Q&A Hero

Q: 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

Q: On January 1, a $2,000,000, 10%, 5-year bond was issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is a. $8,000 b. $2,000 c. $4,000 d. $10,000

Q: If bonds payable are not callable, the issuing corporation a. can exchange them for common stock b. can repurchase them on 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

Q: Balance sheet and income statement data indicate the following: Bonds payable, 6% (this is Year 4 of 20 years) $1,000,000Preferred 8% stock, $100 par (no change during the year) 200,000Common stock, $50 par (no change during the year) 1,000,000Income before income tax for year 340,000Income tax for year 80,000Common dividends paid 60,000Preferred dividends paid 16,000 Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.25 b. 6.67 c. 4.66 d. 4.83

Q: Basil Corporation issues for cash $1,000,000 of 8%, 10-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 $1,000,000 at maturity. b. The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. c. The amount of annual interest paid to bondholders increases over the 10-year life of the bonds. d. The amount of annual interest expense decreases as the bonds approach maturity.

Q: On January 1, Elias 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, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is a. $5,000 b. $5,200 c. $5,800 d. $5,400

Q: 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

Q: 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. a convertible bond c. a bond debenture d. a bond indenture

Q: Levi Company issued $200,000 of 12% bonds on January 1 at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1 and mature in 5 years on January 1. The total interest expense related to these bonds for the current year ending on December 31 is a. $2,000 b. $6,000 c. $18,000 d. $24,000

Q: 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 effective interest rate 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

Q: If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be a. equal to $500,000 b. greater than $500,000 c. less than $500,000 d. greater than or less than $500,000, depending on the maturity date of the bonds

Q: If Eddie Industries issues $1,500,000 of 8% bonds at 105, the amount of cash received from the sale is a. $1,425,000 b. $1,080,000 c. $1,000,000 d. $1,575,000

Q: When the corporation issuing the bonds has the right to redeem the bonds prior to maturity, the bonds are a. convertible bonds b. unsecured bonds c. debenture bonds d. callable bonds

Q: The present value of $40,000 to be received in 2 years, at 12% compounded annually, is (rounded to nearest dollar) a. $31,888 b. $48,112 c. $8,112 d. $40,000

Q: Merchant Company issued 10-year bonds on January 1. 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 rate method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (rounded to the nearest dollar) of a. $7,032 b. $7,500 c. $8,790 d. $14,065

Q: 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

Q: Franklin Corporation issues a $50,000, 10%, 5-year bond on January 1 for $52,100. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is a. $10,290 b. $2,710 c. $2,500 d. $2,290

Q: 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.

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

Q: The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of future interest periods. a. True b. False

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

Q: To determine the 6-month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond. a. True b. False

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

Q: 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. a. True b. False

Q: 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. a. True b. False

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

Q: Bonds payable should be reported on the balance sheet at face value plus or minus any unamortized premium or discount. a. True b. False

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

Q: A bond is simply a form of an interest-bearing note. a. True b. False

Q: The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period. a. True b. False

Q: 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. a. True b. False

Q: Both callable and noncallable bonds can be purchased by the issuing corporation on the open market. a. True b. False

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

Q: If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928 and straight-line amortization is used, the annual interest expense is $5,500. a. True b. False

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

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

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

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

Q: The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium. a. True b. False

Q: Bonds are sold at face value when the contract rate is equal to the market rate of interest. a. True b. False

Q: An equal stream of periodic payments is called an annuity. a. True b. False

Q: Bondholders' claims on the assets of the corporation rank ahead of stockholders' claims. a. True b. False

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

Q: Bondholders are creditors of the issuing corporation. a. True b. False

Q: 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. a. True b. False

Q: 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. a. True b. False

Q: The amortization of a premium on bonds payable decreases bond interest expense. a. True b. False

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

Q: The effective interest rate method of amortizing a bond discount or premium is the preferred method. a. True b. False

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

Q: 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. a. True b. False

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

Q: The times interest earned ratio is computed by dividing bonds payable by interest expense. a. True b. False

Q: When the effective interest rate method of amortization is used, the amount of interest expense for a given period is computed by multiplying the contract rate of interest by the bond’s carrying value at the beginning of the given period. a. True b. False

Q: The higher the times interest earned ratio, the better the creditors’ protection. a. True b. False

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

Q: Gains on the redemption of bonds are reported in the Other Revenue section of the income statement. a. True b. False

Q: Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds. a. True b. False

Q: An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. a. True b. False

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

Q: Only callable bonds can be purchased by the issuing corporation before maturity. a. True b. False

Q: A corporation often issues callable bonds to protect itself against significant declines in future interest rates. a. True b. False

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

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

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

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

Q: One reason a dollar today is worth more than a dollar one year from today is the time value of money. a. True b. False

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

Q: 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. a. True b. False

Q: The present value of an annuity is the sum of the present values of each cash flow. a. True b. False

Q: 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%. a. True b. False

Q: Discount on Bonds Payable is a contra liability account. a. True b. False

Q: A corporation purchases 10,000 shares of its own $10 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity? a. increase by $100,000 b. increase by $350,000 c. decrease by $100,000 d. decrease by $350,000

Q: What is the total stockholders' equity based on the following data? Common Stock $360,000Paid-in Capital in Excess of Par 735,000Retained Earnings (deficit) (56,000) a. $1,095,000 b. $1,151,000 c. $1,039,000 d. $679,000

Q: Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 $10,000Year 2 45,000Year 3 90,000 Determine the dividends in arrears for preferred stock for the second year. a. $25,000 b. $10,000 c. $0 d. $30,000

Q: The date on which a cash dividend becomes a binding legal obligation is the a. declaration date b. date of record c. payment date d. last day of the fiscal year

Q: In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be reported? a. Other Expense section of the income statement b. Intangible Assets section of the balance sheet c. Stockholders' Equity section of the balance sheet d. Other Income section of the income statement

Q: When Wisconsin Corporation was formed on January 1, the corporate charter provided for 100,000 shares of $10 par value common stock. During its first month of operation, the corporation issued 8,500 shares of stock at a price of $16 per share. The journal entry for this transaction would include a a. debit to Cash for $85,000 b. credit to Common Stock for $136,000 c. credit to Paid-In Capital in Excess of Par—Common Stock for $51,000 d. debit to Common Stock for $85,000

Q: Significant changes in stockholders' equity are reported on the a. income statement b. retained earnings statement c. statement of stockholders' equity d. statement of cash flows

Q: The primary purpose of a stock split is to a. increase paid-in capital b. reduce the market price of the stock per share c. increase the market price of the stock per share d. increase retained earnings