CHAPTER 14: LONG-TERM LIABILITIES: BONDS AND NOTES
1.
A bond is simply a form of an interest-bearing note.
a.
True
b.
False
2.
Bondholders are creditors of the issuing corporation.
a.
True
b.
False
3.
Bondholders claims on the assets of the corporation rank ahead of stockholders.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
4.
A bond is usually divided into a number of individual bonds of $500 each.
a.
True
b.
False
5.
If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a
convertible
bond.
a.
True
b.
False
6.
The prices of bonds are quoted as a percentage of the bonds’ market value.
a.
True
b.
False
7.
The face value of a term bond is payable at a single specific date in the future.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
8.
When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.
a.
True
b.
False
9.
The market rate of interest is affected by a variety of factors, including investors’ assessment of current
economic
conditions.
a.
True
b.
False
10.
When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
11.
Bonds are sold at face value when the contract rate is equal to the market rate of interest.
a.
True
b.
False
12.
The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.
a.
True
b.
False
13.
If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium.
a.
True
b.
False
14.
The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the
total
discount or minus the total premium related to the bond.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
15.
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.
a.
True
b.
False
16.
If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable
will
decrease as the bonds approach maturity.
a.
True
b.
False
17.
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.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
18.
There are two methods of amortizing a bond discount or premium: the straight-line method and the double-
declining-balance method.
a.
True
b.
False
19.
The effective interest rate method of amortizing a bond discount or premium is the preferred method.
a.
True
b.
False
20.
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.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
21.
The amortization of a premium on bonds payable decreases bond interest expense.
a.
True
b.
False
22.
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.
a.
True
b.
False
23.
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.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
24.
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.
a.
True
b.
False
25.
Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400
every
6 months.
a.
True
b.
False
26.
Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the
life
of the bond issue.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
27.
If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the
unamortized
discount.
a.
True
b.
False
28.
Both callable and noncallable bonds can be purchased by the issuing corporation in the open market.
a.
True
b.
False
29.
There is a loss on redemption of bonds when bonds are redeemed above carrying value.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
30.
When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must
be
written off.
a.
True
b.
False
31.
A corporation often issues callable bonds to protect itself against significant declines in future interest rates.
a.
True
b.
False
32.
Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.
a.
True
b.
False
33.
Only callable bonds can be purchased by the issuing corporation before maturity.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
34.
Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in
the
bond indenture.
a.
True
b.
False
35.
The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or
less
any unamortized premium.
a.
True
b.
False
36.
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.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
37.
Gains and losses on the redemption of bonds are reported as other income or other expense on the income
statement.
a.
True
b.
False
38.
Discount on Bonds Payable is a contra liability account.
a.
True
b.
False
39.
When there are material differences between the results of using the straight-line method and using the
effective
interest rate method of amortization, the effective interest rate method should be used.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
40.
An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the
term
of the note.
a.
True
b.
False
41.
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.
a.
True
b.
False
42.
Bonds payable should be reported on the balance sheet at face value plus or minus any unamortized premium
or
discount.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
43.
The balance in a bond discount account should be reported on the balance sheet as a deduction from the related
bonds payable.
a.
True
b.
False
44.
The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the
balance
sheet.
a.
True
b.
False
45.
The higher the number of times interest charges are earned ratio, the better the creditors’ protection.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
46.
The number of times interest charges are earned ratio is calculated by dividing Bonds Payable by Interest Expense.
a.
True
b.
False
47.
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.
a.
True
b.
False
48.
An equal stream of periodic payments is called an annuity.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
49.
The buyer determines how much to pay for bonds by computing the present value of future cash receipts using
the
contract rate of interest.
a.
True
b.
False
50.
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.
a.
True
b.
False
51.
The present value of an annuity is the sum of the present values of each cash flow.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
52.
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.
a.
True
b.
False
53.
One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.
a.
True
b.
False
54.
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%.
a.
True
b.
False
Chapter 14: Long-Term Liabilities: Bonds and Notes
55.
When the effective interest rate 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.
a.
True
b.
False
56.
The effective interest rate method produces a constant dollar amount of interest expense to be reported each
interest period.
a.
True
b.
False
57.
One potential advantage of financing corporations through the use of bonds rather than common stock is
a.
the interest on bonds must be paid when due
b.
the corporation must pay the bonds at maturity
c.
the interest expense is deductible for tax purposes by the corporation
d.
a higher earnings per share is guaranteed for existing common shareholders
Chapter 14: Long-Term Liabilities: Bonds and Notes
58.
Which of the following is not an advantage of issuing bonds instead of common stock?
a.
Tax savings result.
b.
Income to common shareholders may increase.
c.
Earnings per share on common stock may be lower.
d.
Stockholder control is not affected.
59.
A bond indenture is
a.
a contract between the corporation issuing the bonds and the underwriters selling the bonds
b.
the amount due at the maturity date of the bonds
c.
a contract between the corporation issuing the bonds and the bondholders
d.
the amount for which the corporation can buy back the bonds prior to the maturity date
60.
When the corporation issuing the bonds has the right to redeem the bonds prior to the maturity, the bonds are
a.
convertible bonds
b.
unsecured bonds
c.
debenture bonds
d.
callable bonds
Chapter 14: Long-Term Liabilities: Bonds and Notes
61.
When the maturities of a bond issue are spread over several dates, the bonds are called
a.
serial bonds
b.
bearer bonds
c.
debenture bonds
d.
term bonds
62.
The market interest rate related to a bond is also called the
a.
stated interest rate
b.
effective interest rate
c.
contract interest rate
d.
straight-line rate
63.
If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of
$500,000 will be
a.
equal to $500,000
b.
greater than $500,000
c.
less than $500,000
d.
greater than or less than $500,000, depending on the maturity date of the bonds