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On November 1,2009,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2009,and interest is payable each November 1 and May 1.How much is the amount of straight-line discount amortization on each semi-annual interest date?


A) $90
B) $45
C) $900
D) $450

E) A) and B)
F) None of the above

Correct Answer

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Which of the following statements correctly describes the accounting for bonds that were issued at a discount?


A) The market rate of interest is less than the stated interest rate.
B) The interest expense over the life of the bonds will be less than the cash interest payments.
C) The present value of the bonds' future cash flows is greater than the bonds' maturity value.
D) The book value of the bond liability increases when interest payments are made on the due dates.

E) A) and B)
F) B) and C)

Correct Answer

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On January 1,2010,Tonika Corporation issued a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used,which of the following journal entries correctly records the 2010 interest expense (to the nearest dollar) ?


A) Interest expense
700
Cash
700

 Interest expense 700 Cash 700\begin{array}{lr}\text { Interest expense } & 700 \\\text { Cash } & &700 \\\end{array}
B)  Interest expense 883 Discount on bonds payable 183 Cash 700\begin{array} { l c } \text { Interest expense } & 883 \\\text { Discount on bonds payable } & &183 \\\text { Cash } && 700\end{array}
C)
 Interest expense 773 Discount on bonds payable 73 Cash 700\begin{array} { l c } \text { Interest expense } & 773 \\\text { Discount on bonds payable } & &73 \\\text { Cash } && 700\end{array}
D)  Interest expense 676 Discount on bonds payable 24 Cash 700\begin{array} { l r r } \text { Interest expense } & 676 & \\\text { Discount on bonds payable } & 24 & \\\text { Cash } & & 700\end{array}

E) A) and B)
F) None of the above

Correct Answer

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The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

A) True
B) False

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Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

A) True
B) False

Correct Answer

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A corporation retired $200,000 of bonds which have an unamortized premium of $8,000,by repurchasing them for $210,000.How much was the gain or loss on the retirement of the bonds?


A) There was a $10,000 loss.
B) There was a $2,000 loss.
C) There was a $10,000 gain.
D) There was an $18,000 loss.

E) A) and D)
F) B) and D)

Correct Answer

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Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.How much is the annual interest expense?


A) $4,700
B) $4,300
C) $4,500
D) $4,680

E) C) and D)
F) B) and C)

Correct Answer

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Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

A) True
B) False

Correct Answer

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Which of the following statements regarding the debt to equity ratio is correct?


A) A high ratio means that the company is primarily financed through stockholder investments.
B) A higher ratio is preferred.
C) It is a measure of a company's ability to pay its debt.
D) It is a measure of investor and creditor risk.

E) A) and D)
F) A) and B)

Correct Answer

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On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.What is the bond liability to be reported on the December 31,2010 balance sheet?


A) $300,000
B) $302,850
C) $302,700
D) $303,000

E) C) and D)
F) All of the above

Correct Answer

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Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

A) True
B) False

Correct Answer

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If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when their book value is $950,000,a loss of $20,000 will be reported.

A) True
B) False

Correct Answer

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The journal entry to record the sale of bonds at their par value results in which of the following?


A) An increase in assets and liabilities equal to the par value of the bonds.
B) An increase in assets and liabilities equal to the par value of the bonds and their associated interest payments.
C) An increase in assets equal to the par value of the bonds and an increase in liabilities equal to the bonds' future cash flows.
D) An increase in assets and liabilities equal to the bonds' future cash flows.

E) A) and B)
F) None of the above

Correct Answer

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Which of the following statements correctly describes the accounting for bonds that were issued at a premium?


A) The interest expense over the life of the bond is less than the cash interest payments.
B) The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used.
C) The amortization of the premium on bonds payable account decreases as the bonds mature when the effective interest method is used.
D) The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is used.

E) None of the above
F) B) and C)

Correct Answer

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The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

A) True
B) False

Correct Answer

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A corporation retired $500,000 of bonds which have an unamortized discount of $10,000,by repurchasing them for $500,000.How much was the gain or loss on the retirement of the bonds?


A) There was no gain or loss.
B) There was a $10,000 loss.
C) There was a $10,000 gain.
D) There was a $500,000 loss.

E) B) and D)
F) A) and B)

Correct Answer

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The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

A) True
B) False

Correct Answer

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When a bond payable is issued at a premium,subsequent amortization of the premium does which of the following?


A) Increase interest expense.
B) Decrease the book value of the bonds.
C) Decrease in amount amortized for each year the bond gets older when the effective-interest method is used.
D) Decrease the amount reported as a cash flow from operating activities.

E) None of the above
F) B) and D)

Correct Answer

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A bond will sell for a premium when the market rate of interest is greater than the stated rate of interest.

A) True
B) False

Correct Answer

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A convertible bond can be called for early retirement at the option of the issuing company.

A) True
B) False

Correct Answer

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