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Chapter 10: Long-Term Liabilities
True / False
1. Discount on Bonds Payable is classified as a current liability.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 - LO: 10-01
KEYWORDS:
Bloom's: Remembering
2. All liabilities that are not classified as current liabilities are classified as long-term.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 - LO: 10-01
KEYWORDS:
Bloom's: Remembering
3. Bonds are generally issued in denominations of $1,000.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
4. Serial bonds are unique because the interest is paid as a series of daily payments.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
5. Bonds are typically issued in denominations of $10,000.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6. If Tanner Company becomes less creditworthy, the market price of its bonds will decline.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
7. Debenture bonds are backed by specific collateral of the issuing company.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
8. Convertible bonds normally sell at a higher price than non-convertible bonds.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
9. If an investor has the right to retire the bonds, they are referred to as callable.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
10. Callable bonds may be retired by the issuer before their specified due date.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11. The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
12. The face rate is also called the nominal or stated rate.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
13. A bond issue price is the present value of the cash flows that the bond will produce.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Remembering
14. The issue price of a bond is always present valued using the market rate of interest.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Remembering
15. When the market rate of interest is less than the face rate, then the bond issue will be sold at a discount.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16. The excess of the face value of bonds over the issue price is known as a premium.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Remembering
17. The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a
constant amount of interest expense from period to period.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Remembering
18. The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the
market rate of interest at the time the bonds are issued.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Remembering
19. The amortization of bond discount increases the effective interest expense incurred each period for the issuer while
amortization of bond premium decreases it.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Remembering
20. When a bond is issued at a discount, the interest expense each year is less than the cash payment for interest.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21. The sum of the carrying value and the redemption price at the time bonds are redeemed results in the gain or loss on
redemption.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 - LO:10-06
KEYWORDS:
Bloom's: Remembering
22. When a bond issue is retired early, the amount of unamortized discount or premium is not considered in the
calculation of a gain or loss.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 - LO:10-06
KEYWORDS:
Bloom's: Remembering
23. In an operating lease, the lessee acquires the right to use an asset for only a limited period of time.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
24. A lease is accounted for as a capital lease if the lease term is 75% or more of the property's economic life.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
25. When a lease is classified as an operating lease, the lease liability should be presented on the balance sheet of the
lessee.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26. IFRS typically uses a more “rule-based” approach than U.S. GAAP.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
27. In general, the international accounting standards provide lease criteria that are similar to the U.S. standards.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
28. The accounting for leases is an excellent example of the differences in how U.S. and IFRS accounting standards are
applied.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
29. The terms of a lease can only be structured in one way to meet the lessor and lessee and satisfy accounting standards.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
30. In an operating lease, the lessee is not required to record the right to use the property as an asset or to record the
obligation for payments as a liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
31. In an operating lease, the lessee has acquired sufficient rights of ownership and control of the property to be
considered its owner.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
32. If the lease term is 75% or more of the property’s economic life, the lease agreement should be accounted for as an
operating lease.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
33. The asset leased under an operating lease requires the lessee to record depreciation expense.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-07 - LO: 10-07
KEYWORDS:
Bloom's: Remembering
34. An investor views a high debt-to-equity ratio and a low times interest earned as a favorable sign of a company’s
abilities to meet its long-term obligations.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 - LO: 10-08
KEYWORDS:
Bloom's: Remembering
35. Long-term liabilities are a component of the “capital structure” of a company.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 - LO: 10-08
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
36. The debt-to-equity ratio is defined as total long-term liabilities divided by total stockholders' equity.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 - LO: 10-08
KEYWORDS:
Bloom's: Remembering
37. Most investors would prefer to see equity rather than debt on the balance sheet.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 - LO: 10-08
KEYWORDS:
Bloom's: Remembering
38. Stock investors view equity as a claim against the company that must be satisfied before they get a return on their
money.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 - LO: 10-08
KEYWORDS:
Bloom's: Remembering
39. All changes in long-term liabilities are reflected in the financing activities category of the statement of cash flows.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 - LO: 10-09
KEYWORDS:
Bloom's: Remembering
40. Most long-term liabilities are related to a firm’s investing activities.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 - LO: 10-09
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
41. The change in the Deferred Taxes account is reflected in the Operating Activities category of the statement of cash
flows.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-09 - LO: 10-09
KEYWORDS:
Bloom's: Remembering
42. [APPENDIX] Deferred tax is an amount that reconciles the differences between the income for financial purposes
with the income reported for tax purposes. In most cases, it is a long-term liability.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 - LO: 10-10
KEYWORDS:
Bloom's: Remembering
43. [APPENDIX] A permanent difference with respect to taxes is a difference that affects the tax records but not the
accounting records, or vice versa.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 - LO: 10-10
KEYWORDS:
Bloom's: Remembering
44. [APPENDIX] Temporary differences occur when an item affects both book and tax calculations but not in the same
time period.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 - LO: 10-10
KEYWORDS:
Bloom's: Remembering
45. [APPENDIX] The Deferred Tax account should reflect permanent differences but not items that are temporary
differences between book accounting and tax reporting.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-10 - LO: 10-10
KEYWORDS:
Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
50. Which of the following items should not appear in the long-term liability section of the balance sheet?
a.
Accrued income taxes
b.
Deferred income taxes
c.
Bonds payable
d.
Pension obligations
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 - LO: 10-01
KEYWORDS:
Bloom's: Applying
51. A convertible bond is one where
a.
the issuer can convert from a fixed interest rate to a floating one.
b.
the issuer can convert it from long-term to short-term.
c.
the issuer can retire the bond before its specified due date.
d.
the holder can convert the bond into common stock at a future time.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Remembering
52. Irwin, Inc. issued $41,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds
sold was
a.
41,000,000
b.
410,000.
c.
4,100,000.
d.
41,000
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Analyzing
53. Which of the following statements regarding bonds payable is true?
a.
Generally, bonds are issued in denominations of $100.
b.
When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the
proceeds when the bonds are sold from the first purchaser to the second purchaser.
c.
A debenture bond is backed by specific assets of the issuing company.
d.
Most bonds are term bonds, meaning that the entire principal amount will mature on a single date.
ANSWER:
d
DIFFICULTY:
Easy
KEYWORDS:
Bloom's: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
54. If a company's bonds are callable,
a.
the investor or buyer of the bonds has the right to retire the bonds.
b.
the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the
market rate of interest is 6%.
c.
the bonds are never allowed to remain outstanding until the maturity date.
d.
the investor never knows what the redemption price will be until the bonds are actually called.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
55. Convertible bonds are attractive to investors because
a.
they usually carry a higher rate of interest than non-convertible bonds.
b.
they carry a convertible interest rate that can be increased when the prime rate of interest increases.
c.
they can be converted into stock at the issuer’s option.
d.
the issuing company cannot retire the bonds before maturity.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
56. Which of the following statements regarding serial bonds is true?
a.
They are likely to be issued by food companies.
b.
They have shorter lives than term bonds.
c.
They are strongly backed by the issuer's collateral.
d.
The bonds do not all mature on the same date.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Applying
57. Bonds are a popular source of financing because
a.
bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
b.
financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of
stock.
c.
a company having cash flow problems can postpone payment of interest to bondholders.
d.
the bondholders can always convert their bonds into stock if they choose.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-02 - LO: 10-02
KEYWORDS:
Bloom's: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
58. On January 2, 2016, Roof Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay
interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. At the maturity date, besides an
interest payment, Roof Master would repay the bondholders
a.
$574,540.
b.
$520,000.
c.
$500,000.
d.
only the last interest payment.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
59. When bonds are issued by a company, the accounting entry shows an
a.
increase in liabilities and a decrease in stockholders’ equity.
b.
increase in liabilities and an increase in stockholders’ equity.
c.
increase in assets and an increase in liabilities.
d.
increase in assets and an increase in stockholders’ equity.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Understanding
60. Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company. If the face rate is 6% and
interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?
a.
$60,000
b.
$120,000
c.
$30,000
d.
$6,000
ANSWER:
a
RATIONALE:
$100,000 × .06 or 6% = $6,000 (Interest for one year)
$6,000 × 10 years = $60,000 (Interest over the life of the bonds)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
61. When determining the amount of interest to be paid on a bond, which of the following information is not necessary?
a.
The face amount of the bonds
b.
The selling price of the bonds
c.
The face rate of interest on the bonds
d.
The length of the interest period, annually or semiannually
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
62. Bennington Corp. issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually. How much cash will the
bond investors receive at the end of the first interest period?
a.
$800
b.
$1,600
c.
$3,200
d.
$4,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
63. Which of the following statements is correct?
a.
Bonds are issued at a price that reflects the stated rate of interest on the day the bond is purchased.
b.
If the face rate of interest on a bond is not equal to the market rate of interest, then the company desiring to
issue the bonds must reprint its bond certificates.
c.
The actual issue price of a bond represents the present value of all future cash flows related to the bond.
d.
The market rate of interest has no bearing on the selling price of the bonds.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Understanding
64. The bond issue price is determined by calculating the
a.
present value of the stream of interest payments and the future value of the maturity amount.
b.
future value of the stream of interest payments and the future value of the maturity amount.
c.
future value of the stream of interest payments and the present value of the maturity amount.
d.
present value of the stream of interest payments and the present value of the maturity amount.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Understanding
65. Fox Chapel Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year.
The market rate of interest is currently 5%. What information is needed in order to determine the selling price?
a.
The life of the bonds, the market rate of interest, the bond rating, and the face amount of the bonds.
b.
The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
c.
The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
d.
The face amount of the bonds, the market rate of interest, the purpose of the issue, and the bond life.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
66. Which of the following statements about bond accounting under the effective interest method is correct?
a.
The cash interest paid is calculated as the bond face value × the effective rate.
b.
The interest expense is calculated as the carrying value × the effective rate.
c.
The difference between the cash interest paid and the interest expense is added to the carrying value of the
bonds if bonds were sold at a premium.
d.
The difference between the interest expense and the interest paid is deducted from the carrying value of the
bonds if bonds were sold at a discount.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Applying
67. Which of the following terms does not describe an interest rate used to calculate the interest expense on the income
statement?
a.
Nominal rate
b.
Market rate
c.
Effective rate
d.
Yield rate
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Understanding
68. Use the information provided in the time value of money tables (Tables 9-1 through 9-4) in the text to answer the
question that follows.
Global Company issued $1,000,000, 8%, 7 year bonds, interest payable semiannually. The market rate of interest was 6%.
The issuance price of the bonds is
a.
$1,111,560
b.
$1,000,000
c.
$1,151,480
d.
$1,112,840
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
69. All of the following refer to the face rate of interest on a bond except:
a.
stated rate
b.
effective rate
c.
nominal rate
d.
coupon rate
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Remembering
70. Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%. This
means that the bonds were issued
a.
at a premium.
b.
at a discount.
c.
at the face value.
d.
with an additional 3 years of interest.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Understanding
71. Flagg Company issued $500,000 of bonds for $498,351, Interest is paid semiannually. The bond markets and the
financial press are likely to state the bond issue price as
a.
498.35.
b.
100.00.
c.
99.67.
d.
49.84.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
72. If bonds are issued at 101.25, this means that
a.
a $1,000 bond sold for $101.25.
b.
the bonds sold at a discount.
c.
a $1,000 bond sold for $1,012.50.
d.
the bond rate of interest is 10.13% of the market rate of interest.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
73. When bonds are sold for less than the face amount, this means that the
a.
maturity value will be less than the face amount.
b.
maturity value will be greater than the face amount.
c.
bonds are sold at a premium.
d.
face rate of interest is less than the market rate of interest.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Applying
74. Which of the following terms does not describe the interest rate printed on the bond certificate?
a.
Coupon rate
b.
Effective rate
c.
Face rate
d.
Stated rate
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Remembering
75. Which of the following trends can be unfavorable from the viewpoint of a bondholder?
a.
The issuing company’s debt ratio is steadily declining.
b.
The issuing company’s interest coverage ratio is steadily rising.
c.
Market interest rates are steadily rising.
d.
The issuing company’s net cash flow from operating activities is steadily increasing.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Applying
76. On the issuance date, the Bonds Payable account had a balance of $50,000,000 and Premium on Bonds Payable had a
balance of $1,000,000. What was the issue price of the bonds?
a.
$50,000,000
b.
$49,000,000
c.
$51,000,000
d.
Unable to determine from the information given
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 - LO: 10-03
KEYWORDS:
Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
77. The Discount on Bonds Payable account is shown on the balance sheet as
a.
an asset.
b.
an expense.
c.
a long-term liability.
d.
a contra long-term liability.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Understanding
78. The Premium on Bonds Payable account is shown on the balance sheet as
a.
a contra asset.
b.
a reduction of an expense.
c.
an addition to a long-term liability.
d.
a subtraction from a long-term liability.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Understanding
79. Bonds are sold at a premium if the
a.
issuing company has a better reputation than other companies in the same business.
b.
market rate of interest was less than the face rate at the time of issue.
c.
market rate of interest was more than the face rate at the time of issue.
d.
company will have to pay a premium to retire the bonds.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Understanding
80. Churchill Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing an interest
rate of 8%, which was equal to the market rate of interest. However, before the bonds could be issued, economic
conditions forced the market rate up to 9%. If the life of the bonds is 6 years and interest is paid annually on December
31, how much will Churchill receive from the sale of the bonds?
a.
Exactly $100,000 because Churchill Company would still pay interest at the face rate of 8%.
b.
Less than $100,000 because the market rate of interest at 9% was more than the face rate.
c.
Greater than $100,000 because the face rate of interest at 8% was less than the market rate.
d.
The bonds would not be sold at all; Churchill Company would have the certificates reprinted bearing the
market rate of 9%.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
81. When will bonds sell at a discount?
a.
The credit standing of the issuing company is not as good as other companies in a similar line of business.
b.
The face rate of interest is less than the market rate of interest at the time of issue.
c.
The face rate of interest is more than the market rate of interest at the time of issue.
d.
The issuing company will be able to retire the bonds at less than face at maturity.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Understanding
82. Discount on Bonds Payable is a balance sheet item for Covington Products Company. How would it most likely be
classified on the balance sheet?
a.
Current liability
b.
Long-term liability
c.
Current asset
d.
Contra-liability
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Applying
83. Premium on Bonds Payable is a balance sheet item for Ohio Products Company. How would it most likely be
classified on the balance sheet?
a.
An increase to a long-term liability
b.
Revenue
c.
Long-term asset
d.
Contra liability
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 - LO: 10-04
KEYWORDS:
Bloom's: Applying
84. Weather Corp. issued 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium. Which
one of the following statements is true?
a.
Weather’s annual interest expense on the bonds will be greater than the amount of interest payments to
bondholders each year.
b.
Weather’s annual interest expense on the bonds will be less than the amount of interest payments to
bondholders each year.
c.
Weather will receive $94,800 as the issue price.
d.
The cash paid to bondholders will be $520 each interest period.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
85. With the effective interest method of amortization, the amortization of bond discount results in a(n)
a.
increase in interest expense.
b.
decrease of stockholders’ equity.
c.
increase in stockholders’ equity.
d.
decrease in interest expense.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Understanding
86. With the effective interest method of amortization, the amortization of bond premium results in a(n)
a.
increase in stockholders’ equity.
b.
no change in stockholders’ equity.
c.
increase in interest expense.
d.
decrease in interest expense.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Understanding
87. On January 2, 2016, Wynn Corporation sold $750,000 of bonds for $745,000. The bonds will mature in 10 years and
pay interest annually on December 31. Wynn properly recorded the payment of interest and amortization of the discount
using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or
the unamortized discount at the end of 2016?
a.
The carrying value will be less than $745,000.
b.
The carrying value will be $745,000.
c.
The carrying value will be greater than $745,000.
d.
The unamortized premium will be less than $5,000.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Analyzing
88. In 2016, Aspinwall Company issued $200,000 of bonds for $175,000. If the face rate of interest was 9% and the
effective rate of interest was 7.99%, how would Aspinwall calculate the interest expense for the first year on the bonds
using the effective interest method?
a.
$175,000 × 7.99%
b.
$175,000 × 9%
c.
$10,000 × 7.99%
d.
$10,000 × 9%
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 - LO: 10-05
KEYWORDS:
Bloom's: Analyzing
