Assume the bonds are retired early at the call price. Determine the loss on the bond call.

Bonds Payable balance (1,000 × $1,000) = $1,000,000
Discount on Bonds Payable balance = $40,000
Call price per bond = $1,010

Assume the bonds are retired early at the call price. Determine the loss on the bond call.

A) $40,000
B) $100,000
C) $60,000
D) $50,000


Answer: D) $50,000

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the interest expense, to the nearest dollar, for the second interest period?

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the interest expense, to the nearest dollar, for the second interest period?

A) $4,377
B) $4,596
C) $4,396
D) $4,158


Answer: C) $4,396

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the bond discount would be credited to Discount on Bonds Payable at the end of the first interest period?

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the bond discount would be credited to Discount on Bonds Payable at the end of the first interest period?

A) $377
B) $754
C) $2,000
D) $4,377



Answer: A) $377

A corporation with a high times interest earned ratio means that:

A corporation with a high times interest earned ratio means that:

A) the company's operating income is equal to its interest obligations.
B) the company's net income is less than its interest obligations.
C) the company is not meeting its interest obligations.
D) the company's net income plus interest expense plus income tax is greater than its interest obligations.


Answer: D) the company's net income plus interest expense plus income tax is greater than its interest obligations.

What is the selling price (to the nearest dollar) of 4-year bonds with a par value of $200,000 and an annual coupon rate of 8% that are sold when the market rate of interest is 12%?

Periods
8%/10%/12%/14%
1/0.9259/0.9091/0.8929/0.8772
2/0.8573/0.8264/0.7972/0.7695
3/0.7938/0.7513/0.7118/0.6750
4/0.7350/0.6830/0.6355/0.5921
Periods
8%/10%/12%/14%
1/0.9259/0.9091/0.8929/0.8772
2/1.7883/1.7355/1.6901/1.6467
3/2.5771/2.4869/2.4018/2.3216
4/3.3121/3.1699/3.0373/2.9137

What is the selling price (to the nearest dollar) of 4-year bonds with a par value of $200,000 and an annual coupon rate of 8% that are sold when the market rate of interest is 12%?

A) $180,093
B) $175,697
C) $199,994
D) $200,000


Answer: B) $175,697

When the premium on bonds is amortized, the amount of recognized interest expense is

When the premium on bonds is amortized, the amount of recognized interest expense is

A) greater than the amount of cash paid for interest.
B) equal to the amount of cash paid for interest.
C) equal to the amount of cash paid for interest less the amount of premium amortization.
D) equal to the premium amortization recognized and recorded.


Answer: C) equal to the amount of cash paid for interest less the amount of premium amortization.

Accounting for a zero coupon bond is similar to

Accounting for a zero coupon bond is similar to

A) accounting for a bond sold at a discount.
B) accounting for a bond sold at a premium.
C) accounting for a bond sold at par value.
D) accounting for common stock sold at a price less than par value.


Answer: A) accounting for a bond sold at a discount

Bonds with a par value of $500,000 are sold at discount for $481,000. Other than the Cash account, what other account is debited.

Bonds with a par value of $500,000 are sold at discount for $481,000. Other than the Cash account, what other account is debited.

A) Premium on Bonds Payable
B) Discount on Bonds Payable
C) Bonds Payable
D) Interest Expense


Answer: B) Discount on Bonds Payable

A bond issued and supported by the general credit standing of the corporation, rather than supported with pledged assets, is called

A bond issued and supported by the general credit standing of the corporation, rather than supported with pledged assets, is called

A) a serial bond.
B) a debenture.
C) an indenture.
D) callable bond.


Answer: B) a debenture.

Which of the following may be a disadvantage to issuing bonds to raise long-term capital?

Which of the following may be a disadvantage to issuing bonds to raise long-term capital?

A) interest payments to bondholders are fixed charges
B) ownership and control of the company are unaffected
C) positive financial leverage may be achieved
D) interest expense is tax deductible


Answer: A) interest payments to bondholders are fixed charges

When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date?

When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date? 

a. Interest expense
b. Cash interest payment
c. Amortization
d. None of the above


Answer: c. Amortization

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the 

a. Par value of the bonds.
b. Coupon rate of interest stated in the bond certificate.
c. Market rate of interest on the date the bonds were issued.
d. Both (a) and (b).


Answer: c. Market rate of interest on the date the bonds were issued.

To determine whether a bond will be sold at a premium, discount, or face value, one must know which of the following pairs of information?

To determine whether a bond will be sold at a premium, discount, or face value, one must know which of the following pairs of information? 

a. The par value and the coupon rate on the date the bonds were issued.
b. The par value and the market rate on the date the bonds were issued.
c. The coupon rate and the market rate on the date the bonds were issued.
d. The coupon rate and the stated rate on the date the bonds were issued.


Answer: c. The coupon rate and the market rate on the date the bonds were issued.

A bond with a face value of $100,000 was issued for $113,500 on January 1, 2009. The stated rate of interest is 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2009?

A bond with a face value of $100,000 was issued for $113,500 on January 1, 2009. The stated rate of interest is 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2009? 

a. $10,000
b. $8,000
c. $11,350
d. $9,080


Answer: b. $8,000

Which of the following is false when a bond is issued at a premium?

Which of the following is false when a bond is issued at a premium? 

a. The bond will issue for an amount above its par value.
b. Bonds payable will be credited for the par value of the bond.
c. Interest expense will exceed the cash interest payments.
d. All of the above are false.


Answer: c. Interest expense will exceed the cash interest payments.

Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital?

Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital? 

a. Stockholders maintain proportionate ownership percentages.
b. Interest expense reduces taxable income.
c. Timing flexibility associated with the payment of interest.
d. All of the above are advantages associated with bonds.


Answer: c. Timing flexibility associated with the payment of interest.

Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this?

Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this? 

a. The market rate of interest has increased since the bonds were sold.
b. The coupon rate of interest has increased since the bonds were sold.
c. The bonds were sold at a discount.
d. The bonds were sold at a premium.


Answer: c. The bonds were sold at a discount.

Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

Since Reedham and quip has agreed to buy the bonds from Scuppers, Reedham and Quip would be referred to as the

a. indenture
b. custodian
c. investment banker
d. trustee
e. underwriter.

Answer: e. underwriter.

The provision allowing retirement of the bonds before maturity makes these ______ bonds. 

a. Debenture
b. subordinated
c. convertible
d. redeemable
e. callable

Answer: e. callable

Should Scrubbers decide to redeem the bonds after two years have gone by, each individual bond will be bought back for 

a. $1,020
b. $102
c. $1,000
d. $1,002
e. $981


Answer: a. $1,020

-individual bond has a par value of $1,000 (or $200,000 total par value / the total of 200 bonds issued) will be bought back for $1,020 (or the $1,000 par value of each individual bond x 1.02)

The 10% rate for similar securities on the date of issue is known as the 

a. stated rate
b. par rate
c. market rate
d. coupon rate
e. contract rate

Answer: c. market rate

When scuppers decided to issue the bonds, they would have executed a bond contract, or _____, which spelled out the terms of the bond, and any privileges and covenants.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

When scuppers decided to issue the bonds, they would have executed a bond contract, or _____, which spelled out the terms of the bond, and any privileges and covenants. 

a. certificate
b. debenture
c. indenture
d. trustee
e. commitment


Answer: c. indenture

The stated rate of interest on the bonds is _____; bondholders will be paid $_____ every _____.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

The stated rate of interest on the bonds is _____; bondholders will be paid $_____ every _____. 

a. 9%; $18,000; year
b. 9%; $18,000; six months
c. 9%; $9,000; six months
d. 10%; $10,000; six months
e. 10%; $20,000; year


Answer: c. 9%; $9,000; six months