9.2-78 Sam’s Shoe Factory issued a $10,000, 10-year, 10% bond dated January 1, at 97. The journal entry to
record the issuance of the bond will include a:
A) debit to cash for $9,700.
B) debit to cash for $10,000.
C) credit to bonds payable for $9,700.
D) debit to premium on bonds payable for $300.
9.2-79 When a bond is issued at a premium:
A) the carrying value of the bond increases each semiannual interest period.
B) the carrying value of the bond decreases each semiannual interest period.
C) the carrying value of the bond remains the same each semiannual interest period.
D) the carrying value is always equal to the par value each semiannual interest period.
9.2-80 A bond was issued at a discount. The journal entry to record the semiannual interest payment would
include:
A) a debit to interest expense, a debit to discount on bonds payable and a credit to cash.
B) a debit to interest expense, a credit to discount on bonds payable and a credit to cash.
C) a debit to interest expense, a debit to cash and a credit to discount on bonds payable.
D) a debit to discount on bonds payable and a credit to cash.
9.2-81 A bond was issued at a premium. The journal entry to record the semiannual interest payment would
include:
A) a debit to interest expense, a debit to premium on bonds payable and a credit to cash.
B) a debit to interest expense, a credit to premium on bonds payable and a credit to cash.
C) a debit to interest expense, a debit to cash and a credit to premium on bonds payable.
D) a debit to premium on bonds payable and a credit to cash.
9.2-82 Which is the preferred method to use when amortizing a bond discount or premium?
A) Effective-interest method of amortization
B) Market-interest rate method of amortization
C) Straight-line method of amortization
D) Both straight-line and market-interest rate methods of amortization are equally preferable
9.2-83 To determine the carrying value of a bond:
A) the premium on bonds payable is added to the bonds payable.
B) the discount on bonds payable is subtracted from bonds payable.
C) the premium on bonds payable is subtracted from bonds payable.
D) both A and B occur.
9.2-84 Under the effective-interest method of amortization, interest expense each period can be calculated by
multiplying the:
A) carrying value of the bonds times the effective-interest rate for the appropriate time period.
B) carrying value of the bonds times the stated interest rate for the appropriate time period.
C) face value of the bonds times the stated interest rate for the appropriate time period.
D) face value of the bonds times the effective-interest rate for the appropriate time period.
9.2-85 At the maturity date of a bond payable:
A) the discount on bonds payable will have been amortized to zero.
B) the premium on bonds payable will have been amortized to zero.
C) the carrying value of the bonds will always be equal to the par value of the bonds.
D) all of the above will occur.
9.2-86 A company issued $100,000 of 10% bonds on January 1. The bonds pay interest semiannually on
January 1 and July 1. The company has a fiscal year end of May 31. On May 31, the company will:
A) make a journal entry to accrue interest expense from January 1 through July 1.
B) make a journal entry to accrue interest expense from January 1 through May 31.
C) make a journal entry to accrue interest expense from July 1 through December 31.
D) not need to make a journal entry on May 31.
9.2-87 On August 1, 2011, Tyler Corporation issues $3,000,000 of 10-year bonds dated August 1, 2011, at
101 when the market rate of interest is 8%. Tyler Corporation uses the effective-interest method of
amortization and interest is paid each January 31, and July 31. The entry to record the first
semiannual interest payment on January 31, 2012, will include a:
A) debit to Premium on Bonds Payable for $300,000.
B) debit to Interest Expense for $121,000.
C) credit to Premium on Bonds Payable for $240,000.
D) debit to Interest Expense for $20,000.
9.2-88 On July 1 the Stanley Corporation issues $2,000,000 of 10-year, 7.5% bonds dated July 1 at 91 when
the market rate of interest is 9%. Stanley Corporation uses the straight-line method of amortization.
Interest is paid each June 30 and December 31. The interest expense recognized for the first
semiannual interest payment on December 31 is:
A) $9,000.
B) $75,000.
C) $84,000.
D) $180,000.
9.2-89 Pharma Inc. issued $800,000 of 7.5%, 15-year bonds dated April 1, 2011 on April 1, 2011, at 97.5. If
Pharma Inc. uses the straight-line method of amortization, the entry to retire the bonds on the maturity
date would include a:
A) debit to Premium on Bonds Payable for $20,000.
B) debit to Bonds Payable for $780,000.
C) credit to Discount on Bonds Payable for $20,000.
D) credit to Cash for $800,000.
9.2-90 The primary reason a company will retire bonds early is:
A) to relieve the pressure of making high interest payments, since they may be able to borrow at a
lower interest rate.
B) to help the bondholders.
C) to increase the amount of debt on the books.
D) none of the above.
9.2-91 Any gains or loss on the early retirement of bonds sold should be recorded as a(n):
A) ordinary revenue or expense reported on the income statement.
B) adjustment to financing activity on a statement of cash flows.
C) other income/loss.
D) prior period adjustment, net of tax, shown on the statement of changes in equity.
9.2-92 To determine the gain or loss on the retirement of bonds before their maturity date:
A) if the carrying value of the bonds exceeds the market price of the bonds, there is a loss on
retirement.
B) if the carrying value of the bonds is less than the market price of the bonds, there is a loss on
retirement.
C) there can be no gain or loss on the retirement of the bonds.
D) if the par value of the bonds exceeds the market price of the bonds, there is a loss on the
retirement.
9.2-93 Bonds that the issuer may pay off at a prearranged price whenever the issuer chooses before the
maturity date are:
A) convertible bonds.
B) debenture bonds.
C) callable bonds.
D) serial bonds.
9.2-94 Conversion of bonds payable into ordinary shares will:
A) decrease liabilities and decrease equity.
B) increase liabilities and increase equity.
C) decrease liabilities and increase equity.
D) increase liabilities and decrease equity.
92.-95 Conversion of bonds payable into ordinary shares will include a:
A) debit to bonds payable and credit to cash.
B) debit to bonds payable and credit to ordinary shares.
C) credit to bonds payable and debit to ordinary shares.
D) debit to cash and credit to bonds payable.
9.2-96 Revision Company has just made the interest payment on its $3,000,000 of outstanding bonds. The
unamortized discount is currently $127,400. Revision decided to retire the bonds by purchasing the
bonds when the bonds were priced at 97. Which statement regarding the retirement is true?
A) Revision paid $2,910,000 to purchase the bond and recognized a $37,400 loss.
B) Revision paid $3,000,000 to purchase the bond and recognized a $164,800 loss.
C) Revision paid $2,872,600 to purchase the bond and recognized a $127,400 loss.
D) Revision paid $2,910,000 to purchase the bond and recognized a $164,800 loss.
9.2-97 Immediately after the last interest payment, Hoffman & Stuart Company converted $2,500,000 of its
bonds into 250,000 shares of $10 par value ordinary shares. The unamortized premium on the bonds
at the date of conversion was $940,000. The entry to record the conversion would include:
A) liabilities decreased by $3,440,000 and shareholders’ equity increased by $3,440,000.
B) liabilities decreased by $3,440,000 and shareholders’ equity increased by $3,600,000.
C) liabilities decreased by $3,600,000 and shareholders’ equity increased by $3,400,000.
D) liabilities decreased by $3,600,000 and shareholders’ equity increased by $3,440,000.
9.2-98 Convertible bonds may be exchanged for:
A) a related company’s ordinary shares.
B) an equity interest in the issuing company.
C) the issuing company’s goods and services.
D) cash.
9.2-99 Great Peaks, Inc., has $3,600,000 of bonds outstanding with an unamortized discount of $160,000
immediately following the last interest payment. At that time, the bonds were converted into
$350,000 shares of $10 par ordinary shares. As a result of this conversion:
A) liabilities decreased by $3,600,000 and shareholders’ equity increased by $3,600,000.
B) liabilities decreased by $3,440,000 and shareholders’ equity increased by $3,600,000.
C) liabilities decreased by $3,440,000 and shareholders’ equity increased by $3,440,000.
D) liabilities decreased by $3,600,000 and shareholders’ equity increased by $3,400,000.
9.3-1 The lessee in a capital lease capitalizes the asset if it meets only one of the four criteria.
9.3-2 Lease payments are paid by the lessee.
9.3-3 Capital leases are preferred over operating leases because capital leases increase a company’s debt
ratio.
9.3-4 Which of the following statements about capital leases is INCORRECT?
A) A capital lease is noncancelable.
B) A capital lease is a long-term financial obligation.
C) Under a capital lease, the lessee records a lease liability at the beginning of the lease term.
D) Under a capital lease, the lessee’s books do not report the leased asset.
9.3-5 If as part of the accounting for a lease, the company debits an asset and credits a liability, then the
lease must be a(n):
A) operating lease.
B) capital lease.
C) cancelable lease.
D) fixed asset lease.
9.3-6 Generally a lessee will prefer:
A) an operating lease, since it does not affect the debt ratio.
B) a capital lease, since no liability is recorded on the balance sheet.
C) a capital lease, since it does not affect the debt ratio.
D) none of the above.
9.3-7 All of the following criteria would qualify a lease as a capital lease EXCEPT:
A) the present value of the lease payments equals 50% of the market value of the leased asset.
B) the lease term is 90% of the asset’s estimated useful life.
C) the lease agreement contains a bargain purchase option.
D) title to the leased asset transfers to the lessee at the end of the lease term.
9.3-8 Edna Corporation signed a lease for $600,000 for a truck. The truck has an estimated useful life of 5
years. This lease would be considered to be a capital lease if:
A) the lease agreement allows Edna to purchase the truck for $250,000 at the end of the lease.
B) title to the truck transfers to Edna at the end of the lease term.
C) the present value of the lease payments equals $25,000.
D) the truck is leased for two years.
9.4-1 Earnings per share is the amount of a company’s net income per share of its outstanding ordinary
shares.
9.4-2 Earnings per share can be used to compare the operating performances of different size
companies.
9.4-3 The times-interest-earned ratio relates net income to interest expense.
9.4-4 A high times-interest-earned ratio indicates ease in paying interest expense.
9.4-5 All of the following are advantages of issuing shares EXCEPT that it:
A) creates no liabilities for the corporation.
B) creates no interest expense which must be paid.
C) generally results in a higher earnings per share.
D) is less risky to the issuing corporation.
9.4-6 All of the following are advantages of issuing bonds EXCEPT that:
A) it generally results in no voting rights.
B) interest expense is tax deductible.
C) it does not dilute control of the corporation.
D) it is less risky to the issuing corporation.
9.4-7 The financing option that has the lowest risk to a company is:
A) financing by issuing shares.
B) financing by issuing bonds payable.
C) financing by retained earnings.
D) financing by issuing notes payable.
9.4-8 The financing option that creates no liabilities or interest expense is:
A) financing by issuing shares.
B) financing by issuing bonds payable.
C) financing by debt.
D) financing by issuing notes payable.
9.4-9 The financing option that does not dilute control of the corporation and often results in higher
earnings per share is:
A) financing by issuing shares.
B) financing by issuing bonds payable.
C) financing by issuing notes payable.
D) both B and C.
9.4-10 A company wishing to maximize earnings per share would:
A) issue bonds.
B) issue shares.
C) issue shares or bonds, depending upon the tax rate.
D) issue shares or bonds, depending upon the interest rate.
9.4-11 Earning more income on borrowed money than the related interest expense, thereby increasing the
earnings for the owners of the business, is called:
A) interest-coverage ratio.
B) trading on the equity.
C) earnings per share.
D) borrowing on equity.
9.4-12 A company wishing to expand can obtain the necessary funds by borrowing on a long-term note
payable or by issuing 50,000 shares of $10 par value ordinary shares. Net income is estimated at
$302,500 if the company borrows the funds, and $330,000 if the company issues shares. The
company currently has 250,000 shares of ordinary shares outstanding. If the company issues shares, earnings
per share would be:
A) $1.00.
B) $1.10.
C) $1.32.
D) $6.60.
9.4-13 A company wishing to expand can obtain the necessary funds by borrowing on a long-term note
payable or by issuing 50,000 shares of $10 par value ordinary shares. Net income is estimated at
$302,500 if the company borrows the funds, and $330,000 if the company issues shares. The
company currently has 250,000 shares of ordinary shares outstanding. If the company issues shares instead of
borrowing funds, earnings per share would
A) decrease by $0.21.
B) decrease by $0.11.
C) increase by $0.21.
D) increase by $0.10.
9.4-14 Assume the following: Sales revenue was $3,000,000. Interest expense was $15,000. Operating
income was $300,000. The times-interest-earned is:
A) 40 times.
B) 30 times.
C) 20 times.
D) 187 times.
9.4-15 The ratio that measures the number of times that operating income can cover interest expense is the:
A) debt ratio.
B) times-interest-earned ratio.
C) current installment of long-term debt.
D) interest ratio.
9.5-1 Current liabilities are reported separately from long-term liabilities.
9.5-2 IFRS require companies to report on their financial statements the fair market value of their financial
instruments, which includes long-term debt.
9.5-3 A company must have a note to the financial statements giving additional details about the company’s
liabilities.
9.5-4 A company must include the following about its liabilities in the notes to the financial statements:
A) current maturities of long-term debt as a current liability.
B) the interest rates on the debt.
C) the maturity dates of the debt.
D) all of the above.
9.5-5 The retirement of callable bonds at an amount above face value would appear on a statement of cash
flows as an:
A) inflow in the financing activities section.
B) outflow in the financing activities section.
C) inflow in the operating activities section.
D) outflow in the operating activities section.
9.5-6 Bonds with a face value of $150,000 are issued at 98. The statement of cash flows would report a:
A) cash inflow of $147,000 in the financing activities section.
B) cash inflow of $3,000 in the financing activities section.
C) cash inflow of $147,000 in the investing activities section.
D) cash inflow of $3,000 in the investing activities section.
9.5-7 The fair market value of long-term debt:
A) is never shown on the financial statements.
B) is shown on the financial statements if it results in the company has an operating loss.
C) is required to be reported on the financial statements.
D) is reported in the financing activities section of the statement of cash flows.