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

Chapter 14--Long-Term Liabilities: Bonds and Notes
Student: ___________________________________________________________________________
1. A bond is simply a form of an interest bearing note.
True False

2. Bondholders are creditors of the issuing corporation.
True False

3. Bonds of major corporations are traded on bond exchanges.
True False

4. Bondholders claims on the assets of the corporation rank ahead of stockholders.
True False

5. A bond is usually divided into a number of individual bonds of $500 each.
True False

6. A secured bond is called a debenture bond and is backed only by the general creditworthiness of the
corporation.
True False

7. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a
convertible bond.
True False

8. The prices of bonds are quoted as a percentage of the bonds' market value.
True False


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

10. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture.
True False

11. The market rate of interest is affected by a variety of factors, including investors' assessment of current
economic conditions.
True False

12. The concept of present value is that an amount of cash to be received at some date in the future is the
equivalent of the same amount of cash held at an earlier date.
True False

13. The buyer determines how much to pay for bonds by computing the present value of future cash receipts
using the contract rate of interest.
True False

14. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.
True False

15. Bonds are sold at face value when the contract rate is equal to the market rate of interest.
True False

16. The present value of the periodic bond interest payments is the value today of the amount of interest to be
received at the at the end of each interest period.
True False

17. An equal stream of periodic payments is called an annuity.
True False

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

19. The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded
annually is $3,636.30.
True False

20. If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1) the
present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000 payments at
5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.
True False

21. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.
True False

22. One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.
True False

23. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a
premium.
True False

24. The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the
total discount or minus the total premium related to the bond.
True False

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.
True False

26. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable
will decrease as the bonds approach maturity.
True False


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.
True False

28. There are two methods of amortizing a bond discount or premium: the straight-line method and the
double-declining-balance method.
True False

29. The effective-interest method of amortizing a bond discount or premium is the preferred method.
True False

30. The amount of interest expense reported on the income statement will be more than the interest paid to
bondholders if the bonds were originally sold at a discount.
True False

31. The amortization of a premium on bonds payable decreases bond interest expense.
True False

32. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual
straight-line amortization of the premium is $1,416.
True False

33. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest
expense is $5,500.
True False

34. Zero-coupon bonds do not provide for interest payments.
True False

35. The issue price of zero-coupon bonds is the present value of their face amount.
True False


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.
True False

37. Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be
$2,400 every 6 months.
True False

38. Amortization is the allocation process of writing off bond premiums and discounts to interest expense over
the life of the bond issue.
True False

39. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the
unamortized discount.
True False

40. The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.
True False

41. At 12/31/2009, the cash and securities held in a sinking fund to redeem bonds in 2011 are classified on the
balance sheet as current assets.
True False

42. If sinking fund cash is used to purchase investments, those investments are reported on the balance sheet as
marketable securities.
True False

43. Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.
True False

44. There is a loss on redemption of bonds when bonds are redeemed above carrying value.
True False


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

46. A corporation often issues callable bonds to protect itself against significant declines in future interest rates.
True False

47. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.
True False

48. Only callable bonds can be purchased by the issuing corporation before maturity.
True False

49. Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in
the bond indenture.
True False

50. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or

less any unamortized premium.
True False

51. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of
bonds is $10,000.
True False

52. Gains and losses on the redemption of bonds are reported as other income or other expense on the income
statement.
True False

53. Bonds may be purchased directly from the issuing corporation or through one of the bond exchanges.
True False


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

55. The unamortized Discount on Bonds Payable account is a contra-liability account.
True False

56. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the
balance sheet.
True False

57. The balance in a bond discount account should be reported on the balance sheet as a deduction from the
related bonds payable.
True False

58. The higher the times interest earned ratio, the better the creditors’ protection.

True False

59. The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.
True False

60. When the effective interest method of amortization is used, the amount of interest expense for a given
period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the
given period.
True False

61. The effective interest method produces a constant dollar amount of interest expense to be reported each
interest period.
True False

62. When there are material differences between the results of using the straight-line method and using the
effective interest method of amortization, the effective interest method should be used.
True False


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.
True False

64. The interest portion of an installment note payment is computed by multiplying the interest rate by the
carrying amount of the note at the end of the period.
True False

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
A. convertible bonds
B. unsecured bonds
C. debenture bonds
D. callable bonds

70. When the maturities of a bond issue are spread over several dates, the bonds are called
A. serial bonds
B. bearer bonds
C. debenture bonds
D. term bonds

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
D. straight-line rate

72. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of
$250,000 will be
A. Equal to $250,000
B. Greater than $250,000
C. Less than $250,000
D. Greater than or less than $250,000, depending on the maturity date of the bonds

73. The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest
dollar)
A. $37,736
B. $42,400
C. $40,000
D. $2,400

74. The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded to
nearest dollar)
A. $23,916
B. $37,632

C. $23,700
D. $30,000


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
D. a discount

76. A corporation issues for cash $9,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount
received for the bonds will be
A. present value of 50 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid
in 25 years
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
of $360,000

77. The interest rate specified in the bond indenture is called the
A. discount rate
B. contract rate
C. market rate
D. effective rate

78. An unsecured bond is the same as a
A. debenture bond.
B. zero coupon bond.
C. term bond.

D. bond indenture.

79. A legal document that indicates the name of the issuer, the face value of the bond and such other data is
called
A. trading on the equity.
B. convertible bond.
C. a bond debenture.
D. a bond certificate.


80. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are
called
A. debentures
B. callable bonds.
C. early retirement bonds.
D. options.

81. The Marx Company issued $100,000 of 12% bonds on April 1, 2010 at face value. The bonds pay interest
semiannually on January 1 and July 1. The bonds are dated January 1, 2010, and mature on January 1,
2014. The total interest expense related to these bonds for the year ended December 31, 2010 is
A. $1,000
B. $3,000
C. $9,000
D. 12,000

82. On January 1, 2014, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds
are sold for $192,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date
is December 31, 2018. Horton records straight-line amortization of the bond discount. The bond interest
expense for the year ended December 31, 2014, is
A. $10,800

B. $18,400
C. $21,600
D. $28,000

83. If $1,000,000 of 8% bonds are issued at 103 1/2, the amount of cash received from the sale is
A. $1,080,000
B. $965,000
C. $1,000,000
D. $1,035,000

84. If $2,000,000 of 10% bonds are issued at 95, the amount of cash received from the sale is
A. $2,200,000
B. $2,000,000
C. $2,100,000
D. $1,900,000


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
maturity.
D. The bonds will be issued at a premium.

86. If the straight-line method of amortization of bond premium or discount is used, which of the following
statements is true?
A. Annual interest expense will increase over the life of the bonds with the amortization of bond premium.

B. Annual interest expense will remain the same over the life of the bonds with the amortization of bond
discount.
C. Annual interest expense will decrease over the life of the bonds with the amortization of bond discount.
D. Annual interest expense will increase over the life of the bonds with the amortization of bond discount.

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

91. When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that
pay interest annually. The selling price of this bond issue was
A. $ 321,970
B. $1,000,000
C. $ 943,494
D. $621,524

92. When the market rate of interest was 11%, Munson Corporation issued $1,000,000, 12%, 8-year bonds that
pay interest semiannually. The selling price of this bond issue was
A. $1,052,310
B. $1,154,387
C. $1,000,000
D. $ 720,495

93. The journal entry a company records for the issuance of bonds when the contract rate and the market rate
are the same is
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. $4,000
B. $896
C. $17,926
D. $1,793

97. The journal entry a company records for the payment of interest, interest expense, and amortization of bond
discount is
A. debit Interest Expense, credit Cash and Discount on Bonds Payable
B. debit Interest Expense, credit Cash
C. debit Interest Expense and Discount on Bonds Payable, credit Cash
D. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable

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
A. $5,000
B. $5,200
C. $5,800
D. $5,400


100. If $1,000,000 of 8% bonds are issued at 105, the amount of cash received from the sale is
A. $1,080,000
B. $950,000
C. $1,000,000
D. $1,050,000

101. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
A. at a premium.
B. at face value.
C. at a discount.
D. only after the stated rate of interest is increased.

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. $8,000.
B. $4,000.
C. $2,000
D. $5,000

104. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would
sell at an amount
A. less than face value.
B. equal to the face value.
C. greater than face value.
D. that cannot be determined.


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
A. $10,420.
B. $5,420.
C. $5,000.
D. $4,580.

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.

109. The Reagan Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2014, at 92. The journal
entry to record the issuance will show a
A. credit to Discount on Bonds Payable for $80,000.
B. debit to Cash of $1,000,000.
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.

112. Bonds with a face amount $1,000,000, are sold at 108. The entry to record the issuance is
A. Cash
1,000,000
Premium on Bonds Payable
80,000
Bonds Payable
1,080,000
B. Cash
1,080,000
Premium on Bonds Payable
80,000
Bonds Payable
1,000,000
C. Cash
1,080,000
Discount on Bonds Payable
80,000
Bonds Payable
1,000,000
D. Cash
1,080,000
Bonds Payable
1,080,000

113. Bonds with a face amount $1,000,000, are sold at 96. The entry to record the issuance is
A. Cash

1,000,000
Premium on Bonds Payable
40,000
Bonds Payable
960,000
B. Cash
960,000
Premium on Bonds Payable
40,000
Bonds Payable
1,000,000
C. Cash
960,000
Discount on Bonds Payable
40,000
1,000,000
Bonds Payable
D. Cash
960,000
Bonds Payable
960,000


114. Sinking Fund Cash would be classified on the balance sheet as
A. a current asset
B. a fixed asset
C. an intangible asset
D. an investment

115. Sinking Fund Investments would be classified on the balance sheet as

A. a current asset
B. a fixed asset
C. an investment
D. a deferred debit

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
A. fixed assets
B. current assets
C. intangible assets
D. investments

117. The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the
life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)
A. enterprise fund
B. sinking fund
C. special assessments fund
D. general fund

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

121. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If
the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?
A. $10,000 loss
B. $25,000 loss
C. $25,000 gain
D. $15,000 gain

122. Bonds Payable has a balance of $900,000 and Premium on Bonds Payable has a balance of $10,000. If the
issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?
A. $1,200 loss
B. $1,200 gain
C. $17,000 loss
D. $17,000 gain

123. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $296,000. The entry to
record the redemption would include a
A. loss on bond redemption of $4,000.
B. gain on bond redemption of $4,000.
C. gain on bond redemption of $2,000.
D. loss on bond redemption of $2,000.

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?
A. $500 loss
B. $15,500 loss
C. $15,500 gain
D. $500 gain

126. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If
the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?
A. $3,000 loss
B. $3,000 gain
C. $7,000 loss
D. $7,000 gain

127. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to
A. face value
B. face value plus the unamortized discount
C. face value minus the unamortized premium
D. face value plus the unamortized premium

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

129. The balance in Discount on Bonds Payable that is applicable to bonds due in 2015 would be reported on
the balance sheet in the section entitled
A. investments
B. long-term liabilities
C. current assets
D. intangible assets


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:

Bonds payable, 8% (issued 1990, due 2015)
Preferred 8% stock, $100 par
(no change during the year)
Common stock, $50 par
(no change during the year)
Income before income tax for year
Income tax for year
Common dividends paid
Preferred dividends paid

$1,200,000
200,000
1,000,000
320,000
80,000
60,000
16,000

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

A. 5.67

B. 4.33
C. 3.24
D. 3.50


135. Balance sheet and income statement data indicate the following:

Bonds payable, 6% (issued 2000, due 2020)
Preferred 8% stock, $100 par
(no change during the year)
Common stock, $50 par
(no change during the year)
Income before income tax for year
Income tax for year
Common dividends paid
Preferred dividends paid

$1,200,000
200,000
1,000,000
340,000
80,000
60,000
16,000

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

A. 5.72
B. 6.83
C. 4.72

D. 4.83
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
A. $7,032
B. $7,500
C. $8,790
D. $14,065

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
A. $27,638
B. $24,000
C. $48,000
D. $55,277


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:
A. $27,635
B. $40,201
C. $36,821
D. $48,620

144. On January 1, 2011, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional
Bank. The note requires annual payments of $15,179, beginning on December 31, 2011. The December 31,
2012 carrying amount in the amortization table for this installment note will be equal to:
A. $26,000
B. $27,635
C. $21,642
D. $28,402

145. On January 1, 2011, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional
Bank. The note requires annual payments of $15,179, beginning on December 31, 2011. The December 31,
2013 carrying amount in the amortization table for this installment note will be equal to:
A. $0
B. $13,000
C. $14,252
D. $16,603

146. An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to
repay the principal and interest in equal annual payments of $22,315 beginning December 31, 2014, for each of
the next five years. After the final payment, the carrying amount on the note will be

A. $ 1,263
B. $21,053
C. $22,315
D. $ 0

147. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with
interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If the
company uses the straight-line method for amortizing the premium, the journal entry to record the first
semiannual interest payment by Lisbon Co. would include a debit to:
A. Interest Payable for $30,000
B. Interest Expense for $32,500
C. Cash for $70,000
D. Premium on Bonds Payable for $5,500


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
of a bond
2. face value times contract rate
3. if the contract rate is less than the effective rate
4. the value reported on the income statement
5. the rate printed on the bond certificate
6. the return required by the market on the day of
issuance
7. if the contract rate exceeds the effective rate

amortization
interest expense
effective rate
bond premium
contract rate

____
____
____
____
____

bond discount ____
interest
payment ____

151. Match the following terms to the most appropriate answer:
1. the principal of the bond is paid back in installments
2. allows the issuer to redeem bonds before maturity
date
3. the value of a bond stated on the bond certificate
4. a bond issued without any collateral or security
5. the entire principal of the bond is paid back on
maturity date
6. allows the bond hold to exchange bond for shares of
stock
7. the legal contract between issuer and bond holder

Debenture ____
Term bond ____
Face value ____
Indenture ____
Callable bond ____
Serial bond ____
Convertible
bond ____