Test bank accounting 25th editon warren chapter 14 long term liabi

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... Annual interest ex

Chapter 14 Long-Term Liabilities: Bonds and Notes

9 The face value of a term bond is payable at a single specific date in the future

18 The present value of an annuity is the sum of the present values of each cash flow

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

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

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

45 When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off

54 Bonds payable would be listed at their carrying value on the balance sheet

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

65 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

66 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

67 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 bond trustee, who is acting on behalf of the bondholders

D the amount for which the corporation can buy back the bonds prior to the maturity date

68 Debenture bonds are

A bonds secured by specific assets of the issuing corporation

B bonds that have a single maturity date

C issued only by the federal government

D issued on the general credit of the corporation and do not pledge specific assets as collateral

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

71 The market interest rate related to a bond is also called the

A stated interest rate

B effective interest rate

C contract interest rate

75 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

B present value of 25 annual interest payments of $720,000

C present value of 25 annual interest payments of $720,000, plus present value of $9,000,000 to be repaid in 25 years

D present value of $9,000,000 to be repaid in 25 years, less present value of 50 semiannual interest payments

80 Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called

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?

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

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

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?

A The carrying amount increases from its amount at issuance date to $2,000,000 at maturity

B The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity

C The amount of annual interest paid to bondholders increases over the 15-year life of the bonds

D The amount of annual interest expense decreases as the bonds approach maturity

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?

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 30-year life of the bonds

D The carrying amount decreases from its amount at issuance date to $10,000,000 at maturity

89 The entry to record the amortization of a premium on bonds payable on an interest payment date includes:

A debit Premium on Bonds Payable, credit Interest Revenue

B debit Interest Expense, credit Premium on Bond Payable

C debit Interest Expense, debit Premium on Bonds Payable, credit Cash

D debit Bonds Payable, credit Interest Expense

90 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

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

94 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

95 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

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

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

98 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

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

102 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

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

A less than face value

B equal to the face value

C greater than face value

D that cannot be determined

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

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

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

A debit to Cash of $1,000,000

B credit to Discount on Bonds Payable for $40,000

C credit to Bonds Payable for $960,000

D debit to Cash for $960,000

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

A debit to Discount on Bonds Payable for $40,000

B debit to Cash of $1,000,000

C credit to Bonds Payable for $960,000

D credit to Cash for $960,000

C credit to Bonds Payable for $1,000,000

D credit to Cash for $920,000

110 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

111 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

114 Sinking Fund Cash 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

118 Sinking Fund Income is reported in the income statement as

A income from operations

B extraordinary

C gain on sinking fund transactions

D other income

119 If bonds payable are not callable, the issuing corporation

A can exchange it 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

120 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

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

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

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

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?

B face value plus the unamortized discount

C face value minus the unamortized premium

D face value plus the unamortized premium

128 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 interest 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

130 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 interest 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

131 Debtors are interested in the times-interest-earned ratio because they want to

A know what rate of interest the corporation is paying

B have adequate protection against a potential drop in earnings jeopardizing their interest payments

C be sure their debt is backed by collateral

D know the tax effect of lending to a corporation

132 Any unamortized premium should be reported on the balance sheet of the issuing corporation as

A a direct deduction from the face amount of the bonds in the liability section

B as paid-in capital

C a direct deduction from retained earnings

D an addition to the face amount of the bonds in the liability section

133 Numbers of times interest charges earned is computed as

A Income before income taxes plus Interest Expense divided by Interest Expense

B Income before income taxes less Interest Expense divided by Interest Expense

C Income before income taxes divided by Interest Expense

D Income before income taxes plus Interest Expense divided by Interest Revenue

134 Balance sheet and income statement data indicate the following:

Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places)?

135 Balance sheet and income statement data indicate the following:

Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places)?

136 When the effective-interest method is used, the amortization of the bond premium

A increases interest expense each period

B decreases interest expense each period

C increases interest expense in some periods and decreases interest expense in other periods

D has no effect on the interest expense in any period

137 The Merchant Company issued 10-year bonds on January 1, 2011 The 15% bonds have a face value of

$100,000 and pay interest every January 1 and July 1 The bonds were sold for $117,205 based on the market interest rate of 12% Merchant uses the effective-interest method to amortize bond discounts and

premiums On July 1, 2011, Merchant should record interest expense (round to the nearest dollar) of

138 The Designer Company issued 10-year bonds on January 1, 2011 The 6% bonds have a face value of

$800,000 and pay interest every January 1 and July 1 The bonds were sold for $690,960 based on the market interest rate of 8% Designer uses the effective-interest method to amortize bond discounts and premiums On July 1, 2011, Designer should record interest expense (round to the nearest dollar) of

139 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

140 On the first day of the fiscal year, Hawthorne Company obtained a $ 88,000, seven-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 of $15,208

B a credit to Notes Payable for $10,808

C a debit to Interest Expense for $4,400

D a debit to Notes Payable for $15,208

141 On January 1, 2014, 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 of $11,942

B a credit to Interest Payable of $11,550

C a debit to Notes Payable of $11,942

D a debit to Interest Expense of $23,492

142 On January 1, 2014, 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, 2014 would include:

A a debit to Interest Expense of $11,550

B a credit to Interest Payable of $11,550

C a credit to Notes Payable of $165,000

D a debit to Notes Payable of $165,000

143 On January 1, 2011, Zero Company obtained a $52,000, four-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, 2011 The December 31, 2011 carrying amount in the amortization table for this installment note will be equal to:

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

148 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

149 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 amoritization of the bond premium (by straight-line method) for the year by Orange Inc includes a credit to:

A Interest Revenue for $5,000

B Interest Revenue for $2,500

C Investment in Lisbon Co Bonds $5,000

D Investment in Lisbon Co Bonds $2,500

150 Match the following terms to the most appropriate answer:

1 the allocation of a premium or discount over the life

2 face value times contract rate interest expense

3 if the contract rate is less than the effective rate effective rate

4 the value reported on the income statement bond premium

5 the rate printed on the bond certificate contract rate

6 the return required by the market on the day of

7 if the contract rate exceeds the effective rate

interest payment

151 Match the following terms to the most appropriate answer:

1 the principal of the bond is paid back in installments Debenture

2 allows the issuer to redeem bonds before maturity

3 the value of a bond stated on the bond certificate Face value

4 a bond issued without any collateral or security Indenture

5 the entire principal of the bond is paid back on

6 allows the bond hold to exchange bond for shares of

7 the legal contract between issuer and bond holder

Convertible

bond

152 Sorenson Co., is considering the following alternative plans for financing their company:

Issue $10 par Common Stock $4,000,000 $1,000,000

Income tax is estimated at 40% of income

Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax

154 Using the following table, what is the present value of $5,000 to be received 5 years, if the market rate is 10% compounded annually?

159 On the first day of the fiscal year, a company issues a $800,000, 6%, 5 year bond that pays semi-annual interest of $24,000 ($800,000 ´ 6% ´ 1/2), receiving cash of $690,960 Journalize the entry to record the first interest payment and the amortization of the related bond discount using the straight-line method

162 A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for

$320,000 Journalize the redemption of the bonds

163 A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for

$475,000 Journalize the redemption of the bonds

164 A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for

$475,000 Journalize the redemption of the bonds

a Issued the installment notes for cash on January 1, 2015

b Paid the first annual payment on the note

Issue $10 Common Stock $3,000,000 $1,000,000

Income tax is estimated at 40% of income

Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax

Issue 8% bonds at face value $2,000,000 $1,000,000

Issue common stock, $10 par 2,000,000 1,500,000

Income tax is estimated at 35% of income Dividends of $1 per share were declared and paid on the preferred stock

Required: Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000

168 Given the following data, determine the times interest earned ratio

Net income - $70,000

Bonds Payable (issued at face value), 8% - $5,000,000

Preferred Stock ($50 par value, 6%, 10,000 shares issued & outstanding)

169 Given the following data, prepare the journal entry to record interest expense and any related amortization

on December 31st of the first year using the effective method Assume interest is paid annually on January 1 The bonds were issued on January 1 for $7,411,233

Bonds Payable $8,000,000 (matures in 10 years)

170 Given the following data, prepare an amortization table (use the effective method)

1/1/10 - issue $800,000, 9%, 3 year bonds, interest paid annually on 12/31, to yield 8%

Use the following format (round to nearest dollar - may have a slight rounding difference);

Date Cash paid Int expense Amortization Bond carry value

Use the following format (round to nearest dollar, may have small rounding difference);

Date Cash paid Int expense Amortization Bond carry value

Bonds payable, 9% issued at face $5,000,000 $3,000,000

Income tax is estimated at 40% of income

Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each

(a) Prepare the journal entry to issue $500,000 bonds which sold for $490,000

(b) Prepare the journal entry to issue $500,000 bonds which sold for $515,000

174 Brubeck Co issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable

on May 1 and November 1 The fiscal year of the company is the calendar year Journalize the entries to record the following selected transactions for the current year:

May 1 Issued the bonds for cash at their face amount

Nov 1 Paid the interest on the bonds

Dec 31 Recorded accrued interest for two months

175 On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable

semiannually, were sold for $1,225,000 Present entries to record the following transactions for the current fiscal year:

(a) Issuance of the bonds

(b) First semiannual interest payment

(c) Amortization of bond discount for the year, using the straight-line method of amortization

(a) Issuance of the bonds

(b) First annual interest payment

(c) Amortization of bond premium for the year, using the straight-line method of amortization

177 On August 1, Clayton Co issued $1,300,000 of 20-year, 9% bonds, dated August 1, for

$1,225,000 Interest is payable semiannually on February 1 and August 1 Present the entries to record the following transactions for the current year:

(a) Issuance of the bonds

(b) Accrual of interest and amortization of bond discount for the year, on December 31, using the straight-line method Round to the nearest

dollar when necessary

Lisbon Co

(a) Issuance of the bonds

(b) Second semiannual interest payment

(c) Amortization of bond premium for the year, using the straight-line method of amortization

Orange Inc

(d) Purchase of the bonds

(e) Receipt of second semiannual interest payment

(f) Amortization of bond premium for the year, using the straight-line method of amortization

179 Present entries to record the selected transactions described below:

(a) Issued $2,750,000 of 10-year, 8% bonds at 97

(b) Amortized bond discount for a full year, using the straight-line method

(c) Called bonds at 98 The bonds were carried at $2,692,250 at the time of the redemption

180 A company issued $2,000,000 of 30-year, 8% callable bonds on April 1, 2011, with interest payable on April 1 and October 1 The fiscal year of the company is the calendar year Journalize the entries to record the following selected transactions:

2011

Apr 1 Issued the bonds for cash at their face amount

Oct 1 Paid the interest on the bonds

2007

July 1 Issued the bonds for cash at their face amount

Dec 31 Paid the interest on the bonds

182 On June 30, 2011, Arlington Company issued $1,500,000 of 10-year, 8% bonds, dated June 30, for

$1,540,000 Present entries to record the following transactions:

Arlington

Company

(1) Issuance of bonds

(2) Payment of first semiannual interest on December 31, 2011

(3) Amortization by straight-line method of bond premium on December 31, 2011

(a) Prepare the journal entry to issue $100,000 bonds which sold for $94,000

(b) Prepare the journal entry to issue $100,000 bonds which sold for $104,000

Bonds payable, 8% (issued 1995, due 2019) $1,200,000 $ 900,000

(a) For each company, what is the number of times bond interest charges were earned (round to one decimal place)?

(b) Which company gives potential creditors the most protection?

185 Prepare an amortization schedule for the 1st 2 years (effective method) using the following data:

1 On January 1, 2010, ABC Co issued $2,000,000, 5%, 10 year bonds, interest payable on June 30th and December 31st to yield 6% Use the following format and round to nearest dollar (may have small rounding error) The bonds were issued for $1,851,234

Date Cash paid Interest expense Amortization Bond carry Value

2 Show how this bond would be reported on the balance sheet at 12/31/11

186 Prepare an amortization schedule for the 1st 2 years (straight line method) using the following data:

1 On January 1, 2010 XYZ Co issued $3,000,000, 6%, 10 year bonds, interest payable on June 30th and December 31st to yield 5% Use the following format and round to the nearest dollar (may have small rounding error) The bonds were issued for $3,233,834

Date Cash paid Interest expense Amortization Bond Carry Value

2 Show how this bond would be reported on the balance sheet on 12/31/11

187 On January 1, 2011, Citrus Retail Co issued a $500,000, 5 year, 8% installment note payable with payments of $100,000 principal plus interest due on January 1 of each year for the next 5 years

1 Prepare the adjusting journal entry at December 31, 2011 to accrue interest for the year

2 Show the account(s) and amount(s) and where it will appear on a multi-step income statement prepared on December 31, 2011

3 Show the account(s) and amount(s) and where they will appear on a classified balance sheet prepared on December 31, 2011

1 Prepare the adjusting journal entry to accrue interest at the end of the 2nd year - 12/31/11

2 Show the account(s) and amount (s) and where the account(s) will appear on a multi-step income statement prepared on December 31, 2011

3 Show the account(s) and amount(s) and where the account(s) will appear on a classified balance sheet prepared on December 31, 2011