Test bank with answers for financial accounting 6e by libby chapter 10

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Chapter 010: Reporting and Interpreting Bonds

True / False Questions
1. An unsecured bond is usually called an indenture.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

2. The use of financial leverage by a company does not result in increased risk for its
investors.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

3. The major disadvantages of issuing a bond are the risk of bankruptcy and the negative cash
impact on cash flow because debt must be repaid at a specified date in the future.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

4. The market interest rate is almost always less than the stated interest rate on bonds.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

10-1
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Chapter 010: Reporting and Interpreting Bonds

5. The issuance price of a bond is the discounted present value of both the principal plus the
cash interest to be received over the life of the bonds discounted by the stated or coupon rate.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

6. When the market interest rate is higher than the stated interest rate, a bond can be
purchased at a discount.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

7. Amortization of a discount on a bond payable will make the amount of interest expense
reported on the income statement less than the cash paid for that year.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

8. A bond issued at a discount will pay total cash payments for interest that is more than the
total interest expense recognized over the period the bond is issued.

FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

10-2
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Chapter 010: Reporting and Interpreting Bonds

9. Either straight-line or effective-interest amortization may be used for bond premiums or
discounts regardless of the amounts involved.
FALSE

AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 3; 4

10. If a bond is issued at a discount or premium, the amount of annual cash interest paid will
be different than the amount paid by a bond issued at par.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3; 4

11. The end of period adjusting entry required for a bond issued at a premium includes a debit
to the account, Premium on Bonds Payable.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

12. A bond issued at a premium will pay cash interest in excess of the amount of interest
expense recognized for accounting purposes.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4

10-3
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Chapter 010: Reporting and Interpreting Bonds

13. For the bondholder (investor), amortization of a bond premium each interest period will
increase the reported amount of interest revenue.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

14. The debt to equity ratio is calculated by dividing total liabilities by total liabilities plus
stockholders' equity.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 5

15. Companies which are investing heavily in fixed assets and acquiring other companies tend
to use more debt financing.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

16. Any gains or losses from early retirement of bonds are included on the income statement.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 6

10-4
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Chapter 010: Reporting and Interpreting Bonds

17. If a company repurchases $1,000,000 of their bonds for $1,020,000 when their book value
is $950,000, then they will generate a loss of $20,000.
FALSE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 6

18. Issuance of bonds provides cash inflow from a financing activity.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 7

19. Repayment of the bonds principal when they mature causes a cash outflow connected to
investing activities.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 7

20. The cash paid for interest must be reported by a company but it can be disclosed in a

variety of locations in the financial reports.
TRUE

AACSB Tag: Communications
Difficulty: Medium
L.O.: 7

10-5
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Chapter 010: Reporting and Interpreting Bonds

Multiple Choice Questions
21. When a company prepares a bond indenture, certain provisions of the bonds are included.
Which of the following is/are not specified in the indenture?
A. Dates of each interest payments.

B. Rate of interest to be paid.
C. Maturity date.
D. Cash to be received at the issue date.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

22. A bond contract that specifies the legal provisions of a bond issue is called
A. a junk bond.
B. an indenture.
C. a premium.
D. a risk covenant.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

23. An unsecured bond for which no assets are specifically pledged to guarantee repayment is
called
A. a debenture
B. a callable bond
C. a convertible bond
D. an indenture

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

10-6

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Chapter 010: Reporting and Interpreting Bonds

24. Which of the following is not a reason that a corporation would want to issue bonds
instead of stock?
A. Interest payments can be deducted for income tax purposes.
B. Stockholders maintain control.
C. The impact on earnings may be positive.
D. There is less cash outflow resulting from bonds.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 1

25. Bonds payable usually are classified on the balance sheet as

A. long-term liabilities.
B. current liabilities.
C. investments and funds.
D. current assets.

AACSB Tag: Communications
Difficulty: Easy
L.O.: 1

26. The annual interest rate specified on a bond (which is based on the maturity amount of the
bond) appropriately can be called the
A. stated rate.
B. market rate.
C. effective rate.
D. .risk rate.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

10-7
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Chapter 010: Reporting and Interpreting Bonds

27. Bonds usually are issued to obtain cash for the purpose of
A. meeting working capital needs.
B. investing in short-term marketable securities.
C. purchasing insurance.
D. acquisitions of long-term assets.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

28. Callable bonds may be
A. turned in for early retirement at the option of the bondholder.
B. converted to common stock at the option of the bondholder.
C. called for early retirement at the option of the issuer.
D. converted to registered bonds at the option of the company president.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

29. Which of the following is a disadvantage to the corporation issuing bonds?

A. The required interest payment due at maturity.
B. The liquid nature of the bonds makes them attractive to investors who may not want to
hold them to maturity.
C. The large principal payment due at maturity.
D. The required dividend payments to bondholders each period.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

10-8
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Chapter 010: Reporting and Interpreting Bonds

30. Which of the following is an advantage of issuing bonds versus issuing stock to finance

expansion?
A. Stockholders remain in control as bondholders cannot vote or share in the company's
earnings.
B. Interest expense is tax deductible but dividends are not.
C. Money can usually be borrowed at a lower rate and then invested to earn a higher return on
assets.
D. All answers are advantages.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

31. A bond where no specific assets are pledged to guarantee repayment is called a
A. debenture bond.
B. callable bond.
C. discount bond.
D. convertible bond.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

32. Which of the following statements is true?
A. Unsecured debt has a preferential claim against the liquidation of assets in relationship to
other creditor claims.
B. Convertible bonds may be retired before maturity at the option of the issuer.
C. Junk bonds are those with a low rating and because their rating is below investment grade
level, they are considered high risk.
D. Secured debt does not have a preferential claim against the liquidation of assets in
relationship to other creditor claims.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

10-9
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Chapter 010: Reporting and Interpreting Bonds

33. Which of the following statements is false?
A. Because junk bonds are higher risk than higher rated investment grade bonds, many banks,
mutual funds and trusts are not allowed to invest in them.
B. Callable bonds can be retired before maturity at the option of the bondholder for a
predetermined cash call price.
C. A debenture bond is one that is not secured by specific assets of the company.

D. A debenture bond is also known as an unsecured bond.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

34. Halverson's times interest earned ratio was 2.98 in 2009, 2.79 in 2008, and 2.31 in 2007.
Which of the following statements about their ratio is correct?
A. Their increasing ratio indicates decreasing levels of debt on which interest is incurred.
B. Their increasing ratio indicates their strategy of pursuing growth by investment in other
companies which has increased debt but their profits have not yet increased from those
investments.
C. The higher ratio was adversely affected by the net loss they reported in 2007.
D. Their increasing ratio would be considered by creditors to be an indicator of higher risk.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

35. Which of the following is true?
A. A higher times interest earned ratio could indicate a growing company.
B. A lower times interest earned ratio is desired by creditors.
C. A more important indicator that a company is able to meet its debt obligations would be
the sufficiency of its cash flow from operating activities.
D. A more important indicator that a company is able to meet its debt obligations would be
the sufficiency of the current ratio.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

10-10
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Chapter 010: Reporting and Interpreting Bonds

36. In 2009, Patty's Pizza reported net income of $4,212 million, interest expense of $167
million and income tax expense of $1,372 million. In 2008, they reported net income of
$3,568 million, interest expense of $163 million and income tax expense of $1,424 million.
Calculate the times interest earned ratio for 2009and 2008 respectively.
A. 32.2 and 29.4 times
B. 28.4 and 23.8 times
C. 34.4 and 31.6 times
D. 34.1 and 26.6 times

AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2

37. In 2009, NTV reported a times interest earned ratio of 32.7 times while Home Movie
Channel reported a ratio of 34.4 times. Which of the following statements is true?
A. NTV and Home Movie Channel have more than adequate ratios demonstrating their ability
to cover interest charges with their earnings levels.
B. Home Movie Channel's ratio is significantly higher than NTV's ratio.
C. Lenders would be pleased with the ratios of both companies and be willing to lend them
money for future expansion.
D. All statements are true.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

38. If the market interest rate for a bond is higher than the stated interest rate, the bond will
sell at
A. a discount.
B. a premium.
C. par.
D. the price cannot be determined from the information given.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

10-11
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Chapter 010: Reporting and Interpreting Bonds

39. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds at 97. The
bonds were dated November 1, 2009, and interest is payable each November 1 and May 1.
The amount of discount amortization at each semi-annual interest date would be (assume
straight-line amortization):
A. $ 50.
B. $100.
C. $600.
D. $450.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

40. Gammell Company issued $50,000 bonds payable, 9% annual interest, maturity in ten

years. The bonds were issued at $48,000. Gammel Company uses straight-line amortization.
The amount of interest expense each full year would be
A. $4,700.
B. $4,300.
C. $4,500.
D. $4,680.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

41. On January 1, 2009, Allison Company issued $600,000, five-year, 8% bonds at $570,000.
The bonds were dated January 1, 2009, and interest is payable each June 30 and December 31.
The company uses the straight-line method of amortization. The amount of the net liability for
bonds payable that would be reported on the December 31, 2009, balance sheet is
A. $600,000.
B. $597,000.
C. $573,000.
D. $576,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

10-12
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Chapter 010: Reporting and Interpreting Bonds

42. Moore Company issued $100 million of fixed interest rate bonds payable at $98 million.
At year-end, the bonds were selling in the bond market at $98 million. What entry would
Moore Company make at year-end to record the change in selling price?
A. Debit Bonds Payable $3 million; credit Interest Expense $3 million.
B. Debit Interest Expense $3 million; credit Bonds Payable $3 million.
C. Debit Investment in Bonds $3 million; credit Investment Revenue $3 million.
D. No entry needed.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

43. If a bond payable is issued at a discount, the amount of the carrying value (the long-term
liability) reported on the subsequent balance sheets
A. remains constant.
B. increases each year.
C. decreases each year.

D. changes from year to year depending upon the market rate of interest each year.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

44. On January 1, 2009, Broker Corp. issued $3,000,000 par value 12%, 10 year bonds which
pay interest each December 31. If the market rate of interest was 14%, the issue price of the
bonds should be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is
.2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at
14% is 5.2161.)
A. $3,339,084
B. $2,843,172
C. $3,000,000
D. $2,686,896

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

10-13
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Chapter 010: Reporting and Interpreting Bonds

45. On January 1, 2009, Dorley Corporation issued $1 million of bonds for $1,073,613 when
the market rate of interest was 6%. They are 10-year bonds paying 8% interest annually. If
Dorley Corporation is using the straight-line amortization method, interest expense on
December 31, 2009 will be
A. $ 80,000
B. $ 60,000
C. $ 87,361
D. $ 72,639

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

46. General Tech Corporation issued $30,000 bonds payable, 5% annual interest, due in ten
years. The bonds were issued at $29,400. Assume straight-line amortization. Interest expense
each year would be
A. $1,500.
B. $1,440.
C. $1,560.
D. $1,100.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

47. If a bond is issued at 98, its stated rate of interest would be
A. higher than the market rate.
B. lower than the market rate.
C. equal to the market rate.
D. unrelated to the market rate.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

10-14
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Chapter 010: Reporting and Interpreting Bonds

48. On January 1, 2009, Tonika Corporation issued a four-year, $10,000, 7% bond. The
interest is payable annually each December 31. The issue price was $9,668 based on an 8%
effective interest rate. Assuming effective-interest amortization is used, the interest expense
on the income statement for the year ended December 31, 2009 would be (to the nearest
dollar)
A. $ 1,547.
B. $ 883.
C. $ 773.
D. $ 700.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

49. When a bond investment is issued at a discount, subsequent amortization of the discount
A. increases interest expense.
B. decreases interest expense.
C. has no effect upon interest expense.
D. decreases interest in the bond.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

50. Which of the following is true when using the effective interest amortization method when
a bond has been issued at a discount?
A. Interest expense is computed by adding the portion of amortized discount to the cash

interest paid.
B. The amount of interest expense recognized each period increases over time.
C. The amount of discount amortized each period decreases over time.
D. All of the answers are true.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

10-15
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Chapter 010: Reporting and Interpreting Bonds

51. Of the following statements, which is false regarding the effective-interest method of
amortization?

A. The amount of interest expense is different each period.
B. The amount of discount or premium that is amortized is the same each period.
C. The amount of cash interest paid is constant each period.
D. None of the other answers are false.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3; 4

52. Which of the following statements is true?
A. Bonds are always issued at their par value.
B. Bonds issued at more than par value are said to be issued at a discount.
C. Once bonds are issued; the bonds will trade in the bond market above or below par
depending on changes in interest rates.
D. Bondholders must hold their bonds to maturity to receive cash for their investment.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3; 4

53. Eaton Company issued $5 million in bonds. The stated rate of interest was 10% and the
market rate 11%. Which of the following statements is true?
A. The bonds were issued at a premium.
B. Annual interest expense will exceed the company's actual cash payments for interest.
C. Annual interest expense will be $500,000.
D. Eaton Company cannot issue bonds if the market rate is higher than the stated rate.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3; 4

10-16
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Chapter 010: Reporting and Interpreting Bonds

54. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

Calculate the issuance price if the market rate of interest is 8%.
A. $5,000,000
B. $5,670,000
C. $5,387,500
D. $5,712,500

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

55. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

Calculate the issuance price if the market rate of interest is 12%.
A. $4,427,500
B. $4,477,500
C. $4,435,000
D. $5,000,000

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

10-17
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Chapter 010: Reporting and Interpreting Bonds

56. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

If Jason issued the bonds for $5,325,000, how much would the premium amortization be on
December 31, 2009 under the straight-line method?
A. $32,500
B. $59,125
C. $16,250
D. $27,956

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 4

57. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

How much cash interest would be paid by Jason on December 31, 2009?
A. $500,000
B. $250,000
C. $300,000

D. $200,000

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

10-18
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Chapter 010: Reporting and Interpreting Bonds

58. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

If Jason issued the bonds for $5,325,000, the amount of interest expense on December 31,

2009 under the straight-line amortization method equals
A. $567,500
B. $540,875
C. $532,500
D. $490,044

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

59. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated
interest rate to be paid annually. The following present value factors have been provided to
answer the subsequent questions:

If Jason issued the bonds at a price of 106.5, what is the book value of Jason's bonds on
December 31, 2009 after the interest payment assuming the straight-line method is used?
A. $5,297,044
B. $5,292,500
C. $5,265,875
D. $5,308,750

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 4

10-19
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Chapter 010: Reporting and Interpreting Bonds

60. Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2009. On
December 31, 2009 the bonds were trading on the bond exchange at 102½. Since the issue
date, the market rate of interest on similar risk bonds has
A. Increased.
B. Decreased.
C. Stayed the same.
D. None of the other answers is correct.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 4

61. On July 1, 2009, GardenWorks, Inc. issued 300, $1,000, ten-year, 7% bonds at 101. The
bonds were dated July 1, 2009, and semi-annual interest will be paid each December 31 and
June 30. GardenWorks Inc., uses straight-line amortization. The bond liability that would be
reported on the balance sheet at December 31, 2009, is

A. $300,000.
B. $302,850.
C. $302,700.
D. $303,000.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

62. On July 1, 2009, Jackson Company issued $300,000, five-year, 9% bonds at $309,000.
The reason Jackson Company issued the bonds at a premium was
A. the stated rate of interest was higher than the rate being paid on investments with
comparable risk.
B. the stated rate of interest was the same as the rate being paid on investments with
comparable risk.
C. the stated rate of interest was lower than the rate being paid on investments with
comparable risk.
D. the bonds were callable.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 4

10-20
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Chapter 010: Reporting and Interpreting Bonds

63. Straight-line amortization of a premium related to a bond issuance would
A. require interest expense be calculated by multiplying the market interest rate times the
book value of the bonds.
B. lead to higher premium amortization in the early years and lower interest expense over the
life of the bonds.
C. require computing the constant amount of premium to be amortized and then deducting it
from cash interest to calculate interest expense.
D. require interest expense be calculated by multiplying the market interest rate times the
book value of the bonds and lead to higher premium amortization in the early years and lower
interest expense over the life of the bonds.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4

64. The amortization of bond premium by the issuer will
A. increase interest expense.
B. decrease interest expense.

C. have no effect on interest expense.
D. determine the cash paid for interest.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

65. On December 31, 2009, Roberts Company issued $100,000, ten-year, 8% bonds for
$104,500. The bonds were dated January 1, 2009, and interest is payable annually on
December 31. Roberts Company uses the straight-line amortization method. Roberts
Company should report the book value, or carrying value, for the bonds on the December 31,
2009, balance sheet as
A. $100,000.
B. $103,400.
C. $104,000.
D. $104,500.

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 4

10-21
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Chapter 010: Reporting and Interpreting Bonds

66. If a bond is issued at 101, the stated rate of interest was
A. higher than market rate.
B. lower than market rate.
C. equal to market rate.
D. not related to market rate.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

67. Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2009, for $102,360
on April 1, 2009. The bonds pay interest annually on April 1. Straight-line amortization is
used by the company. What entry is needed at April 1, 2010 for the first interest payment?

A.

B.

C.

D.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 4

10-22
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Chapter 010: Reporting and Interpreting Bonds

68. In 2009, Tommy's Toys had total liabilities of $5,443 million and total assets of $9,768
million. In 2008, their total liabilities were $6,291 million and total assets were $10,265
million. Which of the following statements is true?
A. The company had a decrease in their debt to equity ratio from 2008 to 2009.
B. The company had more creditor financing versus stockholder equity financing in 2009.

C. Their debt to equity ratio in 2009 means they have less than half their financing provided
by creditors.
D. All answers are true.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

69. In 2009, General Tech had a debt to equity ratio of .21 while their competitor in the
biotechnology field, American Bio had a debt to equity ratio of .24. Which of the following
statements is false?
A. General Tech has a larger portion of its assets financed by equity than American Bio does.
B. When compared to General Tech, American Bio's use of more debt funding increases
financial risk and causes their stockholders to have a lower return on equity when return on
assets exceeds the after-tax interest rate.
C. General Tech's ratio implies that less than 20% of its assets are financed by equity.
D. American Bio's ratio implies that less than 25% of its assets are financed by equity.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 5

70. In 2008, The Mickey Co. had total liabilities of $20,645 million and total assets of
$43,699 million. In 2007, they had total liabilities of $20,918 million and total assets of
$45,027 million. Calculate their debt to equity ratio for 2008 and 2007 respectively.
A. 1.12 and 1.15
B. .90 and .87
C. .47 and .46
D. .52 and .54

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 5

10-23
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Chapter 010: Reporting and Interpreting Bonds

71. In 2010, Western Wear Inc. reported total liabilities of $382 million and total
stockholders' equity of $1,967 million. In 2009, their total liabilities were $343 million and
total stockholders' equity was $1,900 million. Which statement about their debt to equity
position is true?
A. While their debt level increased, their debt to equity ratio decreased slightly.
B. Western Wear Inc. has a very low debt to equity ratio.
C. Stockholders' equity increased at a faster rate than the rate of increase in liabilities.

D. All answers are true.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

72. If a company retires bonds payable early by purchasing the bonds in the open market,
A. any gain or loss would be reported in the income statement as an extraordinary item.
B. the amount paid would always equal the par value.
C. any unamortized premium or discount would be reclassified to stockholders' equity as
contributed capital.
D. the gain or loss would be presented in the asset section of the balance sheet.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

73. On July 1, 2011, immediately after recording interest payments, Salsa, Inc. retired one
fifth of its $500,000 bonds payable for $97,500. The bonds were originally issued at par value
in 2006. Which statement is correct?
A. Cash of $100,000 will be paid to the bondholders.
B. A gain of $2,500 will be reported in the income statement.
C. A loss of $2,500 will be reported in the income statement.
D. A loss of $2,500 will be reported as a separate component of stockholder's equity in the
balance sheet.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 6

10-24
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Chapter 010: Reporting and Interpreting Bonds

74. On the maturity date of bonds payable after interest has been paid, the issuing company
will
A. record a loss if the market rate of interest on the maturity date exceeds the stated rate of
interest.
B. pay bondholders the original amount the bondholders paid to purchase the bonds.
C. debit Bonds Payable and credit Cash for the par value of the bonds.
D. debit Cash and credit Bonds Payable for the carrying amount of the bonds.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

75. Which of the following is true?
A. Bonds can be retired early through calling them or repurchasing them in the market.
B. Early retirement of bonds will always be at face value as any premium or discount would
have been amortized.
C. Bondholders cannot sell their bonds prior to maturity.
D. When interest rates rise, bond prices also rise.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

76. On March 31, 2009, Bundy Corporation retires $10 million of bonds which have an
unamortized premium of $500,000 by repurchasing them in the market for $9,850,000.
Calculate the gain or loss on the retirement of the bonds.
A. $150,000 loss.
B. $150,000 gain.
C. $650,000 gain.
D. $350,000 loss.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 6

10-25
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e