Chapter 15

Several years ago, Bee Corporation issues $400,000, 10% bonds for $380,000. The balance in the disc on bonds payable account at the end of the current year is $8,000. The balance sheet for the current year would show a net liability of: a) $408,000 b) $380,000 c) $388,000 d) $392,000

d) $392,000

Amortizing the discount on a bond payable: a) increases the interest expense for the period b) increases the book value of bonds payable c) decreases the amount of the cash paid to the bondholders d) both a and b are correct

d) both a and b are correct

Immediately after the interest payment, Callis Corporation's $1,000,000 of bonds were converted into 200,000 shares $5 par common stock. The unamortized premium on the bonds at the date of conversion was $34,650. The entry to record the conversion would include a: a) debit bonds payable for $1,000,000 b) credit to premium on bonds payable for $34,650 c) credit to paid-in capital in excess of par-common for $34,650 d) both a and c are correct

d) both a and c are correct

The interest rate that determines the amount of cash interest the borrower pays each year to the bondholder is the: a) contract interest rate b) effective interest rate c) stated interest rate d) both a and c are correct

d) both a and c are correct

The interest rate that investors demand for loaning money is the: a) effective interest rate b) stated interest rate c) market interest rate d) both a and c are correct

d) both a and c are correct

Bonds which mature at the same time are called: a) serial bonds b) callable bonds c) convertible bonds d) term bonds

d) term bonds

If the effective rate of interest exceeds the stated rate of interest, bonds will sell for more than their face value

False

The carrying value of bonds will decrease each interest period if the bonds were sold at a discount.

False

A bond which sells above its face value is said to sell at a premium.

True

Beta Corporation issued $100,000 face value, 10-year, 8% bonds on October 1. Interest is payable each April 1 and October 1. Accrued interest on December 31 amounts to $2,000.

True

Interest expense will increase each period if a company uses the effective-interest method of amortization and the bonds are issued at a discount.

True

The present value of $500 at 10% per period for three periods is $375.50. (Present value tables required

True

Using the effective-interest method, interest expense is based on the carrying amount of the bonds time the effective interest rate for the interest period.

True

Jones Corporation issues $400,000, 10% five-year bonds at 103. The total interest expense over the life of the bonds is: a) $188,000 b) $212,000 c) $200,000 d) $40,000

a) $188,000

Clark Company issues $100,000 of 9%, 10-year bonds dated March 1 at par on May 31. The entry to record the issue includes a: a) debit to cash for $102,250 b) debit to interest payable for $2,250 c) credit to interest revenue for $2,250 d) credit to bonds payable for $102,250

a) debit to cash for $102,250

The entry to record the semiannual interest payment on bonds which were issued at par value includes a: a) debit to interest expense b) credit to discount on bonds payable c) debit to bonds payable d) both a and b are correct

a) debit to interest expense

Jones Corporation issues $400,000, 10%, five-year bonds at 95. The total interest expense over the life of the bonds is: a) $40,000 b) $220,000 c) $180,000 d) $200,000

b) $220,000

On January 2, 19X3, Laser Corporation issues $200,000 face value, 6% bonds for $204,000. It may be derived that the effective rate of interest was: a) more than 6% b) less than 6% c) equal to 6% d) impossible to determine from the given data

b) less than 6%

Earning more income on borrowed money than the related interest expense increases the earning for common stockholders and is termed trading on the equity.

True

GAAP identify gains and losses on early retirement of debt as extraordinary, and the are reported separately on the income statement, net of tax.

True

If convertible bonds were issued at a discount, the discount on bonds payable must be credited when converting the bonds into common stock.

True

Issuing bonds instead of stock generally results in higher earnings per share because interest expense is tax deductible and ownership is not diluted.

True

Offbalancesheet financing is the acquisition of assets or services with debt that is not reported on the balance sheet.

True

The effective interest method of amortization keeps each interest expense amount at the same percentage of the bond's carrying value for every interest payment over the bond's life.

True

The interest expense paid on bonds lowers corporate net income while dividends paid on stocks have no effect on net income.

True

When a bond is issued at a discount, the discount has the effect of raising the interest expense on the bonds to the market rate of interest.

True

The future value of $500 after two years at 12% interest per year is: a) $560.00 b) $627.00 c) $446.43 d) $398.60

b) $627.00

Given a contract interest rate of 8.5%, and a market interest rate of 7.75%, the bonds will be issued at: a) par b) a premium c) a discount d) cannot be determined from the information given

b) a premium

Laser Corporation issues 50, $1,00 face value, 10% bonds at 95. The journal entry includes a: a) debit to cash for $50,000 b) credit to bonds payable for $47,500 c) debit to cash for $47,500 d) debit to premium on bonds payable for $2,500

c) debit to cash for $47,500

The entry to record the issuance of bonds at par value includes a: a) debit to discount on bonds payable b) credit to premium on bonds payable c) debit to cash for the par value of the bonds d) debit to bonds payable for the par value of the bonds

c) debit to cash for the par value of the bonds

On January 2, 19X5, Shelby Corporation issued $200,000, 10%, 10-year bonds for $220,000. The bonds pay interest each December 31. Shelby Corporation uses the straight-line method to amortize premium over discount. On December 31, 19X5, Shelby Corporation would record a: a) credit to cash for $22,000 b) debit to interest expense for $22,000 c) debit to interest expense for $18,000 d) credit premium on bonds payable for $2,000

c) debit to interest expense for $18,000

a) debit to leased liability for $3,651 b) credit to cash for $3,849 c) debit to interest expense for $3,651 d) credit interest expense for $3,849

c) debit to interest expense for $3,651

An example of off balance sheet financing is: a) the issuance of common stock b) the issuance of bonds above face value c) entering into an operating lease agreement d) entering into a capital lease agreement

c) entering into an operating lease agreement

All of the following are advantage of issuing stock except: a) it is less risky to the issuing corporation b) it creates no liabilities c) generally results in higher earnings per share d) creates no interest expense which must be paid

c) generally results in higher earnings per share

All of the following would qualify as a capital lease except the: a) lease term is 80% of the asset's estimate useful life b) lease agreement contains a bargain purchase agreement c) present value of the lease payments equals 70% of the market value of the leased asset d) title to the leased asset transfer to the lessee at the end of the lease term

c) present value of the lease payments equals 70% of the market value of the leased asset

Another name for the principal amount of a bond is: a) market value b) face value c) maturity value d) both b and c are correct

d) both b and c are correct

The premium on bonds payable: a) represents an increase interest expense over the life of the bonds b) represents a decrease in interest expense over the life of the bonds c) decreases interest expense to the effective interest rate d) both b and c are correct

d) both b and c are correct

Discount on bonds payable is a(n): a) contra asset account b) adjunct account to bonds payable c) contra stockholders' equity account d) contra account to bonds payable

d) contra asset account

Laser Corporation issues 50, $1,000 face value, 10% bonds at 102.5. The journal entry includes a: a) debit to cash for $50,000 b) credit to bonds payable for $51,250 c) debit to discount on bonds payable for $1,250 d) credit to premium on bonds payable for $1,250

d) credit to premium on bonds payable for $1,250

All of the following are advantages of issuing bonds except: a) does not dilute control of the corporation b) interest expense is tas deductible c) generally results in higher earning per share d) less risky to the issuing corporation

d) less risky to the issuing corporation

Interest expense on the income statement will exceed the annual interest payment to bondholders if bonds are issued at a premium.

False

The effective rate of interest is the rate of interest stated on the bond certificate.

False

The journal entry to record selling $200,000 face value bonds at 98 will involve a credit to bonds payable for $196,000.

False

The lessee in an operating lease situation capitalizes the asset even thought the lessee may never take legal title to the property.

False

The premium on bonds payable account is amortized by a debit to interest expense and a credit to premium on bonds payable.

False

The proceeds from issuing bonds is equal to the present value of the: a) maturity value of the bonds plus the present value of the periodic interest payment using the effective rate of interest b) maturity value of the bonds plus the present value of the periodic interest payments using the stated rate of interest c) maturity value of the bonds less the present value of the periodic interest payments using the effective rate of interest d) periodic interest payments less the present value of the maturity value of the bonds using the effective rate of interest

a) maturity value of the bonds plus the present value of the periodic interest payments using the effective rate interest

Several years ago, Bee Corporation issued $400,000, 10% bonds for $430,000. The balance in the premium on bonds payable account at the end of the current year is $18,000. The balance sheet for the current year would show a net liability of: a) $412,000 b) $418,000 c) $448,000 d) $382,000

b) $418,000

Ogden Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year December 1 and June 1. Ogden's year end is December 31. The entry to record the issuance of the bonds at face value plus accrued interest on August 1, 19X6, includes a: a) debit to cash for $1,000,000 b) credit to interest payable for $12,500 c) debit to interest expense for $37,5000 d) credit to bonds payable for $1,012,500

b) credit to interest payable for $12,500

Bonds which are backed only by the food faith of the borrower are referred to as: a) mortgage bonds b) debenture bonds c) serial bonds d) registered bonds

b) debenture bonds

Ogden Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year December 1 and June 1. Ogden's year end is December 31. The entry to record the issuance of the bonds on June 1, 19X6, at 103 3/8 includes a: a) debit to bonds payable for $1,000,000 b) debit to cash for $1,033,750 c) credit premium on bonds payable for $30,375 d) debit to premium on payable for $33,750

b) debit to cash for $1,033,750

Ogden Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year December 1 and June 1. Ogden's year end is December 31. The entry to record the issuance of the bonds on June 1, 19X6 at 96 1/2 includes: a) credit to cash for $37,5000 b) debit to discount on bonds payable for $35,000 c) credit to bonds payable for $965,000 d) credit to interest payable for $75,000

b) debit to discount on bonds payable for $35,000

The book value of bonds is equal to bonds payable: a) plus the unamortized discount b) less the unamortized discount c) less the amortized discount d) plus the amortized discount

b) less the unamortized discount

A $1,000 bond quoted at 104 3/8 is selling for: a) $1,043.80 b) $1,040.38 c) $1,043.75 d) $1,004.80

c) $1,043.75

The present value of $2,000 to be received three years from now at 10% interest per year is: a) $1,818.18 b) $1,652.89 c) $1,502.00 d) $2,662.00

c) $1,502.00

Jones Corporation issues $400,000, 10%, five-year bonds at face value. The total interest expense over the life of the bonds is: a) $40,000 b) $400,000 c) $200,000 d) $8,000

c) $200,000

A $1,000 bonds quoted at 97 3/4 is selling for: a) $970.75 b) $907.75 c) $977.50 d) $973.40

c) $977.50

a) debit to depreciation expense for $4,564 b) credit to leased asset for $4,564 c) credit to accumulated depreciation-office building for $5,501 d) no journal entry is required for depreciation on a leased asset

c) credit to accumulated depreciation-office building for $5,501

On January 2, 19X5, Shelby Corporation issued $200,000, 10%, 10-year bonds for $160,000. The bonds pay interest each December 31. Shelby Corporation uses the straight-line method to amortize premium o_ discount. On December 31, 19X5, Shelby Corporation would record a: a) credit to cash for $16,000 b) debit to interest expense for $16,000 c) debit to interest expense for $24,000 d) credit premium on bonds payable for $4,000

c) debit to interest expense for $24,000