Chapter 14: Long-Term Liabilities: Bonds and Notes
64.
When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
a.
a premium
b.
their face value
c.
their maturity value
d.
a discount
65.
The interest rate specified in the bond indenture is called the
a.
discount rate
b.
contract rate
c.
market rate
d.
effective rate
66.
A legal document that indicates the name of the issuer, the face value of the bond and such other data is called
a.
trading on the equity
b.
convertible bond
c.
a bond debenture
d.
a bond indenture
Chapter 14: Long-Term Liabilities: Bonds and Notes
67.
Bonds that are subject to retirement prior to maturity at the option of the issuer are called
a.
debentures
b.
callable bonds
c.
early retirement bonds
d.
options
68.
On January 1 of the current year, the Barton Corporation issued 10% bonds with a face value of $200,000. The
bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31 and the
maturity
date is December 31, five years from now. Barton records straight-line amortization of the bond
discount. The
bond interest expense for the year ended December 31 is
a. $10,900
b. $18,200
c. $21,800
d. $29,000
69.
If $1,000,000 of 8% bonds are issued at 102 3/4, the amount of cash received from the sale
is
a. $1,080,000
b. $972,500
c. $1,000,000
d. $1,027,500
Chapter 14: Long-Term Liabilities: Bonds and Notes
70.
If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is
a. $2,060,000
b. $2,000,000
c. $2,100,000
d. $1,940,000
71.
Selling the bonds at a premium has the effect of
a.
raising the effective interest rate above the stated interest rate
b.
attracting investors that are willing to pay a lower rate of interest than on similar bonds
c.
causing the interest expense to be higher than the bond interest paid
d.
causing the interest expense to be lower than the bond interest paid
72.
If bonds are issued at a discount, it means that the
a.
bondholder will receive effectively less interest than the contractual rate of interest
b.
market interest rate is lower than the contractual interest rate
c.
market interest rate is higher than the contractual interest rate
d.
financial strength of the issuer is suspect
Chapter 14: Long-Term Liabilities: Bonds and Notes
73.
The Levi Company issued $200,000 of 12% bonds on January 1 at face value. The bonds pay interest
semiannually
on January 1 and July 1. The bonds are dated January 1, and mature in five years, on January 1. The
total interest
expense related to these bonds for the current year ending on December 31 is
a. $2,000
b. $6,000
c. $18,000
d. $24,000
74.
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?
a.
The amount of the annual interest expense is computed at 10% of the bond carrying amount at the
beginning
of the year.
b.
The amount of the annual interest expense gradually decreases over the life of the bonds.
c.
The amount of unamortized discount decreases from its balance at issuance date to a zero balance at
maturity.
d.
The bonds will be issued at a premium.
75.
If the straight-line method of amortization of bond premium or discount is used, which of the following statements
is
true?
a.
Annual interest expense will increase over the life of the bonds with the amortization of bond premium.
b.
Annual interest expense will remain the same over the life of the bonds with the amortization of
bond
discount.
c.
Annual interest expense will decrease over the life of the bonds with the amortization of bond discount.
d.
Annual interest expense will increase over the life of the bonds with the amortization of bond discount.
Chapter 14: Long-Term Liabilities: Bonds and Notes
76.
Basil Corporation issues for cash $1,000,000 of 8%, 10-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?
a.
The carrying amount increases from its amount at issuance date to $1,000,000 at maturity.
b.
The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.
c.
The amount of annual interest paid to bondholders increases over the 10-year life of the bonds.
d.
The amount of annual interest expense decreases as the bonds approach maturity.
77.
Dylan 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 9%. The straight-line method is adopted for the amortization of bond discount or
premium. Which of the following statements is true?
a.
The amount of annual interest paid to bondholders remains the same over the life of the bonds.
b.
The amount of annual interest expense decreases as the bonds approach maturity.
c.
The amount of annual interest paid to bondholders increases over the 15-year life of the bonds.
d.
The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity.
78.
The entry to record the amortization of a premium on bonds payable on an interest payment date would
a.
a debit to Premium on Bonds Payable and a credit to Interest Revenue
b.
a debit to Interest Expense and a credit to Premium on Bond Payable
c.
a debit to Interest Expense and Premium on Bonds Payable and a credit to Cash
d.
a debit to Bonds Payable and a credit to Interest Expense
Chapter 14: Long-Term Liabilities: Bonds and Notes
79.
The adjusting entry to record the amortization of a discount on bonds payable is
a.
debit Discount on Bonds Payable, credit Interest Expense
b.
debit Interest Expense, credit Discount on Bonds Payable
c.
debit Interest Expense, credit Cash
d.
debit Bonds Payable, credit Interest Expense
80.
The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the
same is to
a.
debit Bonds Payable, credit Cash
b.
debit Cash and Discount on Bonds Payable, credit Bonds Payable
c.
debit Cash, credit Premium on Bonds Payable and Bonds Payable
d.
debit Cash, credit Bonds Payable
81.
The journal entry a company records for the issuance of bonds when the contract rate is greater than the market
rate would be
a.
debit Bonds Payable, credit Cash
b.
debit Cash and Discount on Bonds Payable, credit Bonds Payable
c.
debit Cash, credit Premium on Bonds Payable and Bonds Payable
d.
debit Cash, credit Bonds Payable
Chapter 14: Long-Term Liabilities: Bonds and Notes
82.
The journal entry a company records for the issuance of bonds when the contract rate is less than the market rate
would be
a.
debit Bonds Payable, credit Cash
b.
debit Cash and Discount on Bonds Payable, credit Bonds Payable
c.
debit Cash, credit Premium on Bonds Payable and Bonds Payable
d.
debit Cash, credit Bonds Payable
83.
The journal entry a company records for the payment of interest, interest expense, and amortization of
bond
discount is
a.
debit Interest Expense, credit Cash and Discount on Bonds Payable
b.
debit Interest Expense, credit Cash
c.
debit Interest Expense and Discount on Bonds Payable, credit Cash
d.
debit Interest Expense, credit Interest Payable and Discount on Bonds Payable
84.
The journal entry a company records for the payment of interest, interest expense, and amortization of
bond
premium is
a.
debit Interest Expense, credit Cash and Premium on Bonds Payable
b.
debit Interest Expense, credit Cash
c.
debit Interest Expense and Premium on Bonds Payable, credit Cash
d.
debit Interest Expense, credit Interest Payable and Premium on Bonds Payable
Chapter 14: Long-Term Liabilities: Bonds and Notes
85.
On January 1, the Elias 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,
ten years from now. Elias records straight-line amortization of the bond discount. The bond interest expense
for
the year ended December 31 of the first year is
a. $5,000
b. $5,200
c. $5,800
d. $5,400
86.
Eddie Industries issues $1,500,000 of 8% bonds at 105, the amount of cash received from the sale
is
a. $1,425,000
b. $1,080,000
c. $1,000,000
d. $1,575,000
87.
If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a.
at a premium
b.
at face value
c.
at a discount
d.
only after the stated rate of interest is increased
Chapter 14: Long-Term Liabilities: Bonds and Notes
88.
The interest expense recorded on an interest payment date is increased
a.
only if the market rate of interest is less than the stated rate of interest on that date
b.
by the amortization of premium on bonds payable
c.
by the amortization of discount on bonds payable
d.
only if the bonds were sold at face value
89.
On January 1, $2,000,000, 5-year, 10% bonds, were issued for $1,960,000. 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
a. $8,000
b. $2,000
c. $4,000
d. $10,000
90.
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at
an
amount
a.
less than face value
b.
equal to the face value
c.
greater than face value
d.
that cannot be determined
Chapter 14: Long-Term Liabilities: Bonds and Notes
91.
Franklin Corporation issues $50,000, 10%, 5-year bonds on January 1, for $52,100. Interest is paid semiannually
on
January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of
bond
interest expense to be recognized on July 1 is
a. $10,290
b. $2,710
c. $2,500
d. $2,290
92.
If bonds are issued at a premium, the stated interest rate is
a.
higher than the market rate of interest
b.
lower than the market rate of interest
c.
too low to attract investors
d.
adjusted to a higher rate of interest
93.
The Freeman Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1 at 96. The journal entry
to
record the issuance will show a
a.
debit to Cash of $2,000,000
b.
credit to Discount on Bonds Payable for $80,000
c.
credit to Bonds Payable for $1,920,000
d.
debit to Cash for $1,920,000
Chapter 14: Long-Term Liabilities: Bonds and Notes
94.
The Glenn Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 96. The journal entry to
record
the issuance will show a
a.
debit to Discount on Bonds Payable for $80,000
b.
debit to Cash of $2,000,000
c.
credit to Bonds Payable for $1,920,000
d.
credit to Cash for $1,920,000
95.
The Hayden Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 92. The journal entry to
record
the issuance will show a
a.
credit to Discount on Bonds Payable for $160,000
b.
debit to Cash of $2,000,000
c.
credit to Bonds Payable for $2,000,000
d.
credit to Cash for $1,840,000
Chapter 14: Long-Term Liabilities: Bonds and Notes
96.
Bonds with a face amount $1,000,000 are sold at 106. The journal entry to record the issuance is
a. Cash
1,000,000
Premium on Bonds Payable
Bonds Payable
60,000
1,060,000
b. Cash
Premium on Bonds Payable
1,060,000
60,000
Bonds Payable
1,000,000
c. Cash
Discount on Bonds Payable
1,060,000
60,000
Bonds Payable
1,000,000
d. Cash
Bonds Payable
1,060,000
1,060,000
97.
Bonds with a face amount $1,000,000 are sold at 98. The entry to record the issuance is
a. Cash
Premium on Bonds Payable
1,000,000
20,000
Bonds Payable
980,000
b. Cash
980,000
Premium on Bonds Payable
20,000
Bonds Payable
1,000,000
c. Cash
980,000
Discount on Bonds Payable
Bonds Payable
20,000
1,000,000
d. Cash
Bonds Payable
980,000
980,000
Chapter 14: Long-Term Liabilities: Bonds and Notes
98.
If bonds payable are not callable, the issuing corporation
a.
can exchange them for common stock
b.
can repurchase them in the open market
c.
must get special permission from the SEC to repurchase them
d.
is more likely to repurchase them if the interest rates increase
99.
When callable bonds are redeemed below carrying value
a.
gain on redemption of bonds is credited
b.
loss on redemption of bonds is debited
c.
retained earnings is credited
d.
retained earnings is debited
100.
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?
a. $10,000 loss
b. $25,000 loss
c. $25,000 gain
d. $15,000 gain
Chapter 14: Long-Term Liabilities: Bonds and Notes
101.
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?
a.
$1,200 loss
b.
$1,200 gain
c. $17,000 loss
d. $17,000 gain
102.
A $300,000 bond was redeemed at 98 when the carrying value of the bond was $292,000. The entry to record the
redemption would include a
a.
loss on bond redemption of $4,000
b.
gain on bond redemption of $4,000
c.
gain on bond redemption of $2,000
d.
loss on bond redemption of $2,000
103.
A $300,000 bond was redeemed at 104 when the carrying value of the bond was $316,000. The entry to record
the
redemption would include a
a.
loss on bond redemption of $3,000
b.
gain on bond redemption of $3,000
c.
gain on bond redemption of $4,000
d.
loss on bond redemption of $4,000
Chapter 14: Long-Term Liabilities: Bonds and Notes
104.
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?
a.
$500 loss
b. $15,500 loss
c. $15,500 gain
d. $500 gain
105.
On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with
interest
payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal
entry to
record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes
a debit to
a.
Interest Expense for $2,500 b. Premium on Bonds Payable for $2,500
c. Interest Expense for $5,000 d. Premium on Bonds Payable for $5,000
106.
On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with
interest
payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If Lisbon
uses the
straight-line method for amortizing the premium, the journal entry to record the first semiannual interest
payment by
Lisbon Co. would include a debit to
a.
Interest Payable for $30,000 b. Interest Expense for $32,500
c.
Cash for $70,000 d. Premium on Bonds Payable for $5,500
Chapter 14: Long-Term Liabilities: Bonds and Notes
107.
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?
a.
$3,000 loss
b.
$3,000 gain
c.
$7,000 loss
d.
$7,000 gain
108.
When the bonds are sold for more than their face value, the carrying value of the bonds is equal to
a.
face value
b.
face value plus the unamortized discount
c.
face value minus the unamortized premium
d.
face value plus the unamortized premium
109.
The balance in Discount on Bonds Payable
a.
should be reported on the balance sheet as an asset because it has a debit balance
b.
should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the
results
obtained by that method materially differ from the results that would be obtained by the effective
interest
rate method
c.
would be added to the related bonds payable to determine the carrying amount of the bonds
d.
would be subtracted from the related bonds payable on the balance sheet
Chapter 14: Long-Term Liabilities: Bonds and Notes
110.
The balance in Premium on Bonds Payable
a.
should be reported on the balance sheet as a deduction from the related bonds payable
b.
should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the
results
obtained by that method materially differ from the results that would be obtained by the effective
interest
rate method
c.
would be added to the related bonds payable on the balance sheet
d.
should be reported in the paid-in capital section of the balance sheet
111.
If a company borrows money from a bank as an installment note, the interest portion of each annual payment will
a.
equal the interest rate on the note times the carrying amount of the note at the beginning of the period
b.
remain constant over the term of the note
c.
equal the interest rate on the note times the face amount
d.
increase over the term of the note
Chapter 14: Long-Term Liabilities: Bonds and Notes
112.
On the first day of the fiscal year, Hawthorne Company obtained an $88,000, 7-year, 5% installment note from
Sea
Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of
the
fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal
entry
Hawthorne would record to make the first annual payment due on the note would include a
a.
debit to cash for $15,208
b.
credit to notes payable for $10,808
c.
debit to interest expense for $4,400
d.
debit to notes payable for $15,208
113.
On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank.
The
note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year.
The
first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record
the
payment of the first annual amount due on the note would include a
a.
debit to cash for $11,942
b.
credit to interest payable for $11,550
c.
debit to notes payable for $11,942
d.
debit to interest expense for $23,492
Chapter 14: Long-Term Liabilities: Bonds and Notes
114.
On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank.
The
note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year.
The
first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record
the
issuance of the installment note for cash on January 1 would include a
a.
debit to interest expense for $11,550
b.
credit to interest payable for $11,550
c.
credit to notes payable for $165,000
d.
debit to notes payable for $165,000
115.
On January 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note
requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the
current
year. The December 31, Year 1 carrying amount in the amortization table for this installment note will be
equal to:
a. $27,635
b. $40,201
c. $36,821
d. $48,620
Chapter 14: Long-Term Liabilities: Bonds and Notes
116.
On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank.
The
note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 2
carrying
amount in the amortization table for this installment note will be equal to
a. $26,000.
b. $27,635
c. $21,642
d. $28,402
117.
On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank.
The
note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3
carrying
amount in the amortization table for this installment note will be equal to
a.
$0
b. $13,000
c. $14,252
d. $16,603
118.
An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to repay
the principal and interest in equal annual payments of $22,315 beginning December 31, of the first year, for each
of
the next five years. After the final payment, the carrying amount on the note will be
a. $1,263
b. $21,053
c. $22,315
d.
$0