Accounting Chapter 9
T or F: The related interest expense for the period is determined by multiplying the stated interest rate by the book value of the bond at the beginning of the current period.
F
If the stated rate is 8% and the market rate is 8% what will the bond sell for, premium, face or discount?
Face
If a bond is sold at a premium, is its bond carrying amount greater than, equal to, or less than the face amount of the bond?
Greater than...the bond carrying amount is equal to the Face amount + unamortized bond premium.
What is the bond carrying amount?
It is the bond liability. (Face amount + unamortized bond premium) or (Face amount - unamortized bond discount), if there is no premium or discount then the bond carrying amount = face amount. By definition face amount and bond payable are the same thing...but face amount and bond liability is NOT the same thing.
If a bond is sold at a discount what will happen to interest expense each payment? Will it stay the same, increase, or decrease each payment?
It will increase each payment because the bond liability is increasing (increasing bond liability x market rate = increasing interest expense).
If a bond is sold (issued) at a premium, the stated rate of interest was A) higher than market rate. B) lower than market rate. C) equal to market rate. D) not related to market rate. E) None of the above is correct.
A
What are three other names for "bond payable"?
bond principal, maturity value, face value
Eaton Company issued $5 million in bonds. The stated rate of interest was 10% and the market rate 11%. Which of the following statements is true? A) The bonds were issued at a premium. B) Annual interest expense will exceed the company's actual cash payments for interest. C) Annual interest expense will be $500,000. D) Eaton Company cannot issue bonds if the market rate is higher than the stated rate. E) Both B and C are correct.
B
Philips Corporation issued (sold) $50,000,000 of its 10% bonds at face on January 1, 20XD. On December 31, 20XD the bonds were trading on the bond exchange at a premium. Since the issue date, the market rate of interest on similar risk bonds has A) Increased. B) Decreased. C) Stayed the same. D) None of the above is correct.
B
Amortization of a premium related to a bond issuance would A) require interest expense be calculated by multiplying the market interest rate times the book value of the bonds. B) lead to higher premium amortization and lower interest expense over the life of the bonds. C) require computing the constant amount of premium to be amortized and then deducting it from cash interest to calculate interest expense. D) require both A and B.
D
The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the: A) stated rate. B) nominal rate. C) coupon rate. D) contract rate. E) A through D are all acceptable terms.
E
T or F: Amortization of a discount on a bond payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.
F
T or F: Interest expense incurred when borrowing money and dividends paid to stockholders are tax deductible.
F
T or F: The issue price of a bond is the discounted present value of the principal and the present value of the cash interest to be received over the life of the bonds discounted by the stated or coupon rate.
F
If a bond is sold at a discount, what was higher the stated rate of interest or the market rate of interest?
Market rate was higher.
Is Face amount and bond liability the same thing?
No. The only time face amount is equal to the bond liability is when a bond is sold at face. [However, on the date the bond matures the bond liability will become the face amount (maturity amount) (because any premium or discount will have been completely amortized away on that date.)]
How is bond interest expense determined?
bond carrying amount x market rate of interest at time of issuance = bond interest expense (if semiannual then Bond carrying amount x ½ market rate). (Bond carrying amount is the same thing as bond liability).
What is another name for the stated rate?
contract rate, nominal rate, or coupon rate
How is bond interest payable (cash payment for interest) determined?
principal x stated rate = annual interest or (Principal x ½ stated rate = semi-annual interest)
If a bond is sold at a premium what will happen to interest expense each interest payment? Will it stay the same, increase, or decrease each payment?
Decrease each payment because the bond carrying amount is decreasing... (bond carrying value x market rate = interest expense).
Which of the following statements about bond accounting is correct? A) The cash interest paid is calculated as the bond face value x the market rate. B) The interest expense is calculated as the carrying value x the market rate. C) Cash interest paid minus interest expense is added to the carrying value of the bonds if bonds were sold at a premium. D) Interest expense minus interest paid is deducted from the carrying value of the bonds if bonds were sold at a discount.
B
On July 1, 20XA, Duval Company sold (issued) 300, $1,000, ten-year, 7% bonds at 7.4% ($291,000). The bonds were dated July 1, 20XA, and interest is payable each December 31 and June 30. The amount of discount amortization on December 31, 20XA (1st interest payment would be): A) $ 50. B) $100. C) $267. D) $450.
C
Johnson Company issued $50,000 bonds payable, 9% annual interest, maturity in ten years. The bonds were sold at $48,000 and the market rate of interest was 9.64%. The amount of interest expense for the first full year would be A) $4,700. B) $4,300. C) $4,500. D) $4,627.
D
Which of the following is a disadvantage to the corporation issuing bonds? A) The required interest payment must be met each period. B) The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. C) The large principal payment due at maturity. D) A and C are both disadvantages. E) All of the above are disadvantages.
D
On January 1, 20XA, Washer Company sold (issued) 600, $1,000, five-year, 8% bonds at $576,000 (when the market rate was 9%). The bonds were dated January 1, 20XA, and interest is payable each June 30 and December 31. The amount of the net liability for bonds payable (bond carrying amount) that would be reported on the December 31, 20XA, balance sheet is A) $600,000. B) $597,000. C) $573,000. D) $576,000. E) $579,926
E
If a $10,000 ten year bond is sold at face what will its bond carrying amount be at the end of the fifth year?
It'll be the $10,000 face amount (bond principal, maturity value) because when a bond is issued at face, there isn't a premium or discount to deal with; the bond carrying amount will equal the face amount the whole life of the bond.
If a bond is sold at a discount will its bond carrying amount ever be more than the face amount?
No. Bond carrying amount for a bond sold at a discount will equal face amount - unamortized bond discount. The most the bond carrying amount will ever be for a bond issued at a discount will be its face amount once the bond discount is fully amortized away (at maturity).
Is bond interest paid (bond interest payable) the same as bond interest expense?
No. They can be the same amount if the bond was sold at face; but by definition they are not the same thing.
If a bond is sold at a premium what was higher the market rate of interest or the stated rate?
Stated rate was higher.
T or F: A bond sold at a premium will pay cash interest in excess of the amount of interest expense recognized for accounting purposes.
T
T or F: Bonds sold at a discount will have an effective (market) interest rate that is higher than the stated interest rate.
T
T or F: The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.
T
T or F: We first compute interest expense and then compute the amortization of premium or discount by comparing the interest expense to interest payable.
T
If a bond is sold at a discount how will interest expense compare with interest paid? Will interest expense be greater than, equal to, or less than interest paid?
The bond sold at a discount because the market rate of interest was higher than the stated rate; based on a higher market rate interest expense will be higher than the amount of interest paid.