Question 1

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

Accepted Answer

Bondholders do not have voting rights.

Question 2

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

Accepted Answer

A callable bond can be called for early retirement at the option of the issuing company. A convertible bond is convertible into common stock at the option of the investor.

Question 3

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

Accepted Answer

The straight-line method can only be used when the amounts involved aren't material.

Question 4

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.

Accepted Answer

When a bond is sold at a discount, the subsequent amortization of the discount results in an increase in the book value of the bond because the discount on bonds payable is a contra-liability account.

Question 5

Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

Accepted Answer

When a bond is sold at a discount, the interest expense on the income statement exceeds the cash payment by the amortization of the bond discount.

Question 6

A bond's interest payments are determined by multiplying the bond's principal amount by the stated interest rate.

Accepted Answer

Bond interest payments are determined by multiplying the bond's principal amount by the stated rate of interest.

Question 7

A bond will sell at its par value when the market rate of interest equals the stated rate of interest.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue; the present value of a bond's cash flows equal its par value when the stated rate and market rate are the same.

Question 8

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.

Accepted Answer

Bond interest payments are fixed charges that must be paid at specified dates.

Question 9

The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue. When the stated rate exceeds the market rate, the bond will sell at a premium.

Question 10

A bond issued at a discount will pay total cash payments for interest that is more than the total interest expense recognized over the life of the bond.

Accepted Answer

When a bond initially sells at a discount, the interest expense over the life of the bond equals the cash interest payments plus the initial amount of discount on bonds payable.

Question 11

The issuing company and the bond underwriter determine the selling price of a bond.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue.

Question 12

Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue; subsequent changes in the market rate of interest do not impact a bond discount or premium.

Question 13

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Accepted Answer

Bond interest payments are tax deductible whereas cash dividend payments are not.

Question 14

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon)rate.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue, not the stated rate.

Question 15

A company has a December 31 fiscal year-end.If the interest is paid annually on December 31,the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

Accepted Answer

Bond interest expense equals the cash payment for interest when the bond initially sells for par value.

Question 16

The journal entry to record the interest cash payment for a bond issued at a premium results in a decrease in the bond.

Accepted Answer

Premium on bonds payable is an adjunct-liability account; amortization of the premium on bonds payable account therefore decreases the bond.

Question 17

When the market rate of interest is greater than the stated interest rate,the bond will sell at a discount.

Accepted Answer

The selling price of a bond is determined by the market rate of interest at the time of issue. When the market rate exceeds the stated rate, the bond will sell at a discount.

Question 18

The journal entry to record the interest cash payment for a bond issued at a discount results in an increase in the book value of the bond liability.

Accepted Answer

The discount on bonds payable is a contra-liability account; amortization of the discount on bonds payable account therefore increases the book value of the bond.

Question 19

The payment of bond interest on the interest payment date,for bonds issued at par value,reduces both the bond liability and assets,assuming that interest expense is recorded at the time of the cash payment.

Accepted Answer

The payment of bond interest increases interest expense and decreases assets.

Question 20

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

Accepted Answer