CH 10

56. Bonds with a par value of less than $1,000 are known as: A. Junk bonds B. Baby bonds C. Callable bonds D. Unsecured bonds E. Convertible bonds

B. Baby bonds

63. Amortizing a bond discount: A. Allocates a part of the total discount to each interest period B. Increases the market value of the Bonds Payable C. Decreases the Bonds Payable account D. Decreases interest expense each period E. Increases cash flows from the bond 64. The Discount on Bonds Payable account is: A. A liability B. A contra liability C. An expense D. A contra expense E. A contra equity

A. Allocates a part of the total discount to each interest period

52. Bonds that have interest coupons attached to their certificates, which the bondholders detach during each interest period and present to a bank for collection, are called: A. Coupon bonds B. Callable bonds C. Serial bonds D. Convertible bonds E. Registered bonds

A. Coupon bonds

50. A bond traded at 102 ½ means that: A. The bond pays 2.5% interest B. The bond traded at $1,025 per $1,000 bond C. The market rate of interest is 2.5% D. The bonds were retired at $1,025 each E. The market rate of interest is 2 ½% above the contract rate

B. The bond traded at $1,025 per $1,000 bond

49. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as: A. Convertible bonds B. Sinking fund bonds C. Callable bonds D. Serial bonds E. Junk bonds

C. Callable bonds

34. To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by: A. Safe deposit boxes B. Mortgages C. Equity D. The FASB E. Debentures

B. Mortgages

87. A company retires its bonds at 105. The carrying value of the bonds at the date of is $103,745. The issuer's journal entry to record the retirement will include a: A. Debit to Premium on Bonds B. Credit to Premium on Bonds C. Debit to Discount on Bonds D. Credit to Gain on Bond Retirement E. Credit to Bonds Payable

A. Debit to Premium on Bonds

46. Which of the following statements is true? A. Interest on bonds is tax deductible B. Interest on bonds is not tax deductible C. Dividends to stockholders are tax deductible D. Bonds do not have to be repaid E. Bonds always decrease return on equity

A. Interest on bonds is tax deductible

65. A discount on bonds payable: A. Occurs when a company issues bonds with a contract rate less than the market rate B. Occurs when a company issues bonds with a contract rate more than the market rate C. Increases the Bond Payable account D. Decreases the total bond interest expense E. Is not allowed in many states to protect creditors

A. Occurs when a company issues bonds with a contract rate less than the market rate

37. Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in: A. Periodic total payments that gradually decrease in amount B. Periodic total payments that are equal C. Periodic total payments that gradually increase in amount D. Increasing amounts of interest each period E. Increasing amounts of principal each period

A. Periodic total payments that gradually decrease in amount

48. Sinking fund bonds: A. Require the issuer to set aside assets in order retire the bonds at maturity B. Require equal payments of both principal and interest over the life of the bond issue C. Decline in value over time D. Are registered bonds E. Are bearer bonds

A. Require the issuer to set aside assets in order retire the bonds at maturity

59. When a bond sells at a premium: A. The contract rate is above the market rate B. The contract rate is equal to the market rate C. The contract rate is below the market rate D. It means that the bond is a zero coupon bond E. The bond pays no interest

A. The contract rate is above the market rate

73. The market value of a bond is equal to: A. The present value of all future cash payments provided by a bond B. The present value of all future interest payments provided by a bond C. The present value of the principal for an interest-bearing bond D. The future value of all future cash payments provided by a bond E. The future value of all future interest payments provided by a bond

A. The present value of all future cash payments provided by a bond

74. The Premium on Bonds Payable account is a(n): A. Revenue account B. Adjunct or accretion liability account C. Contra revenue account D. Asset account E. Contra expense account

B. Adjunct or accretion liability account

70. Which of the following is true regarding the effective interest amortization method? A. Allocates bond interest expense using a changing interest rate B. Allocates bond interest expense using a constant interest rate C. Allocates a decreasing amount of interest over the life of a discounted bond D. Allocates bond interest expense using the current market rate for each period E. Is not allowed by the FASB

B. Allocates bond interest expense using a constant interest rate

54. The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties is called a(n): A. Debenture B. Bond indenture C. Mortgage D. Installment note E. Mortgage contract

B. Bond indenture

76. A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a: A. Credit to Interest Income B. Credit to Premium on Bonds Payable C. Credit to Discount on Bonds Payable D. Debit to Premium on Bonds Payable E. Debit to Discount on Bonds Payable

B. Credit to Premium on Bonds Payable

57. Mark and Holly Melton, the owners of Melton Franchise Systems, say the key to their success is planning the financing for each individual franchise owner. Using the debt to equity ratio, which of the following franchises would be assessed as having the riskiest financing structure? A. Franchise A B. Franchise B C. Franchise C D. Franchise D E. Franchise E

B. Franchise B

51. Secured bonds: A. Are also referred to as debentures B. Have specific assets of the issuing company pledged as collateral C. Are backed by the issuer's bank D. Are subordinated to those of other unsecured liabilities E. Are the same as sinking fund bonds

B. Have specific assets of the issuing company pledged as collateral

75. Adidas issued 10-year, 8% bonds with a par value of $200,000, where interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is true? A. Adidas must pay $200,000 at maturity and no interest payments B. Adidas must pay $206,948 at maturity and no interest payments C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each

C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each

60. A bond sells at a discount when the: A. Contract rate is above the market rate B. Contract rate is equal to the market rate C. Contract rate is below the market rate D. Bond has a short-term life E. Bond pays interest only once a year

C. Contract rate is below the market rate

35. Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are: A. Debentures B. Discounted notes C. Installment notes D. Indentures E. Investment notes

C. Installment notes

36. The carrying value of a long-term note payable: A. Is computed as the future value of all remaining future payments, using the market rate as interest B. Is the face value of the long-term note less the total of all future interest payments C. Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance D. Is computed as the present value of all remaining interest payments, discounted using the note's rate of interest E. Decreases each time period the discount on the note is amortized

C. Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance

53. Bonds owned by investors whose names and addresses are recorded by the issuing company and for which interest payments are made with checks to the bondholders, are called: A. Callable bonds B. Serial bonds C. Registered bonds D. Coupon bonds E. Bearer bonds

C. Registered bonds

47. A bondholder that owns a $1,000, 10%, 10-year bond has: A. Ownership rights B. The right to receive $10 per year until maturity C. The right to receive $1,000 at maturity D. The right to receive $10,000 at maturity E. The right to receive dividends of $1,000 per year

C. The right to receive $1,000 at maturity

45. Operating leases differ from capital leases in that A. For a capital lease the lessee records the lease payments as rent expense, but for an operating lease the lessee reports the lease payments as depreciation expense B. For an operating lease the lessee depreciates the asset acquired under lease, but for the capital lease the lessee does not C. Operating leases create a long-term liability on the balance sheet, but capital leases do not D. Operating leases do not transfer ownership of the asset under the lease, but capital leases often do E. Operating lease payments are generally greater than capital lease payments

D. Operating leases do not transfer ownership of the asset under the lease, but capital leases often do

82. Bonds that give the issuer an option of retiring them prior to the date of maturity are: A. Debentures B. Serial bonds C. Sinking fund bonds D. Registered bonds E. Callable bonds

E. Callable bonds

55. Bonds that mature at different dates and end up with the total principal repaid gradually over a number of periods are referred to as: A. Registered bonds B. Bearer bonds C. Callable bonds D. Sinking fund bonds E. Serial bonds

E. Serial bonds

42. If an issuer sells a bond at any other date than the interest payment date: A. This means the bond sells at a premium B. This means the bond sells at a discount C. The issuing company will report a loss on the sale of the bond D. The issuing company will report a gain on the sale of the bond E. The buyer normally pays the issuer the purchase price plus any interest accrued since the prior interest payment date

E. The buyer normally pays the issuer the purchase price plus any interest accrued since the prior interest payment date