67. The contract between the bond issuer and the bondholders, which identifies the rights and
obligations of the parties, is called a(n):
A. Debenture.
B. Bond indenture.
C. Mortgage.
D. Installment note.
E. Mortgage contract.
68. Bonds that mature at different dates with the result that the entire principal amount is
repaid gradually over a number of periods are known as:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Sinking fund bonds.
E. Serial bonds.
69. To provide security to creditors and to reduce interest costs, bonds and notes payable can
be secured by:
A. Safe deposit boxes.
B. Mortgages.
C. Equity.
D. The FASB.
E. Debentures.
70. Promissory notes that require the issuer to make a series of payments consisting of both
interest and principal are:
A. Debentures.
B. Discounted notes.
C. Installment notes.
D. Indentures.
E. Investment notes.
71. The carrying value of a long-term note payable:
A. Is computed as the future value of all remaining future payments, using the market rate of
interest.
B. Is the face value of the long-term note less the total of all future interest payments.
C. Is computed as the present value of all remaining future payments, discounted using the
market rate of interest at the time of issuance.
D. Is computed as the present value of all remaining interest payments, discounted using the
note’s rate of interest.
E. Decreases each time period the discount on the note is amortized.
14–23
72. The carrying value of bonds at maturity is always equal to:
A. the amount of cash originally received in exchange for the bonds.
B. the par value that the issuer pays the holder.
C. the amount of discount or premium.
D. the amount of cash originally received in exchange for the bonds plus any unamortized
discount or less any premium.
E. $0.
73. A company must repay the bank a single payment of $10,000 cash in 3 years for a loan it
entered into. The loan is at 8% interest compounded annually. The present value factor for 3
years at 8% is 0.7938. The present value of the loan is:
A. $10,000.
B. $12,400.
C. $ 7,938.
D. $ 9,200.
E. $ 7,600.
74. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The
present value of an annuity at 8% for 5 years is 3.9927. Each annuity payment equals
$75,137.13. The present value of the note is:
A. $ 75,137.13.
B. $ 94,013.13.
C. $300,000.00.
D. $375,137.13.
E. $197,810.00.
75. A company borrowed $50,000 cash from the bank and signed a 6-year note at 7%. The
present value of an annuity for 6 years at 7% is 4.7665. The annual annuity payments equal:
A. $ 10,489.88.
B. $ 11,004.88.
C. $ 50,000.00.
D. $ 52,450.00.
E. $238,325.00.
76. A company purchased equipment and signed a 7-year installment loan at 9% annual
interest. The annual payments equal $9,000. The present value of an annuity for 7 years at 9%
is 5.0330. The present value of the loan is:
A. $ 9,000.
B. $ 5,033.
C. $63,000.
D. $57,330.
E. $45,297.
77. A pension plan:
A. Is a contractual agreement between an employer and its employees in which the employer
provides benefits to employees after they retire.
B. Can be underfunded if the accumulated benefit obligation is more than the plan assets.
C. Can include a plan administrator who receives payments from the employer, invests them
in pension assets, and makes benefit payments to pension recipients.
D. Can be a defined benefit plan in which future benefits are set, but the employer’s
contributions vary depending on assumptions about future pension assets and liabilities.
E. All of the choices are correct.
78. All of the following statements regarding leases are true except:
A. For a capital lease the lessee records the leased item as its own asset.
B. For a capital lease the lessee depreciates the asset acquired under the lease, but for an
operating lease the lessee does not.
C. Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D. Capital leases do not transfer ownership of the asset under the lease, but operating leases
often do.
E. For an operating lease the lessee reports the lease payments as rental expense.
79. An advantage of bond financing is:
A. Bonds do not affect owners’ control.
B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. All of the choices are correct.
80. A disadvantage of bonds is:
A. Bonds require payment of periodic interest.
B. Bonds require payment of par value at maturity.
C. Bonds can decrease return on equity.
D. Bond payments can be burdensome when income and cash flow are low.
E. All of the choices are correct.
81. Which of the following statements is true?
A. Interest on bonds is tax deductible.
B. Interest on bonds is not tax deductible.
C. Dividends to stockholders are tax deductible.
D. Bonds do not have to be repaid.
E. Bonds always increase return on equity.
82. A bondholder that owns a $1,000, 10%, 10-year bond has:
A. Ownership rights in the issuing company.
B. The right to receive $10 per year until maturity.
C. The right to receive $1,000 at maturity.
D. The right to receive $10,000 at maturity.
E. The right to receive dividends of $1,000 per year.
83. Collateral agreements for a note or bond can:
A. Lower the risk in comparison with unsecured debt.
B. Increase the risk in comparison with unsecured debt.
C. Have no effect on risk.
D. Reduce the issuer’s assets.
E. Increase total cost for the borrower.
84. The party that has the right to exercise the call option on callable bonds is(are):
A. The bondholders.
B. The bond issuer.
C. The bond indenture.
D. The bond trustee.
E. The bond underwriter.
85. Which of the following accurately describes a debenture?
A. A legal contract between the bond issuer and the bondholders.
B. A type of bond issued in the names and addresses of the bondholders.
C. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at
specified amounts and dates to repay the bonds.
D. A type of bond which is not collateralized but backed only by the issuer’s general credit
standing.
E. A type of bond that can be exchanged for a fixed number of shares of the issuing
corporation’s common stock.
86. A company’s total liabilities divided by its total stockholders’ equity is called the:
A. Equity ratio.
B. Return on total assets ratio.
C. Pledged assets to secured liabilities ratio.
D. Debt-to-equity ratio.
E. Times secured liabilities earned ratio.
87. The debt-to-equity ratio:
A. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B. Is a means of assessing the risk of a company’s financing structure.
C. Is not relevant to secured creditors.
D. Can always be calculated from information provided in a company’s income statement.
E. Must be calculated from the market values of assets and liabilities.
88. Pitt Corporation’s most recent balance sheet reports total assets of $35,000,000 and total
liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds
(at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would
issuing the bonds have on the company’s debt-to-equity ratio?
A. Issuing the bonds would cause the firm’s debt-to-equity ratio to improve from 1.0 to 1.3.
B. Issuing the bonds would cause the firm’s debt-to-equity ratio to worsen from 1.0 to 1.3.
C. Issuing the bonds would cause the firm’s debt-to-equity ratio to remain unchanged.
D. Issuing the bonds would cause the firm’s debt-to-equity ratio to improve from .5 to .8.
E. Issuing the bonds would cause the firm’s debt-to-equity ratio to worsen from .5 to .8.
89. Tart Company’s most recent balance sheet reports total assets of $42,000,000, total
liabilities of $16,000,000 and stockholders’ equity of $26,000,000. Management is
considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds.
What effect, if any, would prepaying the bonds have on the company’s debt-to-equity ratio?
A. Prepaying the debt would cause the firm’s debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm’s debt-to-equity ratio to improve from .62 to .57.
C. Prepaying the debt would cause the firm’s debt-to-equity ratio to worsen from .62 to .50.
D. Prepaying the debt would cause the firm’s debt-to-equity ratio to worsen from .62 to .57.
E. Prepaying the debt would cause the firm’s debt-to-equity ratio to remain unchanged.
90. Bonds can be issued:
A. At par.
B. At a premium.
C. At a discount.
D. Between interest payment dates.
E. All of the choices are correct.
91. When a bond sells at a premium:
A. The contract rate is above the market rate.
B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. It means that the bond is a zero coupon bond.
E. The bond pays no interest.
92. A bond sells at a discount when the:
A. Contract rate is above the market rate.
B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond has a short-term life.
E. Bond pays interest only once a year.
93. A company issues 9%, 20-year bonds with a par value of $750,000. The current market
rate is 8%. The amount of interest owed to the bondholders for each semiannual interest
payment is.
A. $ 60,000.
B. $ 33,750.
C. $ 67,500.
D. $ 30,000.
E. $ 375,000.
94. A company issued 8%, 15-year bonds with a par value of $550,000. The current market
rate is 8%. The journal entry to record each semiannual interest payment is:
A. Debit Bond Interest Expense $22,000; credit Cash $22,000.
B. Debit Bond Interest Expense $44,000; credit Cash $44,000.
C. Debit Bond Interest Expense $36,667; credit Cash $36,667.
D. Debit Bond Interest Expense $660,000; credit Cash $660,000.
E. No entry is needed, since no interest is paid until the bond is due.
95. On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for
$3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of
interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or
discount is being amortized at a rate of $10,000 every six months. The company’s December
31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the
amount of:
A. $3,220,000.
B. $3,342,500.
C. $3,097,500.
D. $3,780,000.
E. $3,902,500.
96. On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for
$3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of
interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or
discount is being amortized at a rate of $10,000 every six months.
The amount of interest expense recognized by Drum Line Airways on the bond issue in Year
1 would be:
A. $132,500.
B. $225,000.
C. $265,000.
D. $245,000.
E. $280,000.
97. On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for
$3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of
interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or
discount is being amortized using the straight-line method at a rate of $10,000 every six
months. The life of these bonds is:
A. 15 years.
B. 30 years.
C. 26.5 years.
D. 32 years
E. 35 years.
98. Amortizing a bond discount:
A. Allocates a portion of the total discount to interest expense each interest period.
B. Increases the market value of the Bonds Payable.
C. Decreases the Bonds Payable account.
D. Decreases interest expense each period.
E. Increases cash flows from the bond.
99. The Discount on Bonds Payable account is:
A. A liability.
B. A contra liability.
C. An expense.
D. A contra expense.
E. A contra equity.
100. A discount on bonds payable:
A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.
101. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and
received proceeds of $396,000. Interest is payable each June 30 and December 31. The
company uses the straight-line method to amortize the discount. The journal entry to record
the first interest payment is:
A. Debit Bond Interest Expense $14,000; credit Cash $14,000.
B. Debit Bond Interest Expense $28,000; credit Cash $28,000.
C. Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds
Payable $200.
D. Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash
$14,000.
E. Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash
$14,200.
102. A company issued 5-year, 7% bonds with a par value of $100,000. The company
received $97,947 for the bonds. Using the straight-line method, the amount of interest
expense for the first semiannual interest period is:
A. $3,294.70.
B. $3,500.00.
C. $3,705.30.
D. $7,000.00.
E. $7,410.60.
103. The effective interest amortization method:
A. Allocates bond interest expense over the bond’s life using a changing interest rate.
B. Allocates bond interest expense over the bond’s life using a constant interest rate.
C. Allocates a decreasing amount of interest over the life of a discounted bond.
D. Allocates bond interest expense using the current market rate for each interest period.
E. Is not allowed by the FASB.
104. A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when
the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using
the effective interest method, the amount of interest expense for the first semiannual interest
period is:
A. $3,500.00.
B. $3,673.01.
C. $3,705.30.
D. $7,000.00.
E. $7,346.03.
105. The market value of a bond is equal to:
A. The present value of all future cash payments provided by a bond.
B. The present value of all future interest payments provided by a bond.
C. The present value of the principal for an interest-bearing bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.
106. The Premium on Bonds Payable account is a(n):
A. Revenue account.
B. Adjunct or accretion liability account.
C. Contra revenue account.
D. Contra asset account.
E. Contra liability account.
107. Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid
semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash
proceeds. Which of the following statements is true?
A. Adidas must pay $200,000 at maturity and no interest payments.
B. Adidas must pay $206,948 at maturity and no interest payments.
C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
108. A company received cash proceeds of $206,948 on a bond issue with a par value of
$200,000. The difference between par value and issue price for this bond is recorded as a:
A. Credit to Interest Income.
B. Credit to Premium on Bonds Payable.
C. Credit to Discount on Bonds Payable.
D. Debit to Premium on Bonds Payable.
E. Debit to Discount on Bonds Payable.
109. If an issuer sells bonds at a date other than an interest payment date:
A. This means the bonds sell at a premium.
B. This means the bonds sell at a discount.
C. The issuing company will report a loss on the sale of the bonds.
D. The issuing company will report a gain on the sale of the bonds.
E. The buyers normally pay the issuer the purchase price plus any interest accrued since the
prior interest payment date.
110. A company issues at par 9% bonds with a par value of $100,000 on April 1, which is 4
months after the most recent interest date. The cash received for accrued interest on April 1 by
the bond issuer is:
A. $ 750.
B. $5,250.
C. $1,500.
D. $3,000.
E. $6,000.
111. A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds
pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond
holder(s) is:
A. $1,500.
B. $3,000.
C. $4,500.
D. $6,000.
E. $7,500.
112. A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when
the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using
the straight-line method, the amount of recorded interest expense for the first semiannual
interest period is:
A. $3,386.30.
B. $3,500.00.
C. $3,613,70.
D. $6,633.70.
E. $7,000.00.