Chapter 9

We can calculate the issue price of a bond as the face amount plus the total periodic interest payments A. True B. False

B

We record gain contingencies when the gain is probable and the amount is reasonably estimable A. True B. False

B

We record interest expense in the period in which we pay it, rather than in the period we incur it A. True B. False

B

When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time A. True B. False (11/10)

B

Which of the following is true for bonds issued at a discount? A. The stated interest rate is greater than the market interest rate B. The market interest rate is greater than the stated interest rate C. The stated interest rate and the market interest rate are equal D. The stated interest rate and the market interest rate are unrelated

B

The price of a bond is equal to: A. The future value of the face amount only B. The present value of the interest only C. The present value of the face amount plus the present value of the stated interest payments D. The future value of the face amount plus the future value of the stated interest payments

C

The rate quoted in the bond contract used to calculate the cash payments for interest is called the A. Effective rate B. Market rate C. Stated rate D. Yield rate (11/8)

C

The term used for bonds that are unsecured as to principal is A. series bonds B. debenture bonds C. indenture bonds. D.callable bonds.

B

A $500,000 bond issue sold for $510,000. Therefore, the bonds A. Sold at a premium because the stated interest rate was higher than the market rate B. Sold for the $500,000 face amount plus $10,000 of accrued interest C. Sold at a discount because the stated interest rate was higher than the market rate D. Sold at a premium because the market interest rate was higher than the stated rate

A

A corporation obtains a $125,000, 6%, five‐year loan for equipment on January 1, 2018. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2018 A. $1,791.60 B. $625.00 C. $2,416.60 D. $1,000.60

A

A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. A. True B. False

A

A premium occurs when the issue price of a bond is above its face amount A. True B. False

A

The entry to record a monthly payment on an installment note A. Increases expense, decreases liabilities, and decreases assets. B. Increases expense, increases liabilities, and increases assets. C. Increases expense, decreases liabilities, and increases assets. D. Increases expense, increases liabilities, and decreases assets.

A

To determine if a bond will be issued at a premium, discount or at face value, one must know which information? A. The stated interest rate and the market interest on the date the bonds were issued. B. The face value and the stated interest rate on the date the bonds were issued. C. The face value and market interest rate on the date the bonds were issued. D. You need additional information.

A

Which of the following definitions describes a term bond? A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer.

A

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is: A. Equal to $500,000 B. More than $500,000 C. Less than $500,000 D. The answer cannot be determined from the information provided

B

A bondholder that owns a $10,000, 6%, 25‐year bond has A. ownership rights in the bond‐issuing entity. B. the right to receive $10,000 at maturity. C. the right to receive $600 per month until maturity. D. the right to receive $10,600 at maturity. E. the right to receive $6,000 per year until maturity.

B

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty liability at the end of the year? A. $ ‐ 0 - B. $ 7,000 C. $ 9,000 D. $16,000

B

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? A. Both bonds will sell for the same amount B. Bond X will sell for more than Bond Y C. Bond Y will sell for more than Bond X D. Both bonds will sell at a premium

B

For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds A. True B. False (11/10)

B

Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement A. True B. False (10/11)

B

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be A. Disclosed, but not reported as a liability B. Disclosed and reported as a liability C. Neither disclosed nor reported as a liability D. Reported as a liability, but not disclosed

B

In each succeeding payment on an installment note A. The amount of interest expense increases. B. The amount of interest expense decreases. C. The amount of interest expense is unchanged. D. The amounts paid for both interest and principal increase proportionately

B

The mixture of debt and equity securities is generally the same for most companies. A. True B. False

B

Which of the following is not a true statement? A. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing B. As a company's level of debt increases, the risk of bankruptcy increases C. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax‐deductible D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure

C

Which of the following is not true regarding callable bonds? A. This feature allows the borrower to repay the bonds before their scheduled maturity date. B. This feature helps protect the borrower against future decreases in interest rates. C. Callable bonds benefit the bond investor. D. A bond can be both callable and convertible.

C

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty expense for the year? A. $ ‐ 0 ‐ B. $ 7,000 C. $ 9,000 D. $16,000

D

Ford estimates engine warranty expense in the year a car is sold. This best follows which of the following accounting principles? A. historical cost B. full disclosure C. consistency D. matching

D

Given the information below, which bond(s) will be issued at a discount? A. Bond 1 B. Bond 2 C. Bond 4. D. Bonds 1 and 4 Stated Rate of Return 5% 10% 12% 7% Market Rate of Return 7% 9% 12% 8%

D

The carrying value, using the effective interest method, would increase each year: A. The carrying value of bonds will never increase B. If the bonds were sold at either a discount or a premium C. If the bonds were sold at a premium D. If the bonds were sold at a discount (11/10)

D