ACCT 2110 Chapter 9 Quiz

When a bond is issued at a discount, the amortization of the bond interest increases each year using the straight-line method. (T/F)

False

A bond issue price is the present value of the cash flows that the bond will produce. (T/F)

True

A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to the lender. (T/F)

True

Callable bonds may be retired by the issuer before their specified due date. (T/F)

True

If a bondholder has the right to retire the bonds, they are referred to as callable. (T/F)

True

In periods of inflation, debt financing is preferable to equity financing because the company is able to repay the lender in dollars that have declined in purchasing power. (T/F)

True

The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period. (T/F)

True

The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued. (T/F)

True

The market value of a bond is determined by calculating its present value, which is based on the face amount, the number of periods, and the market rate of interest. (T/F)

True

When evaluating a company's solvency, an investor's major concern is whether all debt has been properly recorded. (T/F)

True

A long-term leased asset would appear on the balance sheet as: a. current asset. b. long-term lease liability. c. prepaid lease expense. d. current liability.

b. long-term lease liability.

When bonds are sold for less than the par amount, this means that the: a. bonds are sold at a premium. b. stated rate of interest is less than the yield rate of interest. c. maturity value will be less than the par amount. d. maturity value will be greater than the par amount.

b. stated rate of interest is less than the yield rate of interest.

Which of the following statements regarding amortization is true? a. Cash interest payments on bonds equals interest expense on the income statement when there is amortization of bond premium. b. Amortization of the premium causes the premium on bonds payable account to increase. c. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero. d. Amortization of the premium causes the amount of interest expense to increase.

c. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.

The result of using the effective interest method of amortization for bond discounts is that the: a. interest expense for each amortization period is constant. b. cash interest payment is greater than the interest expense. c. effective interest rate for each amortization period is constant. d. amount of interest expense decreases each period.

c. effective interest rate for each amortization period is constant.

Which of the following would describe a callable bond? a. Borrower has the right to issue more bonds prior to due date of existing bonds. b. Borrower has the right to pay off the bonds prior to due date. c. Borrower has the right to call off the interest payments on the bonds. d. Investor has the right to call off the interest payments on the bonds.

b. Borrower has the right to pay off the bonds prior to due date.