Question 1

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization,the effective interest method should be used.

Accepted Answer

The effective interest method is preferred when there are material differences between the results of the straight-line method and the effective interest method. This is because the effective interest method results in a more accurate allocation of interest expense over time.

Question 2

When bonds are converted to stock,no gain or loss is recognized.

Accepted Answer

When bonds are converted to stock, no gain or loss is recognized for tax purposes under the Internal Revenue Code. This is because the conversion is considered to be a continuation of the original investment rather than a new investment.

Question 3

The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period.

Accepted Answer

This statement is true. Unamortized discount is the portion of a debt instrument's price that has not yet been allocated (or "charged") to expense. It is typically associated with bonds or other debt securities that are issued at a price that is less than their face value. The discount is typically amortized over the life of the instrument, and the amount of unamortized discount at the end of a given interest period is simply the starting amount of unamortized discount less the amount of discount that was allocated to expense during the period.

Question 4

The market interest rate is the rate that an issuer of bonds actually will have to bear and that an investor (purchaser)actually will earn over the bond's life.

Accepted Answer

The market interest rate is the actual rate that investors will earn and issuers will have to pay for bonds. It is determined by supply and demand in the market and can fluctuate over time.

Question 5

It is the issuer rather than the bond holder who may exercise the call feature of a callable bond.

Accepted Answer

The call feature of a callable bond is an option given to the issuer to redeem the bond before its maturity date. Only the issuer has the right to exercise this option, not the bond holder.

Question 6

When a bond issue is converted into common stock,total contributed capital is increased by the fair market value of the bonds converted.

Accepted Answer

Total contributed capital is increased by the par value of the common stock issued, not by the fair market value of the bonds converted.

Question 7

When the effective interest method of amortization is used,the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Accepted Answer

The amount of bond interest expense for a given period is calculated by multiplying the effective interest rate by the bond's carrying value at the beginning of the given period. The face interest rate is only used for calculating the cash interest payments, not the interest expense.

Question 8

Regardless of whether the straight-line method or the effective interest method is used,the carrying value of a term bond issued at a discount will increase continually over the life of the bond.

Accepted Answer

The carrying value of a term bond issued at a discount increases over time because the discount is amortized to interest expense, gradually reducing the discount and increasing the carrying value of the bond to its face value at maturity.

Question 9

When a bond has been issued at a discount,the carrying value at the end of one period is equal to the carrying value at the beginning of the period minus the amount of discount that was amortized during the period.

Accepted Answer

When a bond is issued at a discount, the carrying value at the end of one period is equal to the carrying value at the beginning of the period plus the amount of discount that was amortized during the period. The amortization of the discount increases the carrying value of the bond over time until it reaches its face value at maturity.

Question 10

The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period.

Accepted Answer

The effective interest method produces a varying amount of bond interest expense each period because it applies the market rate of interest at issuance to the outstanding balance of the bond, which changes as the bond is paid down or amortizes.

Question 11

When bonds are called for retirement,any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Accepted Answer

When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a loss on the income statement, not a gain.

Question 12

The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium to the bond's face value.

Accepted Answer

This is correct. The carrying value of a bond issued at a premium is calculated by adding the unamortized premium to the bond's face value.

Question 13

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value,a loss will result.

Accepted Answer

When bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, a gain will result because the issuer is paying less than the amount recorded on their books.

Question 14

When the effective interest method of amortization is used for a bond premium,the amount of premium to be amortized for a period is calculated by subtracting the amount of bond interest expense for the period from the amount of cash to be paid for interest for the same period.

Accepted Answer

This statement is true. The effective interest method of amortization requires the premium to be amortized each period based on the difference between the cash paid for interest and the actual bond interest expense recorded in that period. This ensures that the total premium amortized over the life of the bond equals the difference between the face value and the initial selling price of the bond.

Question 15

Issuing bonds at a discount has the effect of increasing interest expense above the face amount of interest.

Accepted Answer

When bonds are issued at a discount, it means that the price of the bond is below its face value. As a result, the company will receive less cash upfront than the face value of the bond. However, the bondholders will still receive interest payments based on the face value of the bond. This creates a higher effective interest rate for the company, leading to higher interest expense than the face amount of interest.

Question 16

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Accepted Answer

The answer of A bond discount is a component of...

Question 17

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.

Accepted Answer

When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital. This is because the market value of the bonds may be higher than their par value, and the company issuing the stock can benefit from this excess value by recording it as additional paid-in capital.

Question 18

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments plus the premium.

Accepted Answer

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium, because the premium effectively reduces the cost of borrowing over the life of the bond.

Question 19

Under the effective interest method of amortizing a bond discount,the bond interest expense recorded for each period decreases over the life of the bond.

Accepted Answer

Under the effective interest method, the bond interest expense actually increases over the life of the bond because it applies a constant interest rate to the carrying amount of the bond, which increases as the discount is amortized.

Question 20

The calculation of cash for interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Accepted Answer

The calculation of cash for interest to be paid on a bond payable is determined by using the bond's stated interest rate and face value, not by any premium or discount upon issuance. The premium or discount affects the initial cost of the bond and the amortization of the premium or discount over the life of the bond, but does not impact the calculation of interest payments.

Quiz 11: Long-Term Liabilities