interest is greater than the stated interest rate, the bond will sell at
a discount.
9. A bond will sell for a premium when the market rate of interest is greater than the stated
rate of interest.
Chapter 10 – Reporting and Interpreting Bonds
10. The proceeds received from a bond issue will be greater than the bond maturity value
when the stated interest rate exceeds the market rate of interest.
11. Increases in the market rate of interest subsequent to a bond issue increase the discount on
the bond.
12. A bond will sell at its par value when the market rate of interest equals the stated rate of
interest.
Chapter 10 – Reporting and Interpreting Bonds
13. A company has a December 31 fiscal year-end. If the interest is paid annually on
December 31, the bond interest expense on the income statement is the amount of the interest
cash payment when the bond initially sells at par value.
14. The payment of bond interest on the interest payment date, for bonds issued at par value,
reduces both the bond liability and assets, assuming that interest expense is recorded at the
time of the cash payment.
15. Amortization of discount on bonds payable will make the amount of interest expense
reported on the income statement less than the cash paid for that year.
Chapter 10 – Reporting and Interpreting Bonds
16. Amortization of a discount on a bond payable will result in an increase in the book value
of the bond liability on the balance sheet.
17. A bond issued at a discount will pay total cash payments for interest that is more than the
total interest expense recognized over the life of the bond.
18. The journal entry to record the interest cash payment for a bond issued at a discount
results in an increase in the book value of the bond liability.
Chapter 10 – Reporting and Interpreting Bonds
19. Either straight-line or effective-interest amortization may be used for bond premiums or
discounts regardless of the amounts involved.
20. The journal entry to record the interest cash payment for a bond issued at a premium
results in a decrease in the bond.
21. A bond issued at a premium will pay cash interest in excess of the amount of interest
expense recognized for accounting purposes.
Chapter 10 – Reporting and Interpreting Bonds
22. Interest expense decreases over time when a bond is initially issued at a premium and the
effective-interest method is used.
23. The journal entry to record the issue of a bond when the stated interest rate exceeds the
market rate of interest debits premium on bonds payable.
24. The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus
stockholders’ equity.
Chapter 10 – Reporting and Interpreting Bonds
25. The debt-to-equity ratio assesses the amount of capital provided by creditors relative to
stockholders’ equity.
26. Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.
27. If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when
their book value is $950,000, a loss of $20,000 will be reported.
Chapter 10 – Reporting and Interpreting Bonds
28. When a company purchases and retires their outstanding bonds payable for an amount less
than their book value, an increase in stockholders’ equity results.
29. Issues of bonds in exchange for cash are reported as a cash flow from financing activities
on the statement of cash flows.
30. The cash payment for interest on a bond payable is reported as a cash flow from financing
activities on the statement of cash flows.
Chapter 10 – Reporting and Interpreting Bonds
31. When a company prepares a bond indenture, certain provisions of the bonds are included.
Which of the following is/are not specified in the indenture?
32. Which of the following bonds does not have specific assets pledged to guarantee
repayment?
Chapter 10 – Reporting and Interpreting Bonds
33. Which of the following is not a reason that a corporation would want to issue bonds
instead of stock?
34. The annual interest rate specified within a bond indenture is called which of the
following?
Chapter 10 – Reporting and Interpreting Bonds
35. Which of the following statements best describes callable bonds?
36. Which of the following statements best describes convertible bonds?
Chapter 10 – Reporting and Interpreting Bonds
37. Which of the following is not an advantage of issuing bonds versus issuing stock to
finance expansion?
38. Which of the following statements is not correct?
Chapter 10 – Reporting and Interpreting Bonds
39. Which of the following statements is correct?
40. Halverson’s times interest earned ratio was 2.98 in 2010, 2.79 in 2009, and 2.31 in 2008.
Which of the following statements about their ratio is possibly correct?
Chapter 10 – Reporting and Interpreting Bonds
41. Which of the following statements doesn’t correctly describe the accounting for bonds that
were issued at their maturity value?
42. The journal entry to record the sale of bonds at their par value results in which of the
following?
Chapter 10 – Reporting and Interpreting Bonds
43. Assuming no adjusting journal entries have been made, the journal entry to record the
cash interest payment on the due date for bonds issued at their par value results in which of
the following?
44. Which of the following statements correctly describes the accounting for bonds that were
issued at a discount?
Chapter 10 – Reporting and Interpreting Bonds
45. Which of the following statements doesn’t correctly describe the accounting for bonds that
were issued at a discount?
46. Assuming no adjusting journal entries have been made, the journal entry to record the
cash interest payment on the due date for bonds issued at a discount results in which of the
following?
Chapter 10 – Reporting and Interpreting Bonds
47. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100.
The bonds were dated November 1, 2009, and interest is payable each November 1 and May
1. How much is the amount of straight-line discount amortization on each semi-annual
interest date?
48. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100.
The bonds were dated November 1, 2009, and interest is payable each November 1 and May
1. How much is the semi-annual interest expense when the straight-line method is utilized?
Chapter 10 – Reporting and Interpreting Bonds
49. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100.
The bonds were dated November 1, 2009, and interest is payable each November 1 and May
1. How much is the book value of the bonds after the November 1, 2010 interest payment was
recorded, assuming the straight-line method of amortization is utilized?
50. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100.
The bonds were dated November 1, 2009, and interest is payable each November 1 and May
1. Which of the following is incorrect assuming the straight-line method of amortization is
utilized?