Finance Chapter 10 Discount on Bonds Payable is classified as a current liability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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