Question 1

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 2

Which of the following is not a disadvantage of raising capital through the issue of bonds payable?

Accepted Answer

All of the other options are disadvantages of raising capital through the issue of bonds payable. However, the fact that interest is deductible for income tax purposes is an advantage as it reduces the firm's tax liability.

Question 3

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 are issued in the name of the bondholder and ownership information is recorded in a ledger maintained by the corporation. This allows the corporation to track who owns the bonds and who is entitled to receive interest payments. Coupon bonds and bearer bonds do not require ownership information to be recorded in a ledger, and unregistered bonds may or may not have such information recorded.

Question 4

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

Accepted Answer

Leveraging involves using borrowed funds to increase investment returns. The idea is that the return on the investment should be greater than the interest paid on the debt, resulting in a profit.

Question 5

A bond sinking fund investment is started on January 5, 2013, by transferring $12,000 in cash to the fund. This $12,000 is invested and earns $1,500 during 2013. On January 5, 2014, 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 6

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

Accepted Answer

The answer of If a bond is a registered bond,...

Question 7

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

Accepted Answer

The answer of Bonds with a face value of $400,000...

Question 8

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

Accepted Answer

The answer of Bonds with a face value of $400,000...

Question 9

Bonds issued at a premium are

Accepted Answer

Bonds issued at a premium are sold for more than their face value. This occurs when the coupon rate on the bond is higher than the prevailing market interest rates. The additional amount paid by investors is the premium and it represents the difference between the face value of the bond and its selling price.

Question 10

Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a debit to the Cash account for

Accepted Answer

The bond was issued at 103, which means the company received $103 for every $100 face value of bonds. Therefore, the cash received from the issuance of the bonds is calculated as $103 x $200,000 = $206,000. So, the entry to record the issuance will include a debit to the Cash account for $206,000.

Question 11

When bonds are issued at a premium, the bond premium

Accepted Answer

When bonds are issued at a premium, it means that the market interest rate is lower than the bonds' stated interest rate, and therefore, investors are willing to pay more than the face value of the bond. This excess amount paid is called the premium. The premium is amortized over the life of the bonds, reducing the amount of interest expense over the life of the bonds. As a result, the net cost of borrowing (interest expense less the premium amortization) is reduced.

Question 12

Bonds with a face value of $200,000 were issued at 103. The entry to record the issuance will include a credit to the Bonds Payable account for

Accepted Answer

The answer of Bonds with a face value of $200,000...

Question 13

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

Accepted Answer

When bonds are issued at face value, there is no premium or discount, so the full value of the bonds is recorded as a liability. Therefore, the entry includes a credit to Bond Payable. There is no need for a debit to Bond Interest Expense or a credit to Bond Interest Payable until interest payments are due in the future.

Question 14

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

Bonds that can be redeemed by the issuer before the maturity date are called callable bonds. The issuer has the right to "call" the bond, meaning they can require the bondholders to surrender the bonds for payment before the maturity date. This benefits the issuer if interest rates have declined since the bonds were issued, allowing them to issue new bonds at a lower interest rate and save money on interest payments. It is important for investors to be aware of whether a bond is callable, as it can affect the potential return on investment.

Question 15

On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 103. If the firm uses the straight-line method of amortization, interest expense for 2014 will be reported at

Accepted Answer

The answer of On December 31, 2013, a corporation issued...

Question 16

Corporations with many bondholders will open a separate checking account because

Accepted Answer

Opening a separate checking account makes it easier to do the bookkeeping on the bond interest, as the corporation can keep track of the interest payments made to each bondholder.

Question 17

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

Accepted Answer

In the interest formula I = Prt, the P stands for Principal, which is the initial amount of money borrowed or invested.

Question 18

A bond sinking fund investment is started on January 5, 2013, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2013. The entry to record the earnings made on the sinking fund investment includes

Accepted Answer

The earnings from the sinking fund investment should be recorded as an increase in the investment account and recognized as income, hence a debit to Bond Sinking Fund Investment and a credit to Income from Sinking Fund Investment.

Question 19

The Premium on Bonds Payable account is shown

Accepted Answer

Premium on Bonds Payable represents the amount by which a company's bonds have been issued above their face value. It is classified as a Long-Term Liability because the premium is typically amortized over the life of the bond.

Question 20

The entry to record the adjustment for accrued bond interest includes

Accepted Answer

When a company issues bonds, it promises to pay interest to bondholders. This interest is accrued over time and is recorded in the Bond Interest Payable account. At the end of an accounting period (such as a month or a year), the company needs to adjust the Bond Interest Payable account to reflect the accrued interest. This adjustment involves debiting the Bond Interest Expense account and crediting the Bond Interest Payable account. Therefore, the best choice is (B) a debit to Bond Interest Expense and a credit to Bond Interest Payable.

Quiz 22: Long-Term Bonds