SAU Accounting II Ch 10

Which of the following correctly describes an installment note? Select one: a. An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. b. The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note. c. An installment note requires equal interest payments with the entire principal balance paid at maturity. d. An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note.

a. An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. Loans that require payments of principal and interest at regular intervals (amortizing loans) are typically represented by installment notes. As the principal balance of the note decreases over time the portion of the payment that is applied to interest expense decreases. However, the amount of the payment remains constant.

Which of the following describes the characteristics of a convertible bond? Select one: a. Bonds may be exchanged for stock at the discretion of the bondholder. b. Bonds mature at specified intervals throughout the life of the total issuance. c. Bonds may be exchanged for stock at the discretion of the issuer. d. Bonds mature on a specified date in the future.

a. Bonds may be exchanged for stock at the discretion of the bondholder. Convertible bonds are liabilities that can be exchanged at the option of the bondholder for common stock or some other specified ownership interest.

Which of the following describes a callable bond? Select one: a. Can be called for early retirement at the option of the issuer b. convertible to common stock at the option of the issuer c. Convertible to common stock at the option of the bondholder d. Can be called for early retirement at the option of the bondholder

a. Can be called for early retirement at the option of the issuer Callable bonds allow the issuing company to redeem (pay off) the bond debt before the maturity date. This is at the option of the issuer (rather than the bondholder).

What is another term used to describe unsecured bonds? Select one: a. Debentures b. Discount bonds c. Par value bonds d. Coupon bonds

a. Debentures Unsecured bonds, also called debentures, are issued based on the general strength of the borrower's credi

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance? Select one: a. Coupon bonds b. Serial bonds c. Term bonds d. Registered bonds

b. Serial bonds Serial bonds have a series of maturity dates so that the repayment of the bonds is accomplished over time.

Why are bonds sometimes issued at a discount? Select one: a. The stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk. b. The stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk. c. The stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk. d. The bonds are being issued between interest payment dates.

b. The stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.

Pace Company issued bonds with a face value of $200,000 at 97. How does the issuance affect the company's accounting equation? Select one: a. Assets and liabilities would both increase by $200,000. b. Assets would increase by $200,000, and liabilities would increase by $194,000. c. Assets and liabilities would both increase by $194,000. d. Assets would increase by $194,000 and liabilities would increase by $200,000.

c. Assets and liabilities would both increase by $194,000. Proceeds = Face value of $200,000 × 97% = $194,000Issue price = $196,000 ÷ $200,000 = 98Discount = Face value of $200,000 − Issue price of $196,000 = $6,000Assets (cash) increase by $194,000. Liabilities (bonds payable) increase by $200,000 and liabilities (discount on bonds payable, a contra liability account) increase by $6,000 for a net increase in liabilities of $194,000.

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year? Select one: a. Increase the amount of interest expense each year b. Has no effect on interest expense each year c. Reduces the amount of interest expense each year d. Cannot be determined from the information provided

c. Reduces the amount of interest expense each year As the principal balance declines each year, the interest expense becomes smaller, and the amount of principal repayment becomes larger with each subsequent payment.

A discount or premium on bonds payable can be defined by which of the following statements? Select one: a. The difference between the call price and the face value of the bond. b. The difference between the interest rate and the market price of the bond. c. The difference between the market price on the issue date and the face value. d. The market rate of interest on the date of the bond issuance.

c. The difference between the market price on the issue date and the face value. When the market rate of interest is higher than the stated rate of interest, bonds will sell at a discount so as to increase the effective rate of interest to the market rate. When the market rate is lower than the stated rate, bonds will sell at a premium so as to reduce the effective rate to the market rate.

How are bonds payable usually classified on the balance sheet? Select one: a. Current liabilities b. Investments and funds c. Other assets d. Long-term liabilities

d. Long-term liabilities Unless they are within one year of maturity, bonds payable are usually classified as long-term on the balance sheet.

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default? Select one: a. Indenture bond b. Registered bond c. Debenture bond d. Mortgage bond

d. Mortgage bond Secured bonds grant their holders a priority legal claim on specified identifiable assets should the issuer default. A common type of secured bond is a mortgage bond, which conditionally transfers the title of designated property to the bondholder until the bond is paid.

Regardless of the specific type of long-term debt, which of the following is normally an expectation with regards to debt transactions? Select one: a. Payment of interest b. Repayment of the debt c. Payment of dividends d. Payment of interest and repayment of the debt

d. Payment of interest and repayment of the debt When a company issues debt, whether notes or bonds, the company is normally expected to repay the debt, as well as to pay interest to the lender.