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70) Which of the following is not a reason why some companies lease rather than buy?
A) Leasing may allow you to borrow with little or no down payment.
B) Leasing may offer protection against risk of declining asset values.
C) Leasing offers flexibility and lower costs when disposing of an asset.
D) Leasing transfers the title to the lessee at the beginning of the lease.
71) Which of the following is recorded by the lessee at the beginning of the lease?
A) Decrease in assets.
B) Increase in expenses.
C) Increase in revenues.
D) Increase in liabilities.
72) At the beginning of the lease period, the lease is reported in the lessee's balance sheet for
which amount?
A) Fair value of the underlying asset.
B) Present value of expected cash inflows from using the underlying asset.
C) Present value of lease payments over the lease period.
D) Leases are not reported in the balance sheet.
73) A company is deciding between two options: (1) purchase a piece of equipment for $10,000
or (2) lease the same piece of equipment for three years and then return the equipment to the
owner. The lease payments are $182.53 per month and have a present value of $6,000. If the
company decides to lease, for what amount would the leased asset be recorded at the beginning
of the lease?
A) $10,000.
B) $6,000.
C) $4,000.
D) $6,571.
74) Before signing a lease, a company reports total assets of $500,000 and total liabilities of
$300,000. The company then signs a 30-month lease for equipment with payments of $922.21
each month. The lease payments have a present value of $25,000. After recording the inception
of the lease, the company would report which of the following?
A) Total assets of $527,666.30, and total liabilities of $325,000.00.
B) Total assets of $525,000.00, and total liabilities of $327,666.30.
C) Total assets of $527,666.30, and total liabilities of $327,666.30.
D) Total assets of $525,000.00, and total liabilities of $325,000.00.
75) On April 1, 2021, a company signs a 20-month lease for equipment. Monthly payments of
$554.15 begin on May 1, 2021. The company's normal borrowing rate is 12%. For what amount
would the company record the lease on April 1, 2021 (rounded to nearest whole dollar)? Use (PV
of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round
interest rate factors.)
A) $12,000.
B) $11,083.
C) $10,000.
D) $10,800.
76) On January 1, 2021, a company signs a 25-year lease for land. Annual payments of $20,000
begin on December 31, 2021. The company's normal borrowing rate is 6%. For what amount
would the company record the lease on January 1, 2021 (rounded to nearest whole dollar)? Use
(PV of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not
round interest rate factors.)
A) $255,667.
B) $440,463.
C) $500,000.
D) $244,333.
77) On July 1, 2021, a company signs a 30-month lease for an office building. Lease payments of
$6,457 are due every three months (10 payments total), beginning on October 1, 2021. The
company's normal borrowing rate is 8% (2% every three months). For what amount would the
company record the lease on July 1, 2021 (rounded to nearest whole dollar)? Use (PV of $1, and
PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate
factors.)
A) $62,000.
B) $58,001.
C) $64,570.
D) $43,327.
78) A bond is a formal debt instrument that obligates the borrower to repay a stated amount at
the maturity date. This stated amount is referred to as the:
A) Note.
B) Interest.
C) Lease.
D) Principal or face amount.
79) A common advantage of obtaining long-term funds by issuing bonds, rather than borrowing
from the bank, includes which of the following?
A) Bonds involve less surrendering of ownership control.
B) Bonds usually have a lower interest rate.
C) Bonds are more likely to involve borrowing from a single lender.
D) Bond issue costs are usually lower than fees charged by the bank.
80) Which of the following definitions describes a term bond?
A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.
81) Which of the following definitions describes a serial bond?
A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.
82) Which of the following definitions describes a secured bond?
A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.
83) Term bonds are:
A) Bonds issued below the face amount.
B) Bonds that mature in installments.
C) Bonds that mature all at once.
D) Bonds issued above the face amount.
84) Serial bonds are:
A) Bonds backed by collateral.
B) Bonds that mature in installments.
C) Bonds with greater risk.
D) Bonds issued below the face amount.
85) Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is
more common?
A) Secured and term.
B) Secured and serial.
C) Unsecured and term.
D) Unsecured and serial.
86) A home loan with fixed monthly payments and the house as collateral most closely
represents which of the following bond characteristics?
A) Secured and term.
B) Secured and serial.
C) Unsecured and term.
D) Unsecured and serial.
87) Which of the following is not true regarding callable bonds?
A) This feature allows the issuer to repay the bonds before their scheduled maturity date.
B) This feature helps protect the issuer against future decreases in interest rates.
C) This feature usually allows the issuer to repay bonds just below face value.
D) This feature benefits the issuer more when the bond's stated rate is 8% and the market interest
rate is 5%.
88) Convertible bonds:
A) Provide potential benefits only to the issuer.
B) Provide potential benefits only to the investor.
C) Provide potential benefits to both the issuer and the investor.
D) Provide no potential benefits.
89) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current
market rate of interest is also 10%. These bonds will sell at a price that is:
A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.
90) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current
market rate of interest is 8%. These bonds will sell at a price that is:
A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.
91) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current
market rate of interest is 6%. These bonds will sell at a price that is:
A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.
92) A $500,000 bond issue sold for $510,000. Therefore, the bonds:
A) Sold at a premium because the stated interest rate was higher than the market rate.
B) Sold for the $500,000 face amount plus $10,000 of accrued interest.
C) Sold at a discount because the stated interest rate was higher than the market rate.
D) Sold at a premium because the market interest rate was higher than the stated rate.
93) A $500,000 bond issue sold for $490,000. Therefore, the bonds:
A) Sold at a discount because the stated interest rate was higher than the market rate.
B) Sold for the $500,000 face amount less $10,000 of accrued interest.
C) Sold at a premium because the stated interest rate was higher than the market rate.
D) Sold at a discount because the market interest rate was higher than the stated rate.
94) For a bond issue that sells for more than the bond face amount, the stated interest rate is:
A) The actual yield rate.
B) The prime rate.
C) More than the market rate.
D) Less than the market rate.
95) For a bond issue that sells for less than the bond face amount, the stated interest rate is:
A) The actual yield rate.
B) The prime rate.
C) More than the market rate.
D) Less than the market rate.
96) Bond X and Bond Y are both issued by the same company. Each of the bonds has a face
value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays
7% interest. The current market rate of interest is 7%. Which of the following is correct?
A) Both bonds will sell for the same amount.
B) Bond X will sell for more than Bond Y.
C) Bond Y will sell for more than Bond X.
D) Both bonds will sell at a premium.
97) Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5
years. Interest payments are made semi-annually. The market rate for this type of bond is 12%.
What is the issue price of the bond (rounded to nearest whole dollar?
(Use Table 2 and Table 4, contained within a separate file.)
A) $83,920.
B) $46,320.
C) $53,605.
D) $50,000.
32
98) Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5
years. Interest payments are made semi-annually. The market rate for this type of bond is 8%.
What is the issue price of the bond (rounded to nearest whole dollar)?
(Use Table 2 and Table 4)
A) $83,920.
B) $46,320.
C) $54,055.
D) $50,000.
99) Given the information below, which bond(s) will be issued at a discount?
Bond 1
Bond 2
Bond 3
Bond 4
Stated Rate of Return
5
%
7
%
12
%
10
%
Market Rate of Return
7
%
8
%
12
%
9
%
A) Bond 1.
B) Bond 2.
C) Bond 4.
D) Bonds 1 and 2.
100) Given the information below, which bond(s) will be issued at a premium?
Bond 1
Bond 2
Bond 3
Bond 4
Stated Rate of Return
5
%
10
%
7
%
10
%
Market Rate of Return
7
%
8
%
7
%
9
%
A) Bond 1.
B) Bond 2.
C) Bond 3.
D) Bonds 2 and 4.
101) Given the information below, which bond(s) will be issued at a discount?
Bond 1
Bond 2
Bond 3
Bond 4
Stated Rate of Return
10
%
8
%
12
%
12
%
Market Rate of Return
12
%
8
%
15
%
10
%
A) Bond 1.
B) Bond 3.
C) Bonds 2 and 4.
D) Bonds 1 and 3.
102) Given the information below, which bond(s) will be issued at a premium?
Bond 1
Bond 2
Bond 3
Bond 4
Stated Rate of Return
7
%
12
%
10
%
8
%
Market Rate of Return
8
%
10
%
10
%
9
%
A) Bond 1.
B) Bond 2.
C) Bond 3.
D) Bonds 2 and 4.
103) The rate quoted in the bond contract used to calculate the cash payments for interest is
called the:
A) Face rate.
B) Yield rate.
C) Market rate.
D) Stated rate.
104) The true interest rate used by investors to value a bond is called the:
A) Face interest rate.
B) Cash payment rate.
C) Market interest rate.
D) Stated interest rate.
105) Which of the following is true for bonds issued at a discount?
A) The stated interest rate is greater than the market interest rate.
B) The market interest rate is greater than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.
D) The stated interest rate and the market interest rate are unrelated.
106) A bond issued at a discount indicates that at the date of issue:
A) Its stated rate was lower than the prevailing market rate of interest on similar bonds.
B) Its stated rate was higher than the prevailing market rate of interest on similar bonds.
C) The bonds were issued at a price greater than their face value.
D) The bonds must be non-interest bearing.
107) Which of the following is true for bonds issued at a premium?
A) The stated interest rate is less than the market interest rate.
B) The market interest rate is less than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.
D) The stated interest rate and the market interest rate are unrelated.
108) A bond issued at a premium indicates that at the date of issue:
A) Its stated rate was lower than the prevailing market rate of interest on similar bonds.
B) Its stated rate was higher than the prevailing market rate of interest on similar bonds.
C) The bonds were issued at a price less than their face value.
D) The bonds must be non-interest bearing.
109) Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for
$19,500,000. The entry to record the bond issuance would have what effect on the financial
statements?
A) Increase assets.
B) Increase liabilities.
C) Increase stockholders' equity.
D) Increase assets and liabilities.
110) Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for
$290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?
A) Increase assets and liabilities.
B) Increase and decrease assets.
C) Increase assets and stockholders' equity.
D) Increase and decrease stockholders' equity.
111) The cash interest payment each period is calculated as the:
A) Face amount times the stated interest rate.
B) Face amount times the market interest rate.
C) Carrying value times the market interest rate.
D) Carrying value times the stated interest rate.
112) Interest expense on bonds payable is calculated as the:
A) Face amount times the stated interest rate.
B) Face amount times the market interest rate.
C) Carrying value times the market interest rate.
D) Carrying value times the stated interest rate.
113) When bonds are issued at a discount, what happens to the carrying value and interest
expense over the life of the bonds?
A) Carrying value and interest expense increase.
B) Carrying value and interest expense decrease.
C) Carrying value decreases and interest expense increases.
D) Carrying value increases and interest expense decreases.
114) When bonds are issued at a premium, what happens to the carrying value and interest
expense over the life of the bonds?
A) Carrying value and interest expense increase.
B) Carrying value and interest expense decrease.
C) Carrying value decreases and interest expense increases.
D) Carrying value increases and interest expense decreases.
115) Bonds payable should be reported as a long-term liability in the balance sheet at the:
A) Face value.
B) Current bond market price.
C) Carrying value.
D) Face value less accrued interest since the last interest payment date.
116) How would the carrying value of bonds payable change over time for bonds issued at a
discount and for bonds issued at a premium?
A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium.
B) Decrease for bonds issued at a discount and increase for bonds issued at a premium.
C) Increase for bonds issued at a discount and decrease for bonds issued at a premium.
D) Increase for bonds issued at a discount and increase for bonds issued at a premium.
117) The carrying value, using the effective interest method, would decrease each year:
A) If the bonds were sold at a discount.
B) If the bonds were sold at a premium.
C) If the bonds were sold at either a discount or a premium.
D) The carrying value of bonds will never decrease.
118) The carrying value, using the effective interest method, would increase each year:
A) If the bonds were sold at a discount.
B) If the bonds were sold at a premium.
C) If the bonds were sold at either a discount or a premium.
D) The carrying value of bonds will never increase.
119) When bonds are issued at a discount and the effective interest method is used for
amortization, at each subsequent interest payment date, the cash paid is:
A) Less than the interest expense.
B) Equal to the interest expense.
C) Greater than the interest expense.
D) More than if the bonds had been sold at a premium.
120) When bonds are issued at a premium and the effective interest method is used for
amortization, at each subsequent interest payment date, the cash paid is:
A) Less than the interest expense.
B) Equal to the interest expense.
C) Greater than the interest expense.
D) More than if the bonds had been sold at a discount.
