Ch. 10 Accounting for Long Term Debt

On January 1, Year 1, Denver Company issued bonds with a face value of $100,000, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were sold at 102.5. Denver uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense during Year 1?

$7500

Which of the following describes the characteristics of a convertible bond?

Bonds may be exchanged for stock at the discretion of the bondholder.

Which of the following describes a callable bond?

Can be called for early retirement at the option of the issuer

Which of the following statements is true regarding the straight-line method of amortizing discounts and premiums on bonds?

It assigns the same amount of interest to each interest period over the life of the bond.

installment note

Liability requiring a series of periodic payments to the lender.

How are bonds payable usually classified on the balance sheet?

Long-term liabilities

Regardless of the specific type of long-term debt, which of the following is normally an expectation with regards to debt transactions?

Payment of interest and repayment of the debt

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

Reduces the amount of interest expense each year

Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

Requirements that the names and addresses of the bondholders be registered with the bond issuer

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

Serial bonds

Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?

The bonds are issued at a premium.

Which of the following statements regarding the stated rate of interest is true if a bond is sold at 101?

The stated rate is higher than the market rate.

Why are bonds sometimes issued at a discount?

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

Which of the following statements about installment notes is correct?

With each subsequent payment on an installment note, the amount of interest expense decreases.

Which of the following correctly describes an installment note?

requires equal payment of interest and principal in which the amount of interest decreases over the life of the loan