Question 1

Premium on Bonds Payable is an adjunct liability account.

Accepted Answer

Premium on Bonds Payable is typically recorded as an adjunct liability account on the balance sheet, representing the amount paid above the face value of the bonds. This account is added to the bonds payable account to determine the total carrying value of the bonds.

Question 2

A contract pledging title to assets as security for a note or bond is known as a(an):
A)Sinking fund.
B)Mortgage.
C)Equity.
D)Lease.
E)Indenture.

Accepted Answer

A mortgage is a legal contract in which a borrower pledges real property as collateral to secure a loan or bond. The lender then holds the title to the property until the debt is fully paid off. This provides security for the lender in case the borrower defaults on the loan.

Question 3

Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:
A)Registered bonds.
B)Bearer bonds.
C)Callable bonds.
D)Sinking fund bonds.
E)Serial bonds.

Accepted Answer

Serial bonds are bonds that mature at different dates, resulting in repayment of the principal over a number of periods. This is in contrast to term bonds, which have a single maturity date where the principal is repaid.

Question 4

Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:
A)Coupon bonds.
B)Callable bonds.
C)Serial bonds.
D)Convertible bonds.
E)Registered bonds.

Accepted Answer

Coupon bonds have physical coupons attached to their certificates, which the bondholders can present to a bank or broker for collection of interest payments. The other options do not involve physical coupons. Callable bonds can be redeemed by the issuer before maturity, serial bonds mature in installments, convertible bonds can be converted into a predetermined number of shares, and registered bonds are registered in the owner's name with the issuer.

Question 5

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Accepted Answer

This is correct. Installment payments are typically made up of both accrued interest and a portion of the principal amount borrowed, allowing for the total loan balance to be gradually paid down over time.

Question 6

The carrying value of a long-term note payable is computed as:
A)The future value of all remaining payments, using the market rate of interest.
B)The face value of the long-term note less the total of all future interest payments.
C)The present value of all remaining payments, discounted using the market rate of interest at the time of issuance.
D)The present value of all remaining interest payments, discounted using the note's rate of interest.
E)The face value of the long-term note plus the total of all future interest payments.

Accepted Answer

The carrying value of a long-term note payable is the present value of all remaining payments, discounted using the market rate of interest at the time of issuance. This represents the value of the note on the balance sheet at a particular point in time.

Question 7

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Accepted Answer

The answer of The effective interest method assigns a bond...

Question 8

Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

Accepted Answer

This statement is true. A company may choose to exercise a call option on its bonds in order to retire them before maturity. Additionally, the company may choose to purchase the bonds on the open market in order to retire them early.

Question 9

Sinking fund bonds:
A)Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
B)Require equal payments of both principal and interest over the life of the bond issue.
C)Decline in value over time.
D)Are registered bonds.
E)Are bearer bonds.

Accepted Answer

Sinking fund bonds require the issuer to set aside assets at specified amounts to retire the bonds at maturity. This helps ensure that the issuer has the necessary funds to pay back the bondholders when the bonds reach maturity.

Question 10

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

Accepted Answer

The issue price of bonds is found by computing the present value of the bond's cash payments, discounted at the market rate of interest.

Question 11

The carrying value of bonds at maturity always equals:
A)the amount of cash originally received in exchange for the bonds.
B)the par value of the bond.
C)the amount of discount or premium.
D)the amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.
E)$0.

Accepted Answer

The carrying value of bonds at maturity is equal to their par value, which is established when the bonds are issued and does not change throughout the life of the bond. Therefore, the carrying value of bonds at maturity always equals the par value of the bond.

Question 12

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accrued since the most recent interest payment.

Accepted Answer

An adjusting entry is necessary to recognize bond interest expense accrued since the most recent interest payment if the bond's interest period does not coincide with the issuing company's accounting period.

Question 13

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:
A)Convertible bonds.
B)Sinking fund bonds.
C)Callable bonds.
D)Serial bonds.
E)Junk bonds.

Accepted Answer

Callable bonds give the issuer the option to retire the bond before maturity by paying a stated dollar amount, which gives them flexibility in managing their debt. Convertible bonds can be exchanged for a specified number of shares of the issuer's common stock. Sinking fund bonds require the issuer to set aside funds each year to retire a portion of the bonds before maturity. Serial bonds are issued with different maturity dates and are retired in installments. Junk bonds are high-yield, high-risk bonds typically issued by companies with a lower credit rating.

Question 14

Secured bonds:
A)Are called debentures.
B)Have specific assets of the issuing company pledged as collateral.
C)Are backed by the issuer's bank.
D)Are subordinated to those of other unsecured liabilities.
E)Are the same as sinking fund bonds.

Accepted Answer

Secured bonds have specific assets of the issuing company pledged as collateral, which distinguishes them from debentures (unsecured bonds). Secured bonds are not backed by the issuer's bank and are not necessarily subordinated to other unsecured liabilities. Sinking fund bonds are a type of bond that require the issuer to deposit money into a sinking fund to redeem the bonds at maturity, which is a different feature than being secured or unsecured.

Question 15

A bond traded at 102½ means that:
A)The bond pays 2.5% interest.
B)The bond traded at 102.5% of its par value.
C)The market rate of interest is 2.5%.
D)The bonds were retired at $1,025 each.
E)The market rate of interest is 2½% above the contract rate.

Accepted Answer

When a bond is traded at 102½, it means that it is being traded at 102.5% of its par value. Par value is typically $1,000, so a bond traded at 102½ would cost $1,025.

Question 16

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n):
A)Debenture.
B)Bond indenture.
C)Mortgage.
D)Installment note.
E)Mortgage contract.

Accepted Answer

The bond indenture is the contract that outlines the terms and conditions of the bond issue, including the rights and obligations of both the issuer and the bondholders. Debenture refers to a type of bond that is unsecured, while a mortgage contract is specific to a loan secured by real estate. An installment note refers to a loan with regular payments over a set period of time.

Question 17

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:
A)Callable bonds.
B)Serial bonds.
C)Registered bonds.
D)Coupon bonds.
E)Bearer bonds.

Accepted Answer

Registered bonds have the names and addresses of the bondholders recorded by the issuing company, and interest payments are made directly to the bondholders via checks or cash transfers. Callable bonds can be redeemed by the issuing company before maturity, serial bonds have varying maturity dates, coupon bonds have physical coupons that must be presented for interest payments, and bearer bonds do not have the bondholder's information recorded and can be transferred by physical possession.

Question 18

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:
A)Debentures.
B)Discounted notes.
C)Installment notes.
D)Indentures.
E)Investment notes.

Accepted Answer

Installment notes require the issuer to make a series of payments that include both interest and principal. Debentures are unsecured debt securities, discounted notes are sold at a price lower than their face value, indentures are legal agreements between the issuer and the holder of the debt, and investment notes is not a commonly used term in finance.

Question 19

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

Accepted Answer

The answer of The equal total payments pattern for installment...

Question 20

When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

Accepted Answer

This is true. When convertible bonds are converted to stock, no gain or loss is recorded and the carrying value of the bonds is transferred to equity accounts.

Quiz 10: Reporting and Analyzing Long-Term Liabilities

Premium on Bonds Payable is an adjunct liability account.

A contract pledging title to assets as security for a note or bond is known as a(an) :

Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:

Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

The carrying value of a long-term note payable is computed as:

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.

Sinking fund bonds:

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

The carrying value of bonds at maturity always equals:

If a bond's interest period does not coincide with the issuing company's accounting period, an adjusting entry is necessary to recognize bond interest expense accrued since the most recent interest payment.

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

Secured bonds:

A bond traded at 102½ means that:

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n) :

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.