Question 1

When a bond payable is issued at a premium, subsequent amortization of the premium does which of the following?
A) Increases interest expense.
B) Decreases the book value of the bonds.
C)The amortization for each year the bond approaches maturity, when the effective-interest method is used, would decrease.
D)Decreases the amount reported as a cash flow from operating activities.

Accepted Answer

The answer of When a bond payable is issued at...

Question 2

A company prepared the following journal entry: Which of the following statements is correct?
Bonds payable
Premium on bonds payable
Loss on bond retirement
Cash
A) The book value of the bonds was less than the cash payment.
B) The increase in stockholders' equity equals the loss on the bond retirement.
C)The decrease in assets is greater than the decrease in liabilities and, as a result, stockholders' equity decreases.
D)The net cash flow from financing activities decreases by the book value of the bonds payable.

Accepted Answer

The decrease in assets (cash) is greater than the decrease in liabilities (bonds payable and premium), resulting in a decrease in stockholders' equity due to the loss on bond retirement.

Question 3

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?
Interest expense
Premium on bonds payable 
Cash
A) The bonds payable book value decreases by the amount of the debit to premium on bonds payable.
B) Assets decrease by the amount of the credit to cash.
C)Stockholders' equity decreases by the amount of the debit to interest expense.
D)The cash payment is reported as a cash flow from financing activities.

Accepted Answer

The cash payment for interest is reported as a cash flow from operating activities, not financing activities.

Question 4

On March 31, 2014, Bundy Corporation retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. How much was the gain or loss on the retirement of the bonds?
A) $150,000 loss.
B) $150,000 gain.
C)$650,000 gain.
D)$350,000 loss.

Accepted Answer

The carrying amount of the bonds is $10,500,000 ($10,000,000 face value + $500,000 unamortized premium). Bundy Corporation paid $9,850,000 to retire the bonds, resulting in a gain of $650,000 ($10,500,000 - $9,850,000).

Question 5

Straight-line amortization of a premium related to a bond issuance would result in which of the following?
A) Interest expense to be calculated by multiplying the market interest rate times the book value of the bonds.
B) Higher premium amortization in the early years and lower interest expense over the life of the bonds.
C)Calculating the constant amount of premium to be amortized and then subtracting it from cash interest to calculate interest expense.
D)Lower premium amortization in the early years and higher interest expense over the life of the bonds.

Accepted Answer

Straight-line amortization involves calculating a constant amount of premium to be amortized each period, which is then subtracted from the cash interest payment to determine the interest expense.

Question 6

When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?
A) Interest expense would increase.
B) The book value of the bonds would increase.
C)The amortization for each year the bond approaches maturity, when the effective-interest method is used, would increase.
D)The amount of amortization would be reported as an increase in cash flow from operating activities.

Accepted Answer

The amount of amortization would not be reported as an increase in cash flow from operating activities, as it does not involve an actual cash outflow. Rather, it is a non-cash expense that reduces net income and increases the bond's book value over time. A, B, and C are all correct statements about the effects of amortizing a bond issued at a discount.

Question 7

A company prepared the following journal entry: Which of the following statements is incorrect?
Bonds payable
Premium on bonds payable
Gain on bond retirement
Cash
A) The book value of the bonds was less than the cash payment.
B) The increase in stockholders' equity equals the gain on the bond retirement.
C)The decrease in assets is less than the decrease in liabilities.
D)The net cash flow from financing activities decreases by the cash payment.

Accepted Answer

The book value of the bonds was more than the cash payment, not less, as indicated by the gain on bond retirement.

Question 8

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?
Cash
Premium on bonds payable 
Bonds payable
A) Total liabilities increase by the amount of the debit to cash.
B) Premium on bonds payable is reported on the balance sheet as a contra-liability account.
C)Total liabilities increase by the amount of the credit to bonds payable.
D)The credit to bonds payable is the amount reported as a cash flow from financing activities.

Accepted Answer

The answer of A company prepared the following journal entry:...

Question 9

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.

Accepted Answer

The answer of A corporation retired $500,000 of bonds, which...

Question 10

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?
A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid.
B) The amount of interest expense recognized each period increases over time.
C)The amount of discount amortized each period decreases over time.
D)The book value of the bonds payable liability decreases.

Accepted Answer

The effective-interest method results in an increasing amount of interest expense recognized each period because it applies a constant interest rate to the carrying amount of the bonds, which increases as the discount is amortized.

Question 11

If a bond is issued at 98, the stated rate of interest was
A) higher than the market rate of interest.
B) lower than the market rate of interest.
C)equal to the market rate of interest.
D)not related to the market rate of interest.

Accepted Answer

If a bond is issued at 98, it means that the bond is sold for 98% of its face value. This indicates that the stated rate of interest is lower than the market rate of interest. Investors are willing to pay less for the bond because the interest rate is not as attractive as other available investments.

Question 12

Which of the following statements is correct?
A) An outflow of cash for interest payments is reported as a cash flow from financing activities.
B) The conversion of bonds to stock is reported as a cash flow from financing activities.
C)An outflow of cash when callable bonds are recalled by the issuer is reported as a cash flow from financing activities.
D)Amortization of discounts and premiums on bonds payable are reported as a cash flow from financing activities.

Accepted Answer

The correct statement is C because when callable bonds are recalled by the issuer, it involves repaying the bondholders, which is a financing activity. This is because it relates to the ways in which a company finances its operations, either through debt (bonds) or equity (stock).

Question 13

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?
Cash
Discount on bonds payable 
Bonds payable
A) Total liabilities increase by only the amount of the credit to bonds payable.
B) Discount on bonds payable is reported on the balance sheet as a contra-liability account.
C)Assets increase by the amount of the debit to cash.
D)The cash inflow (debit) is reported as a cash flow from financing activities.

Accepted Answer

The total liabilities increase by the net amount of the bonds payable minus the discount on bonds payable, not just the amount of the credit to bonds payable.

Question 14

On July 1, 2015, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2010. Which of the following statements is correct?
A) Stockholders' equity is not affected by the bond retirement.
B) A gain of $2,500 will be reported on the income statement.
C)A loss of $2,500 will be reported on the income statement.
D)A gain of $402,500 will be reported on the income statement.

Accepted Answer

When a company retires bonds payable before maturity, the company could have a gain or loss on the retirement. In this case, the company retired one fifth of the $500,000 bonds payable, or $100,000 worth of bonds. The company paid $97,500 to retire these bonds, which is less than their carrying value ($100,000 x 1.05 = $105,000). Therefore, the company will report a gain on the income statement of $105,000 - $97,500 = $2,500. The retirement of bonds payable will result in a reduction of liabilities, but it does not affect stockholders' equity. The company will report the gain or loss on the income statement, not the balance sheet. The gain or loss is based on the carrying value of the bonds at the time of retirement, not the original par value of the bonds. Therefore, options A, C, and D are incorrect.

Question 15

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?
Interest expense
Discount on bonds payable 
Cash
A) The bonds payable book value increases by the amount of the credit to discount on bonds payable.
B) The bonds payable book value decreases by the amount of the credit to cash.
C)Stockholders' equity decreases by the amount of the credit to cash.
D)The cash payment is reported as a cash flow from financing activities.

Accepted Answer

The credit to the discount on bonds payable reduces the discount, thereby increasing the book value of the bonds payable.

Question 16

Which of the following statements regarding the effective-interest method of amortization is incorrect?
A) The amount of interest expense is different each period.
B) The amount of discount or premium, on which amortization is calculated, increases each period.
C)The effective-interest method is one of the options allowed by generally accepted accounting principles for all bond issues.
D)The total interest expense over the life of a bond is the same as that reported under the straight-line method of amortization.

Accepted Answer

The answer of Which of the following statements regarding the...

Question 17

A corporation retired $200,000 of bonds, which have an unamortized premium of $8,000, by purchasing them on the open market 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.

Accepted Answer

The answer of A corporation retired $200,000 of bonds, which...

Question 18

If a bond is issued at 101, the stated rate of interest was
A) higher than the market rate of interest.
B) lower than the market rate of interest.
C)equal to the market rate of interest.
D)not related to the market rate of interest.

Accepted Answer

When a bond is issued at 101, it means the bond is priced above its face value. This indicates that the stated rate of interest on the bond is higher than the prevailing market interest rate.

Question 19

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?
A) There was a $50,000 loss.
B) There was a $10,000 loss.
C)There was a $10,000 gain.
D)There was a $20,000 loss.

Accepted Answer

The answer of A corporation retired $900,000 of bonds which...

Question 20

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)The debt-to-equity ratio is a measure of a company's ability to pay its debt.
D)The debt-to-equity ratio is a measure of investor and creditor risk.

Accepted Answer

The debt-to-equity ratio compares the amount of debt a company has taken on to the amount of equity. A higher ratio means that the company is relying more on debt financing, which can increase the risk to both investors and creditors. Therefore, option D is the correct statement. Option A is incorrect as a high ratio means that a company has higher debt compared to equity. Option B is incorrect because it depends on the industry and company's financial situation. Option C is also incorrect as it is a measure of the proportion of debt and equity, not the ability to pay debt.

Quiz 10: Reporting and Interpreting Bonds

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

A company prepared the following journal entry: Which of the following statements is correct? Bonds payable Premium on bonds payable Loss on bond retirement Cash

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Interest expense Premium on bonds payable Cash

On March 31, 2014, Bundy Corporation retired $10,000,000 of bonds, which have an unamortized premium of $500,000, by paying bondholders $9,850,000. How much was the gain or loss on the retirement of the bonds?

Straight-line amortization of a premium related to a bond issuance would result in which of the following?

When a bond payable is issued at a discount, which of the following would not occur as the bond is amortized each year?

A company prepared the following journal entry: Which of the following statements is incorrect? Bonds payable Premium on bonds payable Gain on bond retirement Cash

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements? Cash Premium on bonds payable Bonds payable

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?

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

If a bond is issued at 98, the stated rate of interest was

Which of the following statements is correct?

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements? Cash Discount on bonds payable Bonds payable

On July 1, 2015, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2010. Which of the following statements is correct?

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements? Interest expense Discount on bonds payable Cash

Which of the following statements regarding the effective-interest method of amortization is incorrect?

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

If a bond is issued at 101, the stated rate of interest was

A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, by paying bondholders $920,000. How much was the gain or loss on the retirement of the bonds?

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