Question 1

Straight-line amortization of bond discount or premium:
A)Can be used for amortization of discount or premium in all cases and circumstances.
B)Provides the same amount of interest expense each period as does the effective interest method.
C)Is appropriate for deep discount bonds.
D)Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Accepted Answer

Straight-line amortization method allocates the discount or premium equally over the life of the bond, resulting in the same total amount of interest expense over the life of a bond as the effective interest method. However, it may not be appropriate for deep discount bonds as it does not reflect the time value of money accurately.

Question 2

An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest.

Accepted Answer

When long term notes are issued at a stated rate of interest that is materially different than the market rate of interest, an implicit or imputed rate of interest must be used to accurately reflect the true economic substance of the transaction. This is required by accounting standards, such as ASC 835-30 (Interest - Imputation of Interest).

Question 3

The specific provisions of a bond issue are described in a document called a bond indenture.

Accepted Answer

A bond indenture is a legal document that outlines the specifics of a bond issue, including the terms and conditions of the bond, the rights and responsibilities of the bondholders and issuer, the interest rate, and the maturity date.

Question 4

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

Accepted Answer

The answer of Periodic interest expense is the stated interest...

Question 5

Most corporate bonds are:
A)Mortgage bonds.
B)Debenture bonds.
C)Secured bonds.
D)Collateral bonds.

Accepted Answer

Most corporate bonds are debenture bonds, which means they are unsecured and not backed by specific assets. Instead, they are backed by the general creditworthiness and reputation of the issuing company.

Question 6

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?
A)$330,000.
B)$300,000.
C)$120,000.
D)$ 20,000.

Accepted Answer

The answer of During the year, Hamlet Inc. paid $20,000...

Question 7

The interest expense on an installment note decreases with each periodic payment.

Accepted Answer

As each periodic payment reduces the outstanding balance of the note, the interest expense is calculated on the reduced balance, which leads to a decrease in the interest expense over time.

Question 8

Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

Accepted Answer

Bonds will sell for a premium when the market rate of interest is lower than their stated rate. When market interest rates rise above the coupon rate of a bond, the bond will sell for a discount.

Question 9

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

Accepted Answer

The answer of Amortization of discount on bonds payable results...

Question 10

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

Accepted Answer

The answer of The initial selling price of bonds represents...

Question 11

Interest expense is:
A)The effective interest rate times the amount of the debt outstanding during the interest period.
B)The stated interest rate times the amount of the debt outstanding during the interest period.
C)The effective interest rate times the face amount of the debt.
D)The stated interest rate times the face amount of the debt.

Accepted Answer

Interest expense is the cost of borrowing money and it is calculated as the effective interest rate times the amount of the debt outstanding during the interest period. The effective interest rate takes into account not only the stated interest rate but also other costs and fees associated with borrowing money (such as origination fees, discount points, etc.). Therefore, choice A is the best answer. Choice B is incorrect because it only takes into account the stated interest rate, which may not reflect the true cost of borrowing money. Choices C and D are also incorrect because they use the face amount of the debt, which may not be the same as the amount of the debt outstanding during the interest period.

Question 12

The method used to pay interest depends on whether the bonds are:
A)Registered or coupon.
B)Mortgaged or unmortgaged.
C)Indentured or debentured.
D)Callable or redeemable.

Accepted Answer

The terms "registered" and "coupon" are used to describe different types of bonds based on how interest payments are made. Registered bonds require the investor to register with the issuer in order to receive interest payments, while coupon bonds have physical coupons attached to the bond that can be presented for payment. This distinction is important because it determines how the investor will receive their interest payments. Mortgaged vs. unmortgaged, indentured vs. debentured, and callable vs. redeemable are not relevant to the method of interest payment.

Question 13

The interest rate that is printed on the bond certificate is not referred to as the:
A)Stated rate.
B)Contract rate.
C)Nominal rate.
D)Effective rate.

Accepted Answer

The term "effective rate" refers to the actual or true rate of return earned on a bond, taking into account the compounding of interest over the bond's life. The stated rate, contract rate, and nominal rate all refer to the interest rate printed on the bond certificate, but do not necessarily reflect the actual rate of return earned by the investor.

Question 14

Bonds usually sell at their:
A)Maturity value.
B)Face value.
C)Present value.
D)Statistical expected value.

Accepted Answer

The answer of Bonds usually sell at their:
A)Maturity value.
B)Face value.
C)Present...

Question 15

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

Accepted Answer

Companies have the option to value some or all of their financial assets and liabilities at fair value, but it is not a requirement.

Question 16

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

Accepted Answer

If a company chooses to report its bonds at fair value, it must report changes in fair value in its income statement. This is due to the fair value option accounting method, which requires that changes in fair value of financial instruments be recognized in earnings.

Question 17

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

Accepted Answer

Paid-in capital is the amount of capital that is contributed by investors in exchange for stocks or shares in a company. When bonds payable are issued with detachable stock purchase warrants, investors can exercise their right to purchase additional shares at a set price, which increases the amount of capital that the company receives from investors. This additional capital is recorded as paid-in capital.

Question 18

The rate of interest that actually is incurred on a bond payable is called the:
A)Face rate.
B)Contract rate.
C)Effective rate.
D)Stated rate.

Accepted Answer

The effective rate is the actual rate of interest that is incurred on a bond payable, taking into account any additional costs or premiums associated with the bond. The face rate, contract rate, and stated rate all refer to the rate of interest stated on the bond agreement, but do not necessarily reflect the actual amount of interest paid.

Question 19

Premium on bonds payable is a contra liability account.

Accepted Answer

The answer of Premium on bonds payable is a contra...

Question 20

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized.

Accepted Answer

The answer of The carrying value of zero-coupon bonds increases...

Quiz 14: Bonds and Long-Term Notes

Straight-line amortization of bond discount or premium:

An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest.

The specific provisions of a bond issue are described in a document called a bond indenture.

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

Most corporate bonds are:

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

The interest expense on an installment note decreases with each periodic payment.

Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

Interest expense is:

The method used to pay interest depends on whether the bonds are:

The interest rate that is printed on the bond certificate is not referred to as the:

Bonds usually sell at their:

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

The rate of interest that actually is incurred on a bond payable is called the:

Premium on bonds payable is a contra liability account.

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized.