Liabilities Long-Term | Test Bank – 10e

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TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) The legal contract between the issuer and the bondholders is called the bond indenture.

⊚ true
⊚ false

2) Like interest on bonds, distributions to owners (dividends) are tax deductible.

⊚ true
⊚ false

3) Interest on bonds is tax deductible.

⊚ true
⊚ false

4) Interest paid in cash is computed by multiplying the par value of a bond by the bond’s contract rate.

⊚ true
⊚ false

5) A disadvantage of bond financing versus equity financing is that bonds require payment of both periodic interest and the par value at maturity, while equity does not require payments.

⊚ true
⊚ false

6) Term bonds mature on one specified date, whereas serial bonds mature at more than one date.

⊚ true
⊚ false

7) Debentures always have specific assets of the issuer pledged as collateral.

⊚ true
⊚ false

8) Bond indenture refers to a bond’s legal contract; debenture refers to an unsecured bond.

⊚ true
⊚ false

9) The market value is the price at which bonds are bought and sold.

⊚ true
⊚ false

10) A bond with a par value of $1,000 trading at 101 ½ sells for a premium.

⊚ true
⊚ false

11) A bond with a par value of $1,000 trading at 97 ½ sells for a premium.

⊚ true
⊚ false

12) Callable bonds give the issuer the option to retire them at a stated dollar amount before maturity.

⊚ true
⊚ false

13) Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's stock.

⊚ true
⊚ false

14) Callable bonds reduce the bondholder's risk by requiring the issuer to set assets aside to repay the debt in a sinking fund.

⊚ true
⊚ false

15) Convertible bonds can be exchanged for a fixed number of shares of the issuing corporation’s stock.

⊚ true
⊚ false

16) A bond's par value is not necessarily the same as its market value.

⊚ true
⊚ false

17) An installment note is a liability requiring a series of payments to the lender.

⊚ true
⊚ false

18) Payments on an installment note include the accrued interest expense plus part of the amount borrowed (the principal).

⊚ true
⊚ false

19) When the contract rate is less than the market rate, a bond sells at a premium.

⊚ true
⊚ false

20) A note’s carrying (book) value at any time equals its face value minus any unamortized discount or plus any unamortized premium.

⊚ true
⊚ false

21) A mortgage gives the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

⊚ true
⊚ false

22) Mortgage bonds are backed only by the good faith and credit of the issuer.

⊚ true
⊚ false

23) When calculating the issue price of a bond, use the market rate to compute the present value of the bond’s future cash flows.

⊚ true
⊚ false

24) An annual rate of 4% is applied as a semiannual rate of 1%.

⊚ true
⊚ false

25) A bond’s future cash flows include the par value to be repaid at maturity and the interest payments.

⊚ true
⊚ false

26) Hoops Incorporated issues 10%, 20-year bonds with a par value of $1,000,000 and semiannual interest payments. If the market rate for bonds is 10% at the time of issuance, then the bonds are issued at par value.

⊚ true
⊚ false

27) Hoops Incorporated issues 9%, 20-year bonds with a par value of $1,000,000 and semiannual interest payments. If the market rate for bonds is 10% at the time of issuance, then the bonds are issued at a premium.

⊚ true
⊚ false

28) The journal entry to record the issuance of a note includes a debit to Cash and a credit to Notes Payable.

⊚ true
⊚ false

29) Present values can be found using Excel, a calculator or present value tables.

⊚ true
⊚ false

30) A company has bonds outstanding with a par value of $250,000. The unamortized discount on the bonds is $12,000. The company calls the bonds at a price of $225,000. As a result, the company should record a $13,000 loss on the bond retirement.

⊚ true
⊚ false

31) A company has bonds outstanding with a par value of $125,000 and a carrying value of $121,000. If the company decides to call the bonds at a price of $120,000, the gain on retirement is $1,000.

⊚ true
⊚ false

32) A lease is an agreement between a lessor and a lessee that gives the lessee the right to use an asset for a period of time in return for cash payment(s).

⊚ true
⊚ false

33) Operating leases are long-term leases where the lessee receives substantially all remaining benefits of the asset.

⊚ true
⊚ false

34) The advantages of lease financing include no up-front, full cash payment and the potential to deduct rental payments from taxable income.

⊚ true
⊚ false

35) A disadvantage of lease financing is the potential to deduct rental payments from taxable income.

⊚ true
⊚ false

36) A pension plan is an agreement for the employer to provide benefits (payments) to employees after they retire.

⊚ true
⊚ false

37) A bond is an issuer's written promise to pay the par value of the bond with interest.

⊚ true
⊚ false

38) An advantage of bond financing is that issuing bonds does not affect owner control.

⊚ true
⊚ false

39) Annual interest payments on bonds are determined by multiplying the par value of the bond by the bond’s contract rate.

⊚ true
⊚ false

40) The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a bond and its risk level.

⊚ true
⊚ false

41) A company that earns a higher return with borrowed funds than it pays in interest on those funds increases its return on equity.

⊚ true
⊚ false

42) The use of debt financing always yields an increase in return on equity.

⊚ true
⊚ false

43) The par value of a bond, or face value, is paid at a stated future date called the maturity date.

⊚ true
⊚ false

44) Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

⊚ true
⊚ false

45) A company's ability to issue unsecured debt depends on its credit standing.

⊚ true
⊚ false

46) Short-term leases have lease terms of more than 12 months and have long-term purchase options.

⊚ true
⊚ false

47) A company with a low level of liabilities in relation to stockholders' equity is likely to have a high debt-to-equity ratio.

⊚ true
⊚ false

48) The debt-to-equity ratio is calculated by dividing stockholders' equity attributable to common shareholders by total liabilities.

⊚ true
⊚ false

49) The debt-to-equity ratio is a measure used to assess the risk of a company's financing structure.

⊚ true
⊚ false

50) A company has total assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

⊚ true
⊚ false

51) A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

⊚ true
⊚ false

52) The contract rate on previously issued bonds changes as the market rate of interest changes.

⊚ true
⊚ false

53) Short-term leases have lease terms of 12 months or less and typically do not have long-term purchase options.

⊚ true
⊚ false

54) A 10-year bond issue with a $100,000 par value, 8% annual contract rate, and interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

⊚ true
⊚ false

55) When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.

⊚ true
⊚ false

56) When the contract rate is above the market rate, a bond sells at a discount.

⊚ true
⊚ false

57) A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

⊚ true
⊚ false

58) The carrying (book) value of a bond at the time it is issued is always equal to its par value.

⊚ true
⊚ false

59) The carrying (book) value of a bond payable is the par value of the bond plus any unamortized discount or minus any unamortized premium.

⊚ true
⊚ false

60) On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.

⊚ true
⊚ false

61) On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,800. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $1,637.50.

⊚ true
⊚ false

62) On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,800. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.

⊚ true
⊚ false

63) A premium on bonds occurs when the contract rate is higher than the market rate at issuance.

⊚ true
⊚ false

64) A premium reduces the interest expense of a bond over its life.

⊚ true
⊚ false

65) A discount reduces the interest expense of a bond over its life.

⊚ true
⊚ false

66) Bearer bonds are also referred to as unregistered bonds.

⊚ true
⊚ false

67) Premium on Bonds Payable is an adjunct liability account.

⊚ true
⊚ false

68) When the contract rate of a bond is greater than the market rate on the date of issuance, the bond sells at a discount.

⊚ true
⊚ false

69) The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the contract rate of interest.

⊚ true
⊚ false

70) The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

⊚ true
⊚ false

71) Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

⊚ true
⊚ false

72) Sinking fund bonds reduce a bondholder’s risk by requiring the issuer to set aside assets to pay debt in a sinking fund.

⊚ true
⊚ false

73) Registered bonds are bonds that are issued in the names and addresses of their holders.

⊚ true
⊚ false

74) The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.
75) Sinking fund bonds:

A) Require the issuer to set aside assets to pay 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.

76) Bonds that give the issuer the option to retire them at a stated dollar amount before maturity are known as:

A) Convertible bonds.
B) Sinking fund bonds.
C) Callable bonds.
D) Serial bonds.
E) Junk bonds.

77) A $1,000 bond trading at 102½ means that:

A) The bond pays 2.5% interest.
B) The bond traded is bought or sold for $1,025.
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 2½% above the contract rate.

78) Secured bonds:

A) Are called debentures.
B) Have specific assets of the issuer 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.

79) Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:

A) Coupon bonds.
B) Callable bonds.
C) Serial bonds.
D) Convertible bonds.
E) Registered bonds.

80) Bonds issued in the names and addresses of their holders are called:

A) Callable bonds.
B) Serial bonds.
C) Registered bonds.
D) Coupon bonds.
E) Bearer bonds.

81) The legal contract between the bond issuer and the bondholders is called a(n):

A) Debenture.
B) Bond indenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.

82) Bonds that mature at more than one date and thus are usually repaid over a number of periods are known as:

A) Registered bonds.
B) Bearer bonds.
C) Callable bonds.
D) Sinking fund bonds.
E) Serial bonds.

83) A contract pledging title to assets as security for a note or bond is known as a(an):

A) Sinking fund.
B) Mortgage.
C) Equity.
D) Lease.
E) Indenture.

84) A liability requiring a series of payments to the lender is referred to as a(n):

A) Debenture.
B) Discounted note.
C) Installment note.
D) Indenture.
E) Investment note.

85) Which of the following is false regarding long-term notes payable?

A) The note’s carrying value at any time equals its face value minus any unamortized discount or plus any unamortized premium.
B) Notes payable are usually issued by a single lender.
C) The market rate of interest at the time of issuance determines the periodic cash payment amount.
D) Over the life of the note, the interest expense allocated to each period is computed by multiplying the market rate by the beginning-of-period balance.
E) The equal total payments pattern has changing amounts of both interest and principal.

86) The carrying value of bonds at maturity always equals:

A) The amount of cash originally received in exchange for the bonds.
B) The par value of the bond.
C) The amount of discount or premium.
D) The amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.
E) The amount in excess of par value.

87) On January 1, Sustainable Energy Corporation issues bonds that have a $100,000 par value, mature in 8 years, and pay 12% interest per year. Interest payments are paid to bondholders semiannually on June 30 and December 31. How much interest does Sustainable Energy Corporation pay to bondholders every six months if the bonds are sold at par?

A) $1,200
B) $3,000
C) $6,000
D) $12,000
E) $100,000

88) On January 1, Forward Company issues bonds that have a $25,000 par value, mature in 4 years, and pay 7% interest per year. Interest payments are paid to bondholders semiannually on June 30 and December 31. How much interest does Forward Company pay to bondholders every six months if the bonds are sold at par?

A) $875
B) $1,750
C) $3,500
D) $7,000
E) $12,250

89) On January 1, Forward Company issues bonds that have a $25,000 par value, mature in 5 years, and pay 10% interest per year. Interest payments are paid to bondholders semiannually on June 30 and December 31. How much interest does Forward Company pay to bondholders every six months if the bonds are sold at par?

A) $1,250
B) $2,500
C) $5,000
D) $12,500
E) $25,000

90) The document which bondholders receive that is evidence of the issuing company’s debt is referred to as a:

A) Bond.
B) Contract rate.
C) Market rate.
D) Bond certificate.
E) Bond indenture.

91) A company’s balance sheet reveals it has total assets of $7,729,200, total liabilities of $2,644,200, and total equity of $5,085,000. The current debt-to-equity ratio for this company is:

A) 0.34.
B) 0.52.
C) 0.66.
D) 1.92.
E) 2.92.

92) A company’s balance sheet reveals it has total assets of $780,000, total liabilities of $280,000, and total equity of $500,000. The current debt-to-equity ratio for this company is:

A) 0.36.
B) 0.56.
C) 0.64.
D) 1.79.
E) 2.79.

93) A pension plan:

A) Is an agreement for the employer to provide benefits (payments) to employees after they retire.
B) Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C) Is always funded fully by employers.
D) Can be a defined benefit plan or an undefined benefit plan.
E) Is a contract between the company and the government.

94) Which of the following statements regarding leases is false?

A) For a finance lease, the lessee records the leased item as its own asset.
B) For a finance lease, the lessee amortizes the right-of-use asset acquired under the lease.
C) Finance leases create a liability on the balance sheet.
D) Finance leases do not transfer ownership of the asset under the lease, but operating leases often do.
E) For a short-term lease of a few days or weeks, the lessee records payments as rental expense.

95) A disadvantage of bond financing is:

A) Bonds do not affect owners' control.
B) Interest on bonds is tax deductible.
C) Bonds can increase return on equity.
D) Bonds pay periodic interest and require the repayment of par value at maturity.
E) All of the above are disadvantages.

96) An advantage of bonds is:

A) Bonds do not affect owner control.
B) Bonds require payment of par value at maturity.
C) Bonds can decrease return on equity.
D) Bond payments can be burdensome when income and cash flow are low.
E) Bonds require payment of periodic interest.

97) 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 increase return on equity.

98) A bondholder that owns a $1,000, 10%, 10-year bond has:

A) Ownership rights in the issuing company.
B) The right to receive $10 semiannually 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.

99) Collateral for a note or bond can:

A) Reduce the risk of loss in comparison with unsecured debt.
B) Increase the risk of loss in comparison with unsecured debt.
C) Have no effect on risk.
D) Reduce the issuer's assets.
E) Increase total cost for the borrower.

100) The party that has the right to exercise a call option on callable bonds is:

A) The bondholder.
B) The bond issuer.
C) The bond indenture.
D) The bond trustee.
E) The bond underwriter.

101) Which of the following accurately describes a debenture?

A) A bond with specific assets pledged as collateral.
B) A type of bond issued in the names and addresses of the bondholders.
C) A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds.
D) A type of bond which is backed by the issuer's general credit standing and is riskier than secured debt.
E) A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.

102) A company's total liabilities divided by its total equity is called the:

A) Equity ratio.
B) Return on total assets ratio.
C) Pledged assets to secured liabilities ratio.
D) Debt-to-equity ratio.
E) Times secured liabilities earned ratio.

103) The debt-to-equity ratio:

A) Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B) Is a measure used to assess the risk of a company's financing structure.
C) Is not relevant to secured creditors.
D) Can always be calculated from information provided in a company's income statement.
E) Must be calculated from the market values of assets and liabilities.

104) Charger Company's most recent balance sheet reports total assets of $31,097,000, total liabilities of $18,247,000 and total equity of $12,850,000. The debt to equity ratio for the period is (rounded to two decimals):

A) 0.59
B) 1.70
C) 0.41
D) 0.70
E) 1.42

105) Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):

A) 0.56
B) 1.80
C) 0.44
D) 0.80
E) 1.25

106) Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

A) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C) Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 0.5 to 0.8.
E) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 0.5 to 0.8.

107) Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?

A) Prepaying the debt would cause the firm's debt-to-equity ratio to improve from 0.62 to 0.50.
B) Prepaying the debt would cause the firm's debt-to-equity ratio to improve from 0.62 to 0.57.
C) Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from 0.62 to 0.50.
D) Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from 0.62 to 0.57.
E) Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.

108) A bond is issued at par value when:

A) The bond pays no interest.
B) The bond is not between interest payment dates.
C) Straight line amortization is used by the company.
D) The market rate of interest is the same as the contract rate of interest.
E) The bond is callable.

109) 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.

110) 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.

111) Morgan Company issues 9%, 20-year bonds with a par value of $780,000 that pay interest semiannually. The amount paid to the bondholders for each semiannual interest payment is.

A) $62,400.
B) $390,000.
C) $70,200.
D) $31,200.
E) $35,100.

112) Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The amount paid to the bondholders for each semiannual interest payment is.

A) $60,000.
B) $33,750.
C) $67,500.
D) $30,000.
E) $375,000.

113) A company issued 7%, 15-year bonds with a par value of $570,000 that pay interest semiannually. The market rate on the date of issuance was 7%. The journal entry to record each semiannual interest payment is:

A) Debit Bond Interest Expense $19,950; credit Cash $19,950.
B) Debit Bond Interest Expense $39,900; credit Cash $39,900.
C) Debit Bond Interest Payable $38,000; credit Cash $38,000.
D) Debit Bond Interest Expense $520,000; credit Cash $520,000.
E) No entry is needed, since no interest is paid until the bond is due.

114) A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:

A) Debit Bond Interest Expense $22,000; credit Cash $22,000.
B) Debit Bond Interest Expense $44,000; credit Cash $44,000.
C) Debit Bond Interest Payable $22,000; credit Cash $22,000.
D) Debit Bond Interest Expense $550,000; credit Cash $550,000.
E) No entry is needed, since no interest is paid until the bond is due.

115) On January 1, Parson Freight Company issues 8.5%, 10-year bonds with a par value of $3,300,000. The bonds pay interest semiannually. The market rate of interest is 9.5% and the bond selling price was $3,075,762. The bond issuance should be recorded as:

A) Debit Cash $3,300,000; credit Bonds Payable $3,300,000.
B) Debit Cash $3,075,762; credit Bonds Payable $3,075,762.
C) Debit Cash $3,300,000; credit Bonds Payable $3,075,762; credit Discount on Bonds Payable $224,238.
D) Debit Cash $3,075,762; debit Discount on Bonds Payable $224,238; credit Bonds Payable $3,300,000.
E) Debit Cash $3,075,762; debit Interest Expense $224,238; credit Bonds Payable $3,300,000.

116) On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:

A) Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B) Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C) Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903.
D) Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.
E) Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.

117) On January 1 of Year 1, Congo Express Airways issued $4,000,000 of 6% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,630,000 and the market rate of interest for similar bonds is 7%. The bond premium or discount is being amortized at a rate of $12,333 every six months. After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue (including interest) in the amount of:

A) $4,345,334.
B) $3,654,666.
C) $4,465,334.
D) $3,774,666.
E) $3,534,666.

118) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months.After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue (including interest) in the amount of:

A) $3,217,563.
B) $3,340,063.
C) $3,782,437.
D) $3,780,000.
E) $3,902,500.

119) On January 1 of Year 1, Congo Express Airways issued $2,250,000 of 5% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $2,030,000 and the market rate of interest for similar bonds is 6%. The bond premium or discount is being amortized at a rate of $7,333 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

A) $112,500.
B) $63,583.
C) $97,834.
D) $135,000.
E) $127,166.

120) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,087 every six months. The amount of interest expense recognized by Congo Express Airways on the bond issue in Year 1 would be:

A) $132,500.
B) $225,000.
C) $265,174.
D) $245,000.
E) $224,826.

121) On January 1 of Year 1, Congo Express Airways issued $4,700,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $4,343,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,500 every six months. The life of these bonds is:

A) 45 years.
B) 41 years
C) 34 years.
D) 11 years.
E) 17 years.

122) On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,087 every six months. The life of these bonds is:

A) 15 years.
B) 30 years.
C) 26.5 years.
D) 32 years
E) 35 years.

123) Amortizing a bond discount:

A) Allocates a portion of the total discount to interest expense 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.

124) 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.

125) 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.

126) On January 1, a company issued and sold a $410,000, 5%, 10-year bond payable, and received proceeds of $405,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

A) Debit Bond Interest Expense $10,250; credit Cash $10,250.
B) Debit Bond Interest Expense $20,500; credit Cash $20,500.
C) Debit Bond Interest Expense $10,000; debit Discount on Bonds Payable $250; credit Cash $10,250.
D) Debit Bond Interest Expense $10,250; debit Discount on Bonds Payable $250; credit Cash $10,500.
E) Debit Bond Interest Expense $10,500; credit Cash $10,250; credit Discount on Bonds Payable $250.

127) On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

A) Debit Bond Interest Expense $14,000; credit Cash $14,000.
B) Debit Bond Interest Expense $28,000; credit Cash $28,000.
C) Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
D) Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.
E) Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.

128) On January 1, a company issued and sold a $470,000, 3%, 10-year bond payable, and received proceeds of $464,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

A) $470,000.
B) $469,700.
C) $470,300.
D) $463,700.
E) $464,300.

129) On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the first interest payment is:

A) $400,000.
B) $399,800.
C) $400,200.
D) $395,800.
E) $396,200.

130) On January 1, a company issued and sold a $470,000, 3%, 10-year bond payable, and received proceeds of $464,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is:

A) $470,000.
B) $469,700.
C) $464,600.
D) $463,700.
E) $464,300.

131) On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is:

A) $400,000.
B) $399,800.
C) $396,400.
D) $395,800.
E) $396,200.

132) A company issued 5-year, 5% bonds with a par value of $91,000. The company received $88,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

A) $2,275.00.
B) $4,960.60.
C) $4,550.00.
D) $2,069.70.
E) $2,480.30.

133) A company issued 10-year, 7% bonds with a par value of $100,000. The company received $96,526 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

A) $3,326.00.
B) $3,500.00.
C) $3,673.70.
D) $7,000.00.
E) $7,347.40.

134) The effective interest method:

A) Allocates total bond interest expense over the bond's life in a way that yields a changing interest rate.
B) Allocates total bond interest expense over the bond's life in a way that yields 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 interest period.
E) Is not allowed by the FASB.

135) A company issued 9%, 5-year bonds with a par value of $75,000. The market rate when the bonds were issued was 10%. The company received $72,103 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

A) $3,375.00.
B) $7,210.30.
C) $6,750.00.
D) $3,750.00.
E) $3,605.15.

136) A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,948 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is:

A) $3,500.00.
B) $3,673.05.
C) $3,705.30.
D) $7,000.00.
E) $7,346.03.

137) A company issued 9.0%, 5-year bonds with a par value of $260,000. The market rate when the bonds were issued was 10.0%. The company received $249,961.74 cash for the bonds. Using the effective interest method, compute the amount of interest expense for the second semiannual interest period (round to 2 decimals).

A) $11,700.00.
B) $12,537.99.
C) $12,498.09.
D) $23,400.00.
E) $25,036.08.

138) A company issued 7%, 5-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,948 cash for the bonds. Using the effective interest method, compute the amount of interest expense for the second semiannual interest period (round to 2 decimals).

A) $3,500.00.
B) $3,679.54.
C) $3,673.01.
D) $7,000.00.
E) $7,346.03.

139) A company issues bonds with a $100,000 par value, an 8% annual contract rate, semiannual interest payments, and a five-year life. The bonds sold for $107,850. The entry to record the issuance of the bonds will include:

A) A credit to Premium on Bonds Payable of $7,850.
B) A debit to Discount on Bonds Payable of $7,850.
C) A credit to Cash of $100,000.
D) A credit to Bonds Payable of $107,850.
E) A debit to Interest Expense of $7,850.

140) The Premium on Bonds Payable account is a(n):

A) Revenue account.
B) Adjunct liability account.
C) Contra revenue account.
D) Contra asset account.
E) Equity account.

141) Adonis Corporation issued 10-year, 11% bonds with a par value of $170,000. Interest is paid semiannually. The market rate on the issue date was 10%. Adonis received $180,595 in cash proceeds. Which of the following statements is true?

A) Adonis must pay $170,000 at maturity plus 20 interest payments of $9,350 each.
B) Adonis must pay $170,000 at maturity plus 20 interest payments of $8,500 each.
C) Adonis must pay $180,595 at maturity plus 20 interest payments of $9,350 each.
D) Adonis must pay $180,595 at maturity and no interest payments.
E) Adonis must pay $170,000 at maturity and no interest payments.

142) Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

A) Adonis must pay $200,000 at maturity and no interest payments.
B) Adonis must pay $206,948 at maturity and no interest payments.
C) Adonis must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D) Adonis must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E) Adonis must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

143) 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.

144) If an issuer sells bonds at a premium:

A) The carrying value of the bond stays constant over time.
B) The carrying value increases from the par value to the issue price over the bond’s term.
C) The carrying value decreases from the par value to the issue price over the bond’s term.
D) The carrying value increases from the issue price to the par value over the bond’s term.
E) The carrying value decreases from the issue price to the par value over the bond’s term.

145) A company issues 9%, 4-year bonds with a par value of $160,000 on January 1 at a price of $165,386, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

A) $14,400.
B) $12,800.
C) $6,400.
D) $7,200.
E) $0.

146) A company issues 9%, 5-year bonds with a par value of $100,000 on January 1 at a price of $106,160, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

A) $9,000.
B) $8,000.
C) $4,000.
D) $4,500.
E) $0.

147) A company issues 7% bonds with a par value of $140,000 at par on January 1. The market rate on the date of issuance was 6%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bondholder(s) is:

A) $9,800.
B) $8,400.
C) $4,900.
D) $4,200.
E) $0.

148) A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bondholder(s) is:

A) $3,200.
B) $2,800.
C) $1,600.
D) $1,400.
E) $0.

149) A company issued 5-year, 7% bonds with a par value of $600,000. The market rate when the bonds were issued was 6.5%. The company received $606,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

A) $20,400.
B) $41,400.
C) $21,000.
D) $21,600.
E) $42,000.

150) A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

A) $3,289.50.
B) $3,500.00.
C) $3,613,70.
D) $6,633.70.
E) $7,000.00.

151) A company issued 5-year, 9.00% bonds with a par value of $104,000. The market rate when the bonds were issued was 8.50%. The company received $106,189 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A) $4,680.00.
B) $9,360.00.
C) $4,513.03.
D) $8,963.14.
E) $2,340.00.

152) A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,108 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:

A) $3,500.00.
B) $7,000.00.
C) $3,318.51.
D) $6,573.90.
E) $1,750.00.

153) Bonds that can be exchanged for a fixed number of shares of the issuing corporation’s stock are known as:

A) Coupon bonds.
B) Callable bonds.
C) Serial bonds.
D) Convertible bonds.
E) Registered bonds.

154) Bonds that give the issuer the option of retiring them at a stated dollar amount before maturity are:

A) Debentures.
B) Serial bonds.
C) Sinking fund bonds.
D) Registered bonds.
E) Callable bonds.

155) A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $5,400. The company calls these bonds at a price of $94,000 the gain or loss on retirement is:

A) $600 gain.
B) $6,000 gain.
C) $6,000 loss.
D) $600 loss.
E) $0 gain or loss.

156) A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company calls these bonds at a price of $97,000, the gain or loss on retirement is:

A) $0 gain or loss.
B) $1,500 gain.
C) $1,500 loss.
D) $3,000 gain.
E) $3,000 loss.

157) Clabber Company has bonds outstanding with a par value of $105,000 and a carrying value of $100,300. If the company calls these bonds at a price of $97,500, the gain or loss on retirement is:

A) $7,500 loss.
B) $4,700 gain.
C) $2,800 gain.
D) $2,800 loss.
E) $4,700 loss.

158) Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:

A) $5,000 loss.
B) $2,700 gain.
C) $2,700 loss.
D) $2,300 loss.
E) $2,300 gain.

159) A company has bonds outstanding with a par value of $240,000. The unamortized premium on these bonds is $7,200. If the company retired these bonds at a call price of $232,800, the gain or loss on this retirement is:

A) $7,200 loss.
B) $7,200 loss.
C) $7,200 gain.
D) $14,400 gain.
E) $7,200 gain.

160) A company has bonds outstanding with a par value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at a call price of $99,000, the gain or loss on this retirement is:

A) $1,000 gain.
B) $1,000 loss.
C) $2,700 loss.
D) $2,700 gain.
E) $3,700 gain.

161) Chang Industries has bonds outstanding with a par value of $222,400 and a carrying value of $236,600. If the company calls these bonds at a price of $229,000, the gain or loss on retirement is:

A) $7,600 gain.
B) $7,600 loss.
C) $14,200 gain.
D) $6,600 gain.
E) $6,600 loss.

162) Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:

A) $1,000 gain.
B) $2,000 loss.
C) $3,000 gain.
D) $1,000 loss.
E) $2,000 gain.

163) A company calls its bonds at a price of $105,000. The face value is $100,000 and the carrying value of the bonds at the retirement date 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.

164) A corporation issued 8% bonds with a par value of $1,150,000, receiving a $50,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation called the bonds at $1,138,500. The gain or loss on this retirement is:

A) $0.
B) $11,500 gain.
C) $11,500 loss.
D) $41,500 gain.
E) $41,500 loss.

165) A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation called the bonds at $990,000. The gain or loss on this retirement is:

A) $0.
B) $10,000 gain.
C) $10,000 loss.
D) $22,000 gain.
E) $22,000 loss.

166) On August 1, a $46,800, 8%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest of $18,159.97. The entry to record the first payment on July 31 would include:

A) Debit to Notes Payable of $18,159.97
B) Debit to Interest Expense of $3,744.00
C) Debit to Cash of $18,159.97
D) Credit to Notes Payable of $18,159.97
E) Credit to Cash $14,415.97

167) On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest of $11,223.34. The entry to record the first payment on July 31 would include:

A) Debit to Notes Payable of $11,223.34
B) Debit to Interest Expense of $1,800
C) Debit to Cash of $11,223.34
D) Credit to Notes Payable of $11,223.34
E) Credit to Cash $9,423.34

168) On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the issuance of the note?

A) Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B) Debit Notes Payable $250,000; credit Cash $250,000.
C) Debit Cash $37,258; credit Notes Payable $37,258.
D) Debit Cash $250,000; credit Notes Payable $250,000.
E) Debit Cash $287,258; credit Interest Payable $37,258; credit Notes Payable $250,000.

169) On July 1, Shady Creek Resort borrowed $340,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $50,670. What amount of interest expense will be included in the first annual payment?

A) $50,670
B) $34,000
C) $316,530
D) $27,200
E) $23,470

170) On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?

A) $20,000
B) $37,258
C) $25,000
D) $17,258
E) $232,742

171) On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of the first annual payment will be applied towards reducing principal?

A) $20,000
B) $37,258
C) $25,000
D) $232,742
E) $17,258

172) On July 1, Shady Creek Resort borrowed $420,000 cash by signing a 10-year, 9% installment note requiring equal payments each June 30 of $65,444. What is the journal entry to record the first annual payment?

A) Debit Cash $420,000; debit Interest Expense $65,444; credit Notes Payable $485,444.
B) Debit Interest Expense $65,444; credit Cash $65,444.
C) Debit Interest Expense $37,800; credit Cash $37,800.
D) Debit Interest Expense $37,800; debit Interest Payable $27,644; credit Cash $65,444.
E) Debit Interest Expense $37,800; debit Notes Payable $27,644; credit Cash $65,444.

173) On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the journal entry to record the first annual payment?

A) Debit Cash $250,000; debit Interest Expense $37,258; credit Notes Payable $287,258.
B) Debit Interest Expense $37,258; credit Cash $37,258.
C) Debit Interest Expense $20,000; credit Cash $20,000.
D) Debit Interest Expense $20,000; debit Interest Payable $17,258; credit Cash $37,258.
E) Debit Interest Expense $20,000; debit Notes Payable $17,258; credit Cash $37,258.

174) A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?

A) Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
B) Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
C) Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
D) Debit Notes Payable $32,136; credit Cash $32,136.
E) Debit Notes Payable $11,250; credit Cash $11,250.

175) On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:

A) Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B) Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C) Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
D) Debit Notes Payable $14,238; credit Cash $14,238.
E) Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

176) On January 1, Year 1, Stratton Company borrowed $230,000 on a 10-year, 8% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $34,277 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is (round to the nearest dollar):

A) Debit Interest Expense $18,400; debit Notes Payable $15,877; credit Cash $34,277.
B) Debit Notes Payable $18,400; debit Interest Expense $15,877; credit Cash $34,277.
C) Debit Interest Expense $17,130; debit Notes Payable $17,147; credit Cash $34,277.
D) Debit Notes Payable $34,277; credit Cash $34,277.
E) Debit Notes Payable $230,000; debit Interest Expense $11,277; credit Cash $34,277.

177) On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the payment on the note on December 31, Year 2 is (round to the nearest dollar):

A) Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B) Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C) Debit Interest Expense $6,493; debit Notes Payable $7,745; credit Cash $14,238.
D) Debit Notes Payable $14,238; credit Cash $14,238.
E) Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.

178) On January 1, a company issues bonds dated January 1 with a par value of $230,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $239,811. The journal entry to record the issuance of the bonds is:

A) Debit Cash $230,000; debit Premium on Bonds Payable $9,811; credit Bonds Payable $239,811.
B) Debit Bonds Payable $230,000; debit Bond Interest Expense $9,811; credit Cash $239,811.
C) Debit Cash $239,811; credit Bonds Payable $239,811.
D) Debit Cash $239,811; credit Discount on Bonds Payable $9,811; credit Bonds Payable $230,000.
E) Debit Cash $239,811; credit Premium on Bonds Payable $9,811; credit Bonds Payable $230,000.

179) On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bonds is:

A) Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
B) Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
C) Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
D) Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.
E) Debit Cash $312,177; credit Bonds Payable $312,177.

180) On January 1, a company issues bonds dated January 1 with a par value of $210,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $218,105. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.)

A) Debit Bond Interest Expense $12,361; credit Discount on Bonds Payable $811; credit Cash $11,550.
B) Debit Bond Interest Expense $10,739; debit Discount on Bonds Payable $811; credit Cash $11,550.
C) Debit Bond Interest Expense $10,739; debit Premium on Bonds Payable $811; credit Cash $11,550.
D) Debit Bond Interest Expense $12,361; credit Premium on Bonds Payable $811; credit Cash $11,550.
E) Debit Interest Payable $11,550; credit Cash $11,550.

181) On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using straight-line amortization is:

A) Debit Interest Payable $13,500; credit Cash $13,500.00.
B) Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.
C) Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
D) Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.
E) Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

182) On January 1, a company issues bonds dated January 1 with a par value of $380,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $396,210. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.)

A) Debit Bond Interest Expense $11,886; debit Discount on Bonds Payable $1,414; credit Cash $13,300.
B) Debit Bond Interest Expense $11,886; debit Premium on Bonds Payable $1,414; credit Cash $13,300.
C) Debit Bond Interest Expense $11,679; debit Premium on Bonds Payable $1,621; credit Cash $13,300.
D) Debit Interest Payable $13,300; credit Cash $13,300.
E) Debit Bond Interest Expense 14,921; credit Premium on Bonds Payable $1,621; credit Cash $13,300.

183) On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:

A) Debit Bond Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash $13,500.00.
B) Debit Interest Payable $13,500; credit Cash $13,500.00.
C) Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00.
D) Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
E) Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

184) Marwick Corporation issues 8%, 5 year bonds with a par value of $1,210,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors:

A) $1,210,000
B) $999,244
C) $1,622,862
D) $1,313,223
E) $797,138

185) Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors:

A) $1,000,000
B) $789,244
C) $1,341,208
D) $1,085,308
E) $658,792

186) Sharmer Company issues 5%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following factors:

A) $957,355
B) $1,000,000
C) $1,250,000
D) $786,745
E) $1,213,255

187) On January 1, a company issues bonds dated January 1 with a par value of $330,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $317,254. The journal entry to record the issuance of the bond is:

A) Debit Cash $330,000; credit Discount on Bonds Payable $12,746; credit Bonds Payable $317,254.
B) Debit Cash $317,254; credit Bonds Payable $317,254.
C) Debit Cash $317,254; debit Discount on Bonds Payable $12,746; credit Bonds Payable $330,000.
D) Debit Bonds Payable $330,000; debit Bond Interest Expense $12,746; credit Cash $342,746.
E) Debit Cash $317,254; debit Premium on Bonds Payable $12,746; credit Bonds Payable $330,000.

188) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

A) Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.
B) Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
C) Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.
D) Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
E) Debit Cash $383,793; credit Bonds Payable $383,793.

189) On January 1, a company issues bonds dated January 1 with a par value of $310,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 12% and the bonds are sold for $298,594. The journal entry to record the first interest payment using straight-line amortization is:

A) Debit Interest Expense $17,050.00; credit Cash $17,050.00.
B) Debit Interest Expense $15,909.40; debit Discount on Bonds Payable $1,140.60; credit Cash $17,050.00.
C) Debit Interest Expense $18,190.60; credit Discount on Bonds Payable $1,140.60; credit Cash $17,050.00.
D) Debit Interest Expense $18,190.60; credit Premium on Bonds Payable $1,140.60; credit Cash $17,050.00.
E) Debit Interest Payable $17,050.00; credit Cash $17,050.00.

190) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:

A) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B) Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
D) Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
E) Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.

191) On January 1, a company issues bonds dated January 1 with a par value of $430,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $412,577. The journal entry to record the first interest payment using the effective interest method of amortization is:

A) Debit Interest Expense $16,503; credit Discount on Bonds Payable $1,453; credit Cash $15,050.
B) Debit Interest Expense $13,597; debit Discount on Bonds Payable $1,453; credit Cash $15,050.
C) Debit Interest Expense $16,503; credit Premium on Bonds Payable $1,453; credit Cash $15,050.
D) Debit Interest Expense $13,597; debit Premium on Bonds Payable $1,453; credit Cash $15,050.
E) Debit Interest Payable $15,050; credit Cash $15,050.

192) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

A) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
B) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
D) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
E) Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.

193) On January 1, a company issues bonds dated January 1 with a par value of $370,000. The bonds mature in 3 years. The contract rate is 6%, and interest is paid semiannually on June 30 and December 31. The market rate is 7%. Using the present value factors below, the issue (selling) price of the bonds is:

A) $379,858.
B) $360,142.
C) $370,000.
D) $59,147.
E) $300,995.

194) On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30 and December 31. The market rate is 5%. Using the present value factors below, the issue (selling) price of the bonds is:

A) $188,900.40.
B) $194,492.40.
C) $200,000.00.
D) $22,032.40.
E) $172,460.00.

195) On January 1, a company issues bonds dated January 1 with a par value of $750,000. The bonds mature in 3 years. The contract rate is 6%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $732,000. The journal entry to record the first interest payment using straight-line amortization is:

A) Debit Interest Payable $22,500; credit Cash $22,500.
B) Debit Bond Interest Expense $22,500; credit Cash $22,500.
C) Debit Bond Interest Expense $25,500; credit Discount on Bonds Payable $3,000; credit Cash $22,500.
D) Debit Bond Interest Expense $19,500; debit Discount on Bonds Payable $3,000; credit Cash $22,500.
E) Debit Bond Interest Expense $22,500; credit Premium on Bonds Payable $3,000; credit Cash $19,500.

196) On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:

A) Debit Interest Payable $21,000; credit Cash $21,000.
B) Debit Bond Interest Expense $21,000; credit Cash $21,000.
C) Debit Bond Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.
D) Debit Bond Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash $21,000.
E) Debit Bond Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash $15,000.

197) On January 1, a company issues bonds dated January 1 with a par value of $430,000. The bonds mature in 5 years. The contract rate is 6%, and interest is paid semiannually on June 30 and December 31. The market rate is 7% and the bonds are sold for $412,111. The journal entry to record the second interest payment using the effective interest method of amortization is:

A) Debit Interest Expense $11,376.11; debit Premium on Bonds Payable $1,523.89; credit Cash $12,900.00.
B) Debit Interest Payable $12,900.00; credit Cash $12,900.00.
C) Debit Interest Expense $11,376.11; debit Discount on Bonds Payable $1,523.89; credit Cash $12,900.00.
D) Debit Interest Expense $14,423.89; credit Discount on Bonds Payable $1,523.89; credit Cash $12,900.00.
E) Debit Interest Expense $14,477.23; credit Discount on Bonds Payable $1,577.23; credit Cash $12,900.00.

198) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the second interest payment using the effective interest method of amortization is:

A) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
B) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
D) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
E) Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash $14,000.00.

199) Which of the following statements regarding convertible bonds is false?

A) Convertible bonds can be exchanged for a fixed number of shares of the issuing corporation’s stock.
B) Holders of convertible bonds have the potential to profit from increases in stock price.
C) Holders of convertible bonds can receive the par value if they hold the debt to maturity.
D) Holders of convertible bonds receive interest while the debt is held.
E) Holders of convertible bonds can choose how many shares of stock to receive at conversion.

200) On January 1, MJKB Incorporated exercises a call option that requires MJKB to pay $316,500 for its outstanding bonds that have a carrying value of $320,500 and a par value of $310,000. The company exercises the call option after the semiannual interest payment was made the day before (December 31). The entry to retire the bonds does not include which of the following?

A) Debit to Bonds Payable $316,500.
B) Debit to Premium on Bonds Payable $10,500.
C) Credit to Gain on Retirement of Bonds of $4,000.
D) Credit to Cash of $316,500.
E) Debit to Bonds Payable $310,000.

201) On January 1, MJKB Incorporated exercises a call option that requires MJKB to pay $315,000 for its outstanding bonds that have a carrying value of $319,000 and a par value of $310,000. The company exercises the call option after the semiannual interest payment was made the day before (December 31). The entry to retire the bonds does not include which of the following?

A) Debit to Bonds Payable $315,000.
B) Debit to Premium on Bonds Payable $9,000.
C) Credit to Gain on Retirement of Bonds of $4,000.
D) Credit to Cash of $315,000.
E) Debit to Bonds Payable $310,000.

202) On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables:

What is the issue (selling) price of the bond?

A) $320,560.80
B) $403,171.62
C) $300,010.00
D) $308,107.00
E) $325,592.40

Answer Key

Test name: John Wild Ch10 Algorithmic and Static

1) TRUE

2) FALSE

3) TRUE

4) TRUE

5) TRUE

6) TRUE

7) FALSE

8) TRUE

9) TRUE

10) TRUE

11) FALSE

12) TRUE

13) FALSE

14) FALSE

15) TRUE

16) TRUE

17) TRUE

18) TRUE

19) FALSE

20) TRUE

21) TRUE

22) FALSE

23) TRUE

24) FALSE

25) TRUE

26) TRUE

27) FALSE

28) TRUE

29) TRUE

30) FALSE

31) TRUE

32) TRUE

33) FALSE

34) TRUE

35) FALSE

36) TRUE

37) TRUE

38) TRUE

39) TRUE

40) FALSE

41) TRUE

42) FALSE

43) TRUE

44) FALSE

45) TRUE

46) FALSE

47) FALSE

48) FALSE

49) TRUE

50) FALSE

51) FALSE

52) FALSE

53) TRUE

54) TRUE

55) TRUE

56) FALSE

57) TRUE

58) FALSE

59) FALSE

60) FALSE

61) TRUE

62) FALSE

63) TRUE

64) TRUE

65) FALSE

66) TRUE

67) TRUE

68) FALSE

69) FALSE

70) FALSE

71) TRUE

72) TRUE

73) TRUE

74) FALSE

75) A

76) C

77) B

78) B

79) A

80) C

81) B

82) E

83) B

84) C

85) C

86) B

87) C

88) A

89) A

90) D

91) B

92) B

93) A

94) D

95) D

96) A

97) A

98) C

99) A

100) B

101) D

102) D

103) B

104) E

105) E

106) B

107) A

108) D

109) A

110) C

111) E

112) B

113) A

114) A

115) D

116) D

117) D

118) B

119) E

120) C

121) E

122) A

123) A

124) B

125) A

126) E

127) E

128) E

129) E

130) C

131) C

132) E

133) C

134) B

135) E

136) B

137) B

138) B

139) A

140) B

141) A

142) C

143) B

144) E

145) D

146) D

147) C

148) C

149) A

150) A

151) C

152) C

153) D

154) E

155) A

156) C

157) C

158) E

159) D

160) E

161) A

162) E

163) A

164) D

165) D

166) B

167) B

168) D

169) D

170) A

171) E

172) E

173) E

174) C

175) A

176) C

177) C

178) E

179) D

180) C

181) E

182) B

183) A

184) D

185) D

186) A

187) C

188) B

189) C

190) C

191) A

192) D

193) B

194) B

195) C

196) C

197) E

198) E

199) E

200) A

201) A

202) E