comprehensive questions chapter 10
The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)
constant rate of interest.
A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 9%. The 8% rate of interest is called the __________ rate.
contractual
Bonds that may be exchanged for common stock at the option of the bondholders are known as
convertible bonds.
Over the term or life of a bond issued at a discount, the balance in the Discount on Bonds Payable account will
decrease.
Over the term or life of a bond issued at a premium, the balance in the Premium on Bonds Payable account will
decrease.
The year-end balance of the Discount on Bonds Payable is
deducted from Bonds Payable on the balance sheet.
A liability is classified as current or long-term based on its
due date compared to the end of the current period.
A corporation issues $1,000,000 of 8%, 5-year bonds when bonds of similar risk are paying 7.5%. The 7.5% rate of interest is called the __________ rate.
effective
The market rate of interest is often called the
effective rate.
The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that
exceeds the amount of cash to be paid for interest for the period.
In order for a liability to be classified as a current liability, it must be a debt that the company
expects to pay from existing current assets or through the creation of other current liabilities.
Secured bonds are bonds that
have specific assets of the issuer pledged as collateral.
If bonds are issued at a premium, the stated interest rate is
higher than the market rate of interest.
If bonds are issued at a discount, it means that the
market interest rate is higher than the contractual interest rate.
The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the
market rate of interest decreases, then bond prices will go up.
The carrying value of bonds will equal the market price of the bonds
on the date of issuance.
The sale or issuance of bonds for more than their face value
will cause the total cost of borrowing to be less than the bond interest paid.
The time period for classifying a liability as a current liability rather than as a long-term liability can be determined by whether it is expected to be paid
within one year or the operating cycle, whichever is longer.
A current liability is a debt that can reasonably be expected to be paid
within one year, or the operating cycle, whichever is longer.
Which of the following would not be a current liability on December 31?
A $10,000 bond payable due on December 31 in five years
A company sells annual magazine subscriptions and it publishes six magazines each a year. The company sells 75,000 subscriptions in December at $10 each. The journal entry in December to record the sale of the subscriptions should include
A debit to the Cash account for $750,000 and credit an unearned revenue account for $750,000.
What term is used for bonds that give the issuing company an option to redeem (or buy back) the bonds prior to maturity for a stated dollar amount?
Callable bonds
What term is used for bonds that give the bondholder an option to exchange the bond for shares of the company's common stock?
Convertible bonds
When a bond is issued at a discount, at what value is it reported on the balance sheet?
Face value minus any unamortized discount
What is the effect of amortizing a bond premium?
It decreases the carrying value of the bonds.
What is the effect of amortizing a bond discount?
It increases the carrying value of the bonds.
What is the nature of a bond premium?
It reduces the cost of borrowing.
Which of the following LEAST likely would be classified as a current liability?
Mortgage payable
Which of the following is a typical current liability?
Sales taxes payable
What term is used for bonds that have specific assets pledged as collateral?
Secured bonds
Which of the following statements regarding the amortization of discounts and premiums on bonds is false?
The amount of interest expense decreases each period over the life of a discounted bond issue when the effective interest method is used.
Which of the following statements regarding the amortization of discounts and premiums on bonds is true?
The amount of interest expense increases each period over the life of a discounted bond issue when the effective interest method is used.
Which of the following is true for bonds that have been issued at a discount?
The carrying value of the bonds will increase over the life of the bonds.
A corporation issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, what does this indicate?
The contractual interest rate exceeds the market interest rate.
Which of the following is true for bonds that have been issued at a discount?
The discount indicates that the cost of the bonds is higher than the bond interest paid.
Which of the following statements regarding the amortization of discounts and premiums on bonds is true?
The effective interest method applies a constant percentage to the bond carrying value to compute interest expense.
The journal entry to record issuing bonds at a discount will include a debit to the Cash account for the following amount:
The face value of the bonds minus the amount of the discount
The journal entry to record issuing bonds at a premium will include a debit to the Cash account for the following amount:
The face value of the bonds plus the amount of the premium
Which of the following is true for bonds that have been issued at a premium?
The premium indicates that the cost of the bonds is lower than the bond interest paid.
Which one of the following is not a typical current liability?
Unpaid note payable that is due after the next year
Which of the following statements regarding the amortization of discounts and premiums on bonds is false?
When the straight-line and effective interest methods of amortization result in interest that is materially different, GAAP requires use of the straight-line method.
The year-end balance of the Premium on Bonds Payable is
added to Bonds Payable on the balance sheet.
The interest expense recorded on an interest payment date is increased
by the amortization of discount on bonds payable.
When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the
carrying value of the bonds at the beginning of the period by the effective interest rate.
