chap 14

The effective interest method is preferred when amortizing bond premiums and discounts. True False

True

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture. registered bond. bond debenture. bond coupon.

bond indenture.

In the recent year Sheffield Corp. had net income of $210800, interest expense of $53000, and tax expense of $86000. What was Sheffield Corp.'s times interest earned for the year? 5.6 6.6 5.0 4.0

6.6

Which of the following is not an example of "off-balance-sheet financing"? Capital leases Operating leases Non-consolidated subsidiary Special purpose entity

Capital leases

A long-term note is valued at its face value. True False

False

Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8% for $92,278,000, to yield 10%. If the company uses the effective interest method of amortization, interest expense for the first six months would be $4,000,000. True False

False

The effective interest method calculates bond interest expense by multiplying the carrying value of the bonds at the beginning of the period by the stated rate of interest. True False

False

The entry for bond premium amortization includes a debit to interest expense and a credit to the premium on bonds payable. True False

False

When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. True False

False

How would the amortization of discount on bonds payable affect each of the following? Carrying value of bond Net income Increase Decrease Increase Increase Decrease Decrease Decrease Increase

Increase Decrease

When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond? Par. Interest. Yield. Price.

Price

Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement. True False

True

The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet. True False

True

Which of the following is not a typically classified as a long-term liability? Lease Liability Unearned Revenue Mortgage Payable Bonds Payable

Unearned Revenue

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include a credit to Interest Expense for $2,000,000. a credit to Premium on Bonds Payable for $2,000,000. a debit to Cash for $100,000,000. a credit to Bonds Payable for $102,000,000.

a credit to Premium on Bonds Payable for $2,000,000.

The generally accepted method of accounting for gains or losses from the early extinguishment of debt is to compute them as an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. an adjustment to the cost basis of the asset obtained by the debt issue.

a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

Bond issuance costs are: amortized into expense over the life time of the bond. recorded as an asset. recorded as an interest expense. added to the issue amount of the bond payable.

amortized into expense over the life time of the bond.

Premium on bonds payable is debited to a deferred charge account and amortized over the life of the bonds. an adjunct account. a contra account. reported as a reduction of the bond liability.

an adjunct account.

The printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amortized over the life of the bonds. not be reported as an expense until the period the bonds mature or are retired. be expensed when incurred. be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.

be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.

All of the following statements related to bonds are correct regarding bonds except: bonds represent a promise to pay a sum of money plus periodic interest. bonds arise from a contract known as a bond indenture. bonds typically have a $1,000 face value. bonds usually pay interest annually.

bonds usually pay interest annually.

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a callable bond. retirable bond. debenture bond. convertible bond.

callable bond.

The interest rate written in the terms of the bond indenture is known as the market rate. yield rate. coupon rate, nominal rate, or stated rate. effective rate.

coupon rate, nominal rate, or stated rate.

The interest rate actually earned by bondholders is called the stated rate. effective yield. coupon rate. nominal rate.

effective yield.

A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2021, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2021 should have equaled the face amount less unamortized discount. call price less unamortized discount. face amount plus unamortized discount. call price.

face amount less unamortized discount.

If a bond sold at 97, the market rate was: greater than the stated rate. equal to the coupon rate. less than the stated rate. equal to the stated rate.

greater than the stated rate.

Bonds which do not pay interest unless the issuing company is profitable are called secured bonds. debenture bonds. term bonds. income bonds.

income bonds.

Under the effective interest method, interest expense: is the same total amount as straight-line interest expense over the term of the bonds. always decreases each period the bonds are outstanding. is the same annual amount as straight-line interest expense in the earlier years. always increases each period the bonds are outstanding.

is the same total amount as straight-line interest expense over the term of the bonds.

When a bond sells at a premium, interest expense will be: less than the bond interest payment. none of these answer choices are correct. greater than the bond interest payment. equal to the bond interest payment.

less than the bond interest payment.

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the market rate. stated rate. nominal rate. coupon rate.

market rate.

Note disclosures for long-term debt generally include all of the following except assets pledged as security. call provisions and conversion privileges. restrictions imposed by the creditor. names of specific creditors.

names of specific creditors.

The numerator in the times interest earned ratio is: net income plus interest expense and income tax expense. net income. net income plus income tax expense. net income plus interest expense.

net income plus interest expense and income tax expense.

A long-term note is valued at its face value. maturity value. market value. present value.

present value.

A bond issued in the name of the owner is a: income bond. bearer bond. registered bond. convertible bond.

registered bond.

When bonds sell between interest payment dates, the purchaser will pay the seller: the price of the bonds only. the price of the bonds less the accrued interest. the price of the bonds plus the accrued interest. None of these answers are correct.

the price of the bonds plus the accrued interest.

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that the market rate of interest exceeded the stated rate. the stated rate of interest exceeded the market rate. no necessary relationship exists between the two rates. the market and stated rates coincided.

the stated rate of interest exceeded the market rate.

A debenture bond is a (an): unsecured bond. secured bond. callable bond. term bond.

unsecured bond.

Both discount on bonds payable and premium on bonds payable are: contra accounts. nominal accounts. valuation accounts. adjunct accounts.

valuation accounts.