Chapter 12—Long-Term Liabilities: Bonds and Notes Key
1. A bond is simply a form of an interest bearing note.
2. Bondholders are creditors of the issuing corporation.
3. Bonds of major corporations are traded on bond exchanges.
4. Bondholders claims on the assets of the corporation rank ahead of stockholders.
5. A bond is usually divided into a number of individual bonds of $500 each.
6. A secured bond is called a debenture bond and is backed only by the general creditworthiness of the
corporation.
7. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a
convertible bond.
8. The face value of bonds is quoted as a percentage of the bonds’ market value.
9. The face value of a term bond is payable at a single specific date in the future.
10. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.
11. The market rate of interest is affected by a variety of factors, including investors’ assessment of current
economic conditions.
12. The concept of present value is that an amount of cash to be received at some date in the future is the
equivalent of the same amount of cash held at an earlier date.
13. The buyer determines how much to pay for bonds by computing the present value of future cash receipts
using the contract rate of interest.
14. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.
15. Bonds are sold at face value when the contract rate is equal to the market rate of interest.
16. The present value of the periodic bond interest payments is the value today of the amount of interest to be
received at the end of each interest period.
17. An equal stream of periodic payments is called an annuity.
18. The present value of an annuity is the sum of the present values of each cash flow.
19. The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded
annually is $3,636.30.
20. If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1) the
present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000 payments at
5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.
21. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.
22. One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.
23. If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will sell at a
premium.
24. The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the
25. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use
do not materially differ from the results obtained by use of the interest method.
26. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable
will decrease as the bonds approach maturity.
27. If the straight-line method of amortization of discount on bonds payable is used, the amount of yearly
interest expense will increase as the bonds approach maturity.
28. There are two methods of amortizing a bond discount or premium: the straight-line method and the double-
declining-balance method.
29. The effective-interest method of amortizing a bond discount or premium is the preferred method.
30. The amount of interest expense reported on the income statement will be more than the interest paid to
bondholders if the bonds were originally sold at a discount.
31. The amortization of a premium on bonds payable decreases bond interest expense.
32. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual
straight-line amortization of the premium is $1,416.
33. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest
expense is $5,500.
34. Zero-coupon bonds do not provide for interest payments.
35. The issue price of zero-coupon bonds is the present value of their face amount.
36. To determine the six month interest payment amount on a bond, you would take one-half of the market rate
times the face value of the bond.
37. Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be
$2,400 every 6 months.
38. Amortization is the allocation process of writing off bond premiums and discounts to interest expense over
the life of the bond issue.
39. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the
unamortized discount.
40. The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.
41. At 12/31/2009, the cash and securities held in a sinking fund to redeem bonds in 2011 are classified on the
balance sheet as current assets.
42. If sinking fund cash is used to purchase investments, those investments are reported on the balance sheet as
marketable securities.
43. Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.
44. There is a loss on redemption of bonds when bonds are redeemed above carrying value.
45. When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount
must be written off.
46. A corporation often issues callable bonds to protect itself against significant declines in future interest rates.
47. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.
48. Only callable bonds can be purchased by the issuing corporation before maturity.
49. Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in
the bond indenture.
50. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or
less any unamortized premium.
51. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of
bonds is $10,000.
52. Gains and losses on the redemption of bonds are reported as other income or other expense on the income
statement.
53. Bonds may be purchased directly from the issuing corporation or through one of the bond exchanges.
54. Bonds payable would be listed at their carrying value on the balance sheet.
55. The unamortized Discount on Bonds Payable account is a contra-liability account.
56. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the
balance sheet.
57. The balance in a bond discount account should be reported on the balance sheet as a deduction from the
related bonds payable.
58. The higher the times interest earned ratio, the better the creditors’ protection.
59. The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.
60. When the effective interest method of amortization is used, the amount of interest expense for a given
period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the
given period.
61. The effective interest method produces a constant dollar amount of interest expense to be reported each
interest period.
62. When there are material differences between the results of using the straight-line method and using the
effective interest method of amortization, the effective interest method should be used.
63. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for
the term of the note.
64. The interest portion of an installment note payment is computed by multiplying the interest rate by the
carrying amount of the note at the end of the period.
65. One potential advantage of financing corporations through the use of bonds rather than common stock is
66. Which of the following is not an advantage of issuing bonds instead of common stock?
67. A bond indenture is
68. Debenture bonds are
69. When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a
specific price, the bonds are
70. When the maturities of a bond issue are spread over several dates, the bonds are called
71. The market interest rate related to a bond is also called the
72. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of
$250,000 will be
73. The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest
dollar)
74. The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded to
nearest dollar)
75. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
76. A corporation issues for cash $9,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount
received for the bonds will be
77. The interest rate specified in the bond indenture is called the
78. An unsecured bond is the same as a
79. A legal document that indicates the name of the issuer, the face value of the bond and such other data is
called
80. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are
called
81. The Marx Company issued $100,000 of 12% bonds on April 1, 2010 at face value. The bonds pay interest
semiannually on January 1 and July 1. The bonds are dated January 1, 2010, and mature on January 1,
2014. The total interest expense related to these bonds for the year ended December 31, 2010 is
82. On January 1, 2014, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds
are sold for $192,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date
is December 31, 2018. Horton records straight-line amortization of the bond discount. The bond interest
expense for the year ended December 31, 2014, is
83. If $1,000,000 of 8% bonds are issued at 103 1/2, the amount of cash received from the sale is
84. If $2,000,000 of 10% bonds are issued at 95, the amount of cash received from the sale is
85. A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when
the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or
premium. Which of the following statements is true?
86. If the straight-line method of amortization of bond premium or discount is used, which of the following
statements is true?
87. A corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when
the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or
premium. Which of the following statements is true?
88. A corporation issues for cash $10,000,000 of 8%, 30-year bonds, interest payable annually, at a time when
the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or
premium. Which of the following statements is true?
89. The entry to record the amortization of a premium on bonds payable on an interest payment date includes:
90. The adjusting entry to record the amortization of a discount on bonds payable is
91. When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that
pay interest annually. The selling price of this bond issue was
92. When the market rate of interest was 11%, Munson Corporation issued $1,000,000, 12%, 8-year bonds that
pay interest semiannually. The selling price of this bond issue was
93. The journal entry a company records for the issuance of bonds when the contract rate and the market rate
are the same is
94. The journal entry a company records for the issuance of bonds when the contract rate is greater than the
market rate would be
95. The journal entry a company records for the issuance of bonds when the contract rate is less than the market
rate would be
96. When the market rate of interest was 11%, Valley Corporation issued $100,000, 8%, 10-year bonds that pay
interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each
interest period would be
97. The journal entry a company records for the payment of interest, interest expense, and amortization of bond
discount is
98. The journal entry a company records for the payment of interest, interest expense, and amortization of bond
premium is
99. On January 1, 2014, the Baker Corporation issued 10% bonds with a face value of $50,000. The bonds are
sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is
December 31, 2023. Baker records straight-line amortization of the bond discount. The bond interest expense
for the year ended December 31, 2014, is
100. If $1,000,000 of 8% bonds are issued at 105, the amount of cash received from the sale is
101. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
102. The interest expense recorded on an interest payment date is increased
103. On January 1, 2014, $1,000,000, 5-year, 10% bonds, were issued for $980,000. Interest is paid
semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize
discount on bonds payable, the semiannual amortization amount is
104. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would
sell at an amount
105. A corporation issues $100,000, 10%, 5-year bonds on January 1, 2011, for $104,200. Interest is paid
semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond
premium, the amount of bond interest expense to be recognized on July 1, 2011, is
106. If bonds are issued at a premium, the stated interest rate is
107. The Victor Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal
entry to record the issuance will show a
108. The Miracle Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The
journal entry to record the issuance will show a
109. The Reagan Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 92. The journal
entry to record the issuance will show a
110. If bonds are issued at a discount, it means that the
111. Selling the bonds at a premium has the effect of
112. Bonds with a face amount $1,000,000, are sold at 108. The entry to record the issuance is
113. Bonds with a face amount $1,000,000, are sold at 96. The entry to record the issuance is
114. Sinking Fund Cash would be classified on the balance sheet as
115. Sinking Fund Investments would be classified on the balance sheet as
116. The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2015 should
be classified on the balance sheet as
117. The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the
life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)
118. Sinking Fund Income is reported in the income statement as
119. If bonds payable are not callable, the issuing corporation
120. When callable bonds are redeemed below carrying value
121. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If
the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?
122. Bonds Payable has a balance of $900,000 and Premium on Bonds Payable has a balance of $10,000. If the
issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?
123. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $296,000. The entry to
record the redemption would include a
124. A $300,000 bond was redeemed at 104 when the carrying value of the bond was $315,000. The entry to
record the redemption would include a
125. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $15,500. If
the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption?
126. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If
the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?
127. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to
128. The balance in Discount on Bonds Payable
129. The balance in Discount on Bonds Payable that is applicable to bonds due in 2015 would be reported on