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104)
Saffron Industries 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 remain unchanged.
B)
Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
C)
Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
D)
Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
E)
Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
105)
A bond is issued at par value when:
A)
Straight line amortization is used by the company.
B)
The bond pays no interest.
C)
The bond is callable.
D)
The bond is not between interest payment dates.
E)
The market rate of interest is the same as the contract rate of interest.
106)
When a bond sells at a premium:
A)
The contract rate is below the market rate.
B)
The bond pays no interest.
C)
The contract rate is above the market rate.
D)
It means that the bond is a zero coupon bond.
E)
The contract rate is equal to the market rate.
107)
A bond sells at a discount when the:
A)
Contract rate is equal to the market rate.
B)
Bond pays interest only once a year.
C)
Contract rate is above the market rate.
D)
Contract rate is below the market rate.
E)
Bond has a short-term life.
108)
Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest
semiannually. The current market rate is 8%. The amount paid to the bondholders for each
semiannual interest payment is:
A) $375,000. B) $67,500. C) $33,750. D) $60,000. E) $30,000.
109)
A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually.
The market rate on the date of issuance was 8%. The journal entry to record each semiannual
interest payment is:
A)
No entry is needed, since no interest is paid until the bond is due.
B)
Debit Bond Interest Expense $22,000; credit Cash $22,000.
C)
Debit Bond Interest Payable $22,000; credit Cash $22,000.
D)
Debit Bond Interest Expense $550,000; credit Cash $550,000.
E)
Debit Bond Interest Expense $44,000; credit Cash $44,000.
110)
On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000.
The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price
was $1,864,097. The bond issuance should be recorded as:
A)
Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B)
Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C)
Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
D)
Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable
$2,000,000.
E)
Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable
$135,903.
111)
On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest
semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of
interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of
$10,087 every six months.After accruing interest at year end, the company's December 31, Year 1
balance sheet should reflect total liabilities associated with the bond issue in the amount of:
A) $3,780,000.
B) $3,782,437.
C) $3,340,063.
D) $3,217,563.
E) $3,902,500.
112)
On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest
semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of
interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of
$10,087 every six months.
The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1
would be:
A) $224,826. B) $245,000. C) $132,500. D) $225,000. E) $265,174.
113)
On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest
semiannually on January 1 and July 1. The bond issue price is $3,197,389 and 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 $10,087 every six months. The life of these bonds is:
A)
30 years. B) 26.5 years. C) 35 years. D) 32 years E) 15 years.
114)
Amortizing a bond discount:
A)
Decreases the Bonds Payable account.
B)
Increases the market value of the Bonds Payable.
C)
Increases cash flows from the bond.
D)
Allocates a portion of the total discount to interest expense each interest period.
E)
Decreases interest expense each period.
115)
The Discount on Bonds Payable account is:
A)
A contra expense.
B)
A contra liability.
C)
A contra equity.
D)
A liability.
E)
An expense.
116)
A discount on bonds payable:
A)
Is not allowed in many states to protect creditors.
B)
Increases the Bond Payable account.
C)
Occurs when a company issues bonds with a contract rate more than the market rate.
D)
Occurs when a company issues bonds with a contract rate less than the market rate.
E)
Decreases the total bond interest expense.
117)
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 $14,200; credit Cash $14,000; credit Discount on Bonds
Payable $200.
C)
Debit Bond Interest Expense $28,000; credit Cash $28,000.
D)
Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash
$14,200.
E)
Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash
$14,000.
118)
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 carrying value of the bonds immediately after
the first interest payment is:
A) $400,000. B) $396,200. C) $399,800. D) $400,200. E) $395,800.
119)
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 carrying value of the bonds immediately after
the second interest payment is:
A) $395,800. B) $400,000. C) $399,800. D) $396,200. E) $396,400.
120)
A company issued 10-year, 7% bonds with a par value of $100,000. The company received
$96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first
semiannual interest period is:
A) $7,347.40. B) $3,500.00. C) $3,673.70. D) $7,000.00. E) $3,326.00.
121)
The effective interest amortization method:
A)
Allocates bond interest expense over the bond's life using a constant interest rate.
B)
Allocates bond interest expense over the bond's life using a changing interest rate.
C)
Allocates bond interest expense using the current market rate for each interest period.
D)
Allocates a decreasing amount of interest over the life of a discounted bond.
E)
Is not allowed by the FASB.
122)
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) $3,673.01. B) $3,705.30. C) $7,000.00. D) $7,346.03. E) $3,500.00.
123)
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 $97,946.80 cash for the bonds. Using the effective
interest method, the amount of interest expense for the second semiannual interest period is:
A) $3,679.49. B) $7,000.00. C) $3,673.01. D) $7,346.03. E) $3,500.00.
124)
The market value (price) of a bond is equal to:
A)
The present value of the principal for an interest-bearing bond.
B)
The future value of all future interest payments provided by a bond.
C)
The present value of all future cash payments provided by a bond.
D)
The future value of all future cash payments provided by a bond.
E)
The present value of all future interest payments provided by a bond.
125)
The Premium on Bonds Payable account is a(n):
A)
Contra asset account.
B)
Contra revenue account.
C)
Adjunct liability account.
D)
Equity account.
E)
Revenue account.
126)
Adonis Corporation 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%. Adonis received $206,948 in cash
proceeds. Which of the following statements is true?
A)
Adonis must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
B)
Adonis must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
C)
Adonis must pay $200,000 at maturity and no interest payments.
D)
Adonis must pay $206,948 at maturity and no interest payments.
E)
Adonis must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
127)
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 Discount on Bonds Payable.
B)
Credit to Premium on Bonds Payable.
C)
Credit to Interest Income.
D)
Debit to Discount on Bonds Payable.
E)
Debit to Premium on Bonds Payable.
128)
If an issuer sells bonds at a premium:
A)
The carrying value of the bond stays constant over time.
B)
The carrying value increases from the par value to the issue price over the bond's term.
C)
The carrying value decreases from the par value to the issue price over the bond's term.
D)
The carrying value decreases from the issue price to the par value over the bond's term.
E)
The carrying value increases from the issue price to the par value over the bond's term.
129)
A company issues 9%, 5-year bonds with a par value of $100,000 on January 1 at a price of
$106,160, when the market rate of interest was 8%. The bonds pay interest semiannually. The
amount of each semiannual interest payment is:
A) $4,000. B) $4,500. C) $9,000. D) $8,000. E) $0.
130)
A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on
the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The
cash paid on July 1 to the bond holder(s) is:
A) $3,200. B) $1,400. C) $0. D) $1,600. E) $2,800.
131)
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 $102,105 cash for the bonds. Using the straight-line
method, the amount of recorded interest expense for the first semiannual interest period is:
A) $6,633.70. B) $7,000.00. C) $3,500.00. D) $3,289.50. E) $3,613,70.
