Corporation Bonds

Two of the main factors in determining the price at which bonds will sell are

the stated rate and the market rate.

______________ bonds give the issuing corporation the option of redeeming the bonds before the maturity date.

Callable

A $100,000 bond issue sold at 103 has a market price of $100,300.

False

A bond is an obligation of the shareholders.

False

A discount amortization effects a gradual reduction of the bonds payable account to zero over time.

False

Names and addresses of owners of coupon bonds are recorded and kept current in the corporate records.

False

Premium on Bonds Payable should be classified as a contra-liability account.

False

The Discount on Bonds Payable balance is subtracted from Bonds Payable on the income statement.

False

Bonds payable less the discount on bonds payable is called the carrying value of the bonds.

True

If a corporation issues term bonds, each bond will have the same maturity date.

True

The process of adjusting the bond interest expense account for any premium or discount is called _________________.

amortization

When the selling price of a bond is stated at 100, it means that the bonds are selling

at face value.

A(n) _____________ is a written promise to pay a specific sum of money at a specific future date.

bond

The formal written agreement for issuing bonds is called a(n) ____________________.

bond indenture

The accumulation and investment of money over a period of years to provide the amount needed for the redemption of bonds is a(n) ___________________.

bond sinking fund

Term bonds are

bonds that all have the same maturity date.

Bonds issued with a provision that they may be called for redemption before the date of maturity are known as

callable bonds.

Bonds payable plus the premium or less the discount on bonds payable equals the ______________

carry value

The discount on bonds payable account would be classified as a(n)

contra-liability.

Bonds classified as to the timing of principal payments include all of the following EXCEPT serial bonds. callable bonds. debenture bonds. term bonds.

debenture bonds.

A bond issue of $100,000 selling at 98, would require a journal entry including a

debit to Discount on Bonds Payable for $2,000.

The interest rate that can be earned on investments similar to the specific bond issue is the _____________.

market rate

The ____________________ is the difference between the face value and the price of a bond when the current market interest rate is less than the stated rate of that bond.

premium

The ________________ is the amount to be paid to the bondholder at maturity.

principal

The rate of interest that bonds pay based on face value is the _______________ rate.

stated

________________ bonds are backed by specific corporate assets.

Secured

The carrying value of bonds is calculated by

adding the premium on bonds payable account balance to the bonds payable account balance.

The premium on bonds payable account would be classified as a(n)

adjunct-liability.

Bonds issued giving the holder the option of exchanging the bonds for capital stock of the corporation are called

convertible bonds.

The sale and issuance of $400,000, 8% bonds with a market rate of 8% would involve debiting Cash for

$400,000.

If bonds were being issued with a stated rate of 8% and the market rate is 9%, the bonds would most likely sell at which of the following? 100 80 95 108

95

______________ bonds give the holder the option of exchanging the bonds for capital stock of the corporation.

Convertible

______________________ bonds are backed solely by the general credit of the corporation issuing the bonds.

Debenture

A debenture bond is a common type of secured bond.

False

An entry to record the sale and issuance of bonds at a discount will include a credit to Discount on Bonds Payable.

False

Bondholders are the owners of the corporation.

False

Bonds Sinking Fund is reported as a liability on the corporation's balance sheet.

False

Bonds secured by a mortgage on corporate property are called guaranteed bonds.

False

A discount amortization does not affect the amount of cash paid for bond interest.

True

Bonds Payable is reported as a long-term liability on the corporation's balance sheet.

True

Bonds issued that mature at regular intervals are called serial bonds.

True

Gain on Bonds Redeemed is reported as a component of other income on the corporation's income statement.

True

If bonds that originally were sold at a premium are redeemed, the calculation of the gain or loss must take into account the unamortized premium through the date of redemption.

True

If bonds that originally were sold at face value are redeemed for less than face value, a gain results.

True

If the interest rate on bonds is the same as the current market rate, the bonds will sell for their face value.

True

To determine whether a bond will sell at a price equal to, greater than, or less than face value, compare the stated and market interest rates.

True

If the rate of interest on bonds is lower that the current market rate, the bonds will sell at

a discount.

Bond Interest Payable is reported as a(n)

current liability on the balance sheet.

The difference between the face value and the price of a bond when the current market interest rate is greater than the stated rate of that bond is called a(n) ______________

discount

The bonds payable account would be classified as a(n)

long-term liability.

A $200,000, 8% bond issue was sold at face value and later redeemed at 104% of face value. The corporation would have a

loss of $8,000.

If bonds were originally sold at face value and the corporation pays more than the face amount when the bonds are redeemed, there is a

loss.

Bonds secured by a mortgage on corporate property are called

mortgage bonds.

Bonds that are backed solely by specific secured assets are called

mortgage bonds.

When selling bonds at a premium, the premium received effectively

reduces the cost of borrowing.

The ownership of ______________ bonds is recorded in the corporate records.

registered

Bonds issued in a series so that a specified amount of the bond matures each year are called

serial bonds.

Bonds issued at the same time so that they all have the same maturity date are called

term bonds.

Usually, there is a gain or loss involved when bonds are redeemed before maturity. The gain or loss is the difference between

the amount paid to redeem the bonds and the carrying value of the bonds.

A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The bond interest expense for the first interest payment would be

$16,000.

Bonds issued in a series so that a specified amount of principal matures each year are called term bonds.

False

Bonds issued with a provision that they may be called for redemption before the date of maturity are called convertible bonds.

False

Convertible bonds give the issuing corporation the option of calling for redemption at a stated price before the maturity date.

False

Debenture bonds are backed by specific assets of the corporation.

False

If cash is paid to a trustee who administers a sinking fund, the corporation would credit the Bond Sinking Fund for the amount of cash paid.

False

If the interest rate on bonds is lower than the current market rate, the bonds will sell at a premium.

False

The interest rate specified in a bond contract is known as the market rate.

False

When bonds are redeemed at a loss, the journal entry would require a credit to Loss on Bonds Redeemed.

False

________________ bonds all have the same maturity date.

Term

If the stated interest rate on bonds is less than the current market rate, the bonds will sell at a discount.

True

Loss on Bonds Redeemed generally is reported as other expense near the bottom of the income statement.

True

Premium on Bonds Payable should be classified as an adjunct-liability account.

True

The accumulation and investment of money over a period of years that provides the amount necessary for the redemption of a bond issued at its maturity is called a sinking fund.

True

The process of adjusting the bond interest expense account for any premium is called amortization of the premium.

True

The straight-line method of amortizing a bond premium provides for amortizing an equal amount each time period.

True

The sum of bonds payable and premium on bonds payable is called the carrying value of the bonds.

True

Usually, there is either a gain or a loss involved in the redemption of bonds before their maturity date.

True

When bonds are issued at a discount, both bonds payable on the balance sheet and interest expense on the income statement are affected.

True

While bonds and notes are both formal written promises to pay an amount of money at a specified date, notes generally tend to be for much smaller amounts and for a shorter period of time.

True

The year-end adjusting entry required for bonds issued at a discount would require

a debit to Bond Interest Expense, a credit to Discount on Bonds Payable, and a credit to Bond Interest Payable.

A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The entry to record the first interest payment would include

a debit to Premium on Bonds Payable of $2,000.

If the interest rate on bonds is higher than the current market rate, they will sell at

a premium.

A bond issue of $500,000 selling at 100, would require a journal entry including a

credit to Bonds Payable of $500,000.

The amount written on the bond certificate is known as its ____________

face value