Question 1

Bonds with a face value of $450,000 were issued at 97. The entry to record the issuance will include a debit to the Discount on Bonds Payable account for

Accepted Answer

The discount on bonds payable is calculated as the difference between the face value and the issued price. Here, the bonds were issued at 97% of their face value, so the discount is 3% of $450,000, which equals $13,500 (0.03 * $450,000).

Question 2

A bond sinking fund investment is started on January 5, 2019, by transferring $12,000 in cash to the fund. The company intends to accumulate $12,000 each year in the fund. This $12,000 is invested and earns $1,500 during 2019. On January 5, 2020, the amount of cash transferred to the sinking fund investment will be

Accepted Answer

The answer of A bond sinking fund investment is started...

Question 3

The entry to record the issuance of bonds at face value includes

Accepted Answer

The answer of The entry to record the issuance of...

Question 4

If the market rate of interest is higher than the contract rate of interest offered on the bonds being sold, they will be sold at

Accepted Answer

When the market rate of interest is higher than the contract rate of interest offered on the bonds being sold, investors will demand a higher rate of return to compensate for the lower rate of interest offered by the bonds. This results in the bonds being sold at a discount.

Question 5

In the interest formula I = Prt, the P stands for

Accepted Answer

The letter P in the interest formula I = Prt stands for Principal, which is the amount of money initially invested or borrowed. The interest is calculated based on this principal amount. Therefore, the correct choice is C. A is incorrect because payment refers to the amount paid towards the principal and interest of a loan. B is incorrect because premium is a payment made for an insurance policy or other service. D is incorrect because prime number is a mathematical concept and not related to the interest formula.

Question 6

When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds, the bonds are referred to as

Accepted Answer

Callable bonds are bonds that can be redeemed by the issuer before their scheduled maturity date, often allowing the issuer to take advantage of lower interest rates. The issuer has the right to "call in" or redeem the bonds by paying the bondholders the face value of the bonds plus any accrued interest up to the call date.

Question 7

If a bond is a registered bond, it can NOT be a bond.

Accepted Answer

A registered bond cannot be a coupon bond because coupon bonds are unregistered and interest payments are made to whoever holds the physical bond certificate.

Question 8

Twenty-year, 6% bonds with a face value of $550,000 are issued at 102 on January 1 of the current year. How much of the premium will be amortized under the straight-line method in the first
Semi-annual interest period?

Accepted Answer

The premium on the bonds is calculated as ($550,000 * 102%) - $550,000 = $11,000. Under the straight-line method, this premium is amortized evenly over the life of the bonds. Since the bonds are 20-year bonds with semi-annual interest payments, there are 40 periods (20 years * 2). Therefore, the amortization per period is $11,000 / 40 = $275.

Question 9

Bonds issued at a premium are

Accepted Answer

Bonds issued at a premium means that they are sold for more than face value. This is because the coupon rate of the bond is higher than the prevailing market interest rates, making the bond more valuable to investors, who are willing to pay a premium to receive a higher yield.

Question 10

Retained earnings are often appropriated while the bonds are outstanding. Which of the following is a reason for the appropriation?

Accepted Answer

Appropriating retained earnings while bonds are outstanding is a way for corporation management to show a commitment to protecting the interests of bondholders. It signals to bondholders that the company is committed to maintaining financial stability and has a plan in place to repay its debt obligations. It is not always required by underwriters, tax law, or buyers.

Question 11

A company issued 10-year, 8% bonds with a par value of $1,000,000. The company received
$980,000 upon issuance. Using the straight-line method, the amount of interest expense for the first semi-annual interest period is:

Accepted Answer

The correct answer is A because the straight-line method allocates the discount evenly over the life of the bond. In this case, the discount is $20,000 ($1,000,000 - $980,000) and the bond has a 10-year life. Therefore, the semi-annual interest expense is $20,000 / 20 = $1,000. The total interest expense for the first semi-annual interest period is $1,000 + $40,000 = $41,000.

Question 12

The difference between the face value and the selling price of a 10-year discounted bond issued two years after authorization, is amortized for

Accepted Answer

The difference between the face value and the selling price of a discounted bond is known as a bond premium or discount. In the case of a discounted bond issued two years after authorization, the difference between the face value and the selling price is amortized for the remaining eight years of the bond's life. This means that the premium or discount is gradually added to or subtracted from the bond's value over eight years. This amortization process keeps the bond's interest expense in line with its book value.

Question 13

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

Accepted Answer

Retained Earnings Appropriated for Bond Retirement is a component of equity and thus appears on the Balance Sheet as a separate line item. It represents the portion of retained earnings that has been set aside for retiring the company's bonds.

Question 14

Corporations with many bondholders will open a separate checking account because

Accepted Answer

Opening a separate checking account simplifies the bookkeeping process for managing bond interest payments to multiple bondholders.

Question 15

A bond sinking fund investment is started on January 5, 2019, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2019. The entry to record the earnings made on the sinking fund investment includes

Accepted Answer

Since the $10,000 was initially transferred to the Bond Sinking Fund Investment account, any earnings made on that investment should also be recorded in that account. Therefore, the entry to record the $1,100 of earnings would be a debit to Bond Sinking Fund Investment for $1,100 and a credit to Income from Sinking Fund Investment for $1,100. Option A is incorrect because it incorrectly credits the income to Cash instead of the investment account. Option B is incorrect because it incorrectly records the income as a credit to the investment account itself. Option D is incorrect because it uses a generic account title of Interest Income instead of the specific Income from Sinking Fund Investment account.

Question 16

The corporation must maintain a subsidiary ledger showing who owns the bonds and is entitled to receive interest payments if the bonds are

Accepted Answer

Registered bonds require the owner's information to be recorded in a subsidiary ledger, whereas bearer bonds do not require any record-keeping. Coupon bonds may or may not be registered, depending on the issuer's preference. Unregistered bonds are similar to bearer bonds in that ownership information is not recorded. Therefore, the correct choice is C – registered bonds.

Question 17

Ten-year bonds with a face value of $600,000 were issued at 96 on January 1, 2019. The carrying value of the bond on December 31, 2020, after two years of interest payments and straight-line amortization is:

Accepted Answer

The bonds were issued at 96, which means they were issued at 96% of their face value. Therefore, the initial carrying value is 96% of $600,000 = $576,000. Since the bonds are being amortized using the straight-line method over 10 years, the annual amortization amount is ($600,000 - $576,000) / 10 = $2,400. After two years, the total amortization would be $2,400 * 2 = $4,800. Therefore, the carrying value on December 31, 2020, would be the initial carrying value plus the total amortization, which is $576,000 + $4,800 = $580,800.

Question 18

A company issued 10-year, 5% bonds with a par value of $1,000,000. The company received
$1,040,000 upon issuance. Using the straight-line method, the amount of interest expense for the first semi-annual interest period is:

Accepted Answer

The answer of A company issued 10-year, 5% bonds with...

Question 19

Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Cash account for

Accepted Answer

Issuing bonds at 98 means they were issued at 98% of their face value. Therefore, $400,000 * 0.98 = $392,000, which is the amount of cash received.

Question 20

Using borrowed funds to earn a profit higher than the interest charged for borrowing is called

Accepted Answer

The term used for using borrowed funds to earn a profit higher than the interest charged for borrowing is called leveraging. By leveraging, an individual or a business can increase their potential return on investment. However, leveraging also involves some risks as the return on investment might be lower than expected, which could result in a negative impact on the borrower's finances.

Quiz 22: Long-Term Bonds