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| 1 | |
Debenture is the formal name of the contract between the issuing company and its bondholders. |
| | A) | True |
| | B) | False |
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| 2 | |
The par value of the bond is the amount to be paid at maturity, but the face amount of the bond is the current issue price of the bond. |
| | A) | True |
| | B) | False |
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| 3 | |
A bond is a written promise to pay an amount identified as the par value of the bond with interest. |
| | A) | True |
| | B) | False |
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| 4 | |
Term bonds are scheduled for maturity on one specified date. |
| | A) | True |
| | B) | False |
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| 5 | |
The formula for determining the debt-to-equity ratio is: cost of pledged assets/amount of secured liabilities. |
| | A) | True |
| | B) | False |
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| 6 | |
A company financed mainly with debt is more risky. |
| | A) | True |
| | B) | False |
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| 7 | |
The book value of a bond at issuance always equals the proceeds from the issuance of the bond. |
| | A) | True |
| | B) | False |
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| 8 | |
Both the straight-line method and effective interest methods amortize (or reduce) bond discounts and bond premiums to zero over the life of the bond. |
| | A) | True |
| | B) | False |
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| 9 | |
The contract rate sets the amount of interest the issuer pays in cash, which is not necessarily the bond interest expense actually incurred by the issuer over the life of the bonds. |
| | A) | True |
| | B) | False |
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| 10 | |
A discount increases bond interest expense. |
| | A) | True |
| | B) | False |
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| 11 | |
Bonds with a contract rate that is greater than the market rate will sell at a discount. |
| | A) | True |
| | B) | False |
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| 12 | |
The Premium on Bonds Payable account will appear as a contra-liability account in the long-term liability section of a classified balance sheet. |
| | A) | True |
| | B) | False |
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| 13 | |
When bonds are sold at a premium, the carrying amount of the bonds payable becomes progressively larger as the bonds near their maturity date. |
| | A) | True |
| | B) | False |
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| 14 | |
A gain or loss might be recognized when a bond converted to stock. |
| | A) | True |
| | B) | False |
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| 15 | |
When an installment note requires equal payments and includes equal annual payments of principal plus interest, the total payments pattern consists of changing amounts of both interest and principal. |
| | A) | True |
| | B) | False |
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| 16 | |
Which of the following describes a disadvantage of bonds? |
| | A) | The interest on bonds is tax deductible. |
| | B) | Bonds can increase return on equity. |
| | C) | Bonds require payment of periodic interest and maturity value. |
| | D) | Bonds do not affect stockholder control. |
| | E) | None of the above. |
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| 17 | |
Which of the following describes a bond issued and supported only by the general credit standing of the issuing corporation? |
| | A) | Unsecured bond |
| | B) | Indenture |
| | C) | Term bond |
| | D) | Serial bond |
| | E) | Callable bond |
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| 18 | |
Which type of bond gives the issuing corporation the option of retiring the bond, at a predetermined price, prior to bond's the maturity date? |
| | A) | Debenture |
| | B) | Convertible bond |
| | C) | Serial bond |
| | D) | Secured bond |
| | E) | Callable bond |
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| 19 | |
The debt-to-equity ratio is 6.0. If total equity is $10,000, what is the amount of total liabilities? |
| | A) | $600,000 |
| | B) | $6,000 |
| | C) | $100,000 |
| | D) | $60,000 |
| | E) | None of the above |
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| 20 | |
A company issues $400,000 of 8% bonds, which mature in 10 years, at par on January 1, 2008. The bonds pay interest semiannually on each June 30 and December 31. What entry should be made on December 31, 2008? |
| | A) | Debit Bond Interest Expense $32,000; Credit Bond Interest Payable $32,000 |
| | B) | Debit Bond Interest Expense $32,000; Credit Cash $32,000 |
| | C) | Debit Bond Interest Expense $16,000; Credit Bond Interest Payable $16,000 |
| | D) | Debit Bond Interest Expense $16,000; Credit Cash $16,000 |
| | E) | None of the above |
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| 21 | |
Which of the following statements is not correct regarding the issuance of bonds at par? |
| | A) | The proceeds for bonds issued at par equals the par value of the bond. |
| | B) | The stated interest rate equals the market interest rate for bonds issued at par. |
| | C) | When bonds are issued at par, the Cash account is debited and the Bonds Payable account is credited for the bonds' par value. |
| | D) | On each semiannual interest payment date, bond interest expense is calculated as bond par value multiplied by the bond contract rate multiplied by 1/2 year. |
| | E) | All of the above are correct statements. |
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| 22 | |
When bonds are quoted at "95", which of the following is true? |
| | A) | The bonds are being sold at 95% of their par value. |
| | B) | The bonds are being sold at 95% of the maturity value. |
| | C) | The bonds are being sold at a 5% premium. |
| | D) | All of the above. |
| | E) | None of the above. |
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| 23 | |
The straight-line method of amortizing bond discounts and premiums results in which of the following? |
| | A) | An equal portion of bond interest expense is charged to each period. |
| | B) | The discount or premium account is reduced to zero by the end of the bond's life. |
| | C) | A debit is made to the Interest Expense account when a discount is amortized; alternatively, a credit is made to the Interest Expense account when a premium is amortized. |
| | D) | All of the above are correct statements. |
| | E) | None of the above is a correct statement. |
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| 24 | |
Which of the following statements are not correct regarding bonds sold at a discount? |
| | A) | The carrying amount gets larger each year. |
| | B) | The Discount on Bonds Payable account gets smaller each year. |
| | C) | At maturity, the face value and carrying value will be equal. |
| | D) | The balance of Bonds Payable account will get larger each year. |
| | E) | At maturity, the balance of the Discount on Bonds Payable will be zero. |
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| 25 | |
A total of $100,000 of 6%, 10-year bonds, with semiannual interest are sold at 98. What is the amount of periodic bond discount amortization using the straight-line method? |
| | A) | $100 |
| | B) | $10,000 |
| | C) | $200 |
| | D) | $9,900 |
| | E) | None of the above |
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| 26 | |
When $500,000 of 2-year, 8% bonds that pay interest semiannually are sold when the market rate of interest is 12%, which of the following lines describes the calculation of the selling price of the bonds? (Refer to the present value tables in your textbook as needed.) |
| | A) | (0.7921 × $500,000) + (3.4651 × $30,000) = bond selling price |
| | B) | (0.7972 × $500,000) + (3.3121 × $30,000) = bond selling price |
| | C) | (0.7972 × $500,000) + (3.4651 × $50,000) = bond selling price |
| | D) | (0.8900 × $500,000) + (1.8334 × $50,000) = bond selling price |
| | E) | (0.7921 × $500,000) + (3.4651 × $20,000) = bond selling price |
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| 27 | |
When $100,000 of 6% annual interest, 10-year bonds are sold at 103.5, what will be the total interest expense on the bonds? |
| | A) | $ 6,000 |
| | B) | $56,500 |
| | C) | $60,000 |
| | D) | $63,500 |
| | E) | None of the above |
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| 28 | |
Bonds with a par value of $100,000 and a carrying value of $103,600 are retired at a call price of $101,000. The journal entry to retire the bonds would include which of the following? |
| | A) | A credit to the Cash account for $101,000 |
| | B) | A debit to the Bonds Payable account for $100,000 |
| | C) | A credit to the Gain on Retirement of Bonds account for $2,600 |
| | D) | A debit to the Premium on Bonds Payable account for $3,600 |
| | E) | All of the above |
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| 29 | |
Which of the following is an obligation requiring a series of payments to a lender? |
| | A) | Current liability |
| | B) | Installment note |
| | C) | Accounts payable |
| | D) | Series note payable |
| | E) | None of the above |
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| 30 | |
Lack-Luster Corporation borrowed money by issuing a $100,000 installment note payable that required $10,000 annual payments plus interest of 12% on the unpaid balance prior to the payment. What was the interest expense at the end of the third year? |
| | A) | $8,400 |
| | B) | $7,200 |
| | C) | $9,600 |
| | D) | $18,400 |
| | E) | None of the above |
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