Accounting Chapter 9

Amortization of premiums and discounts formula

$$$ / # of payments

If bonds are issued at 101.25, this means that A.) a $1,000 bond sold for $1,012.50 B.) a $1,000 bond sold for $101.25 C.) the bonds sold at a discount D.) the bond rate of interest is 10.125% of the market rate of interest

A.) a $1,000 bond sold for $1,012.50

When bonds are issued at a premium, the interest expense for the period is the amount of interest payment for the period A.) minus the premium amortization for the period B.) plus the premium amortization for the period C.) plus the discount amortization for the period D.) minus the discount amortization for the period

A.) minus the premium amortization for the period

Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period? A.) $800 B.) $1,600 C.) $3,200 D.) $4,000

B.) $1,600

Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds? A.) $120,000 B.) $60,000 C.) $30,000 D.) $6,000

B.) $60,000

Bonds are sold at a premium if the A.) market rate of interest was more than the stated rate at the time of issue B.) market rate of interest was less than the stated rate at the time of issue C.) company will have to pay a premium to retire the bonds D.) issuing company has a better reputation than other companies in the same business

B.) market rate of interest was less than the stated rate at the time of issue

What best describes the discount on bonds payable account? A.) a liability B.) an asset C.) a contra liability D.) an expense

C.) a contra liability

The premium on bonds payable account is shown on the balance sheet as? A.) a contra asset B.) a reduction of an expense C.) an addition to a long-term liability D.) a subtraction from a long-term liability

C.) an addition to a long-term liability

Bonds are a popular source of financing because? A.) a company having cash flow problems can postpone payment of interest to bondholders B.) financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock C.) bond interest expense is deductible for tax purposes, while dividends paid on stock are not D.) the bondholders can always convert their bonds into stock if they choose

C.) bond interest expense is deductible for tax purposes, while dividends paid on stock are not

When bonds are issued at a discount, the interest expense for the period is the amount of interest payment for the period A.) plus the premium amortization for the period B.) minus the premium amortization for the period C.) plus the discount amortization for the period D.) minus the discount amortization for the period

C.) plus the discount amortization for the period

Which of the following statements regarding bonds is true? A.) generally, bonds are issued in denominations of $100 B.) when an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser C.) the entire principal amount of most bonds mature on a single date D.) a debenture bond is backed by the specific assets of the issuing company

C.) the entire principal amount of most bonds mature on a single date

Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (numbers are omitted) A.) Dr: interest expense Cr: cash B.) Dr: interest expense Cr: bonds payable Cr: cash C.) Dr: interest expense Dr: discount on bonds payable Cr: cash D.) Dr: interest expense Cr: discount on bonds payable Cr: cash

D.) Dr: interest expense Cr: discount on bonds payable Cr: cash

Installment bonds differ from typical bonds in what way? A.) essentially they are the same B.) the entire principal balance is paid off at maturity for installment bonds C.) installment bonds do not have a stated rate D.) a portion of each installment bond payment pays down the principal balance

D.) a portion of each installment bond payment pays down the principal balance

When bonds are issued by a company, the accounting entry typically shows an? A.) increase in liabilities and a decrease in stockholders' equity B.) increase in assets and an increase in stockholders' equity C.) increase in liabilities and an increase in stockholders' equity D.) increase in assets and an increase in liabilities

D.) increase in assets and an increase in liabilities

JE for bond at PAR

Dr: Cash Cr: Bonds Payable

JE for bond at PREMIUM

Dr: Cash Cr: Premium on B/P Cr: B/P

(JE) Bond DISCOUNT

Dr: Cash Dr: Discount on B/P Cr: B/P

Determining Bond Interest Expense

Face Value x Face Rate x Time

Serial

a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured

Unsecured

good credit reputation of Issuer is collateral

Secured

provides a measure of protection to the bond holder (interest rate is a bit lower)

Term

refers to bonds from the same issue with the same maturity dates

(T/F) Long-term bonds payable goes under Liabilities on the Balance Sheet

true