The issuance price of a bond is the discounted present value of both the principal plus the cash interest to be received over the life of the bonds discounted by the stated or coupon rat
Trang 1True / False Questions
Trang 25 The issuance price of a bond is the discounted present value of both the principal plus the cash interest to be received over the life of the bonds discounted by the stated or coupon rate
Trang 39 Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved
10 If a bond is issued at a discount or premium, the amount of annual cash interest paid will
be different than the amount paid by a bond issued at par
11 The end of period adjusting entry required for a bond issued at a premium includes a debit
to the account, Premium on Bonds Payable
Trang 413 For the bondholder (investor), amortization of a bond premium each interest period will increase the reported amount of interest revenue
15 Companies which are investing heavily in fixed assets and acquiring other companies tend
to use more debt financing
Trang 517 If a company repurchases $1,000,000 of their bonds for $1,020,000 when their book value
is $950,000, then they will generate a loss of $20,000
Trang 6Multiple Choice Questions
21 When a company prepares a bond indenture, certain provisions of the bonds are included Which of the following is/are not specified in the indenture?
A Dates of each interest payments
B Rate of interest to be paid
Trang 724 Which of the following is not a reason that a corporation would want to issue bonds instead of stock?
A Interest payments can be deducted for income tax purposes
B Stockholders maintain control
C The impact on earnings may be positive
D There is less cash outflow resulting from bonds
Trang 827 Bonds usually are issued to obtain cash for the purpose of
A meeting working capital needs
B investing in short-term marketable securities
28 Callable bonds may be
A turned in for early retirement at the option of the bondholder
B converted to common stock at the option of the bondholder
C called for early retirement at the option of the issuer
D converted to registered bonds at the option of the company president
AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1
29 Which of the following is a disadvantage to the corporation issuing bonds?
A The required interest payment due at maturity
B The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity
C The large principal payment due at maturity
D The required dividend payments to bondholders each period
Trang 930 Which of the following is an advantage of issuing bonds versus issuing stock to finance expansion?
A Stockholders remain in control as bondholders cannot vote or share in the company's earnings
B Interest expense is tax deductible but dividends are not
C Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets
D All answers are advantages
32 Which of the following statements is true?
A Unsecured debt has a preferential claim against the liquidation of assets in relationship to other creditor claims
B Convertible bonds may be retired before maturity at the option of the issuer
C Junk bonds are those with a low rating and because their rating is below investment grade
level, they are considered high risk
D Secured debt does not have a preferential claim against the liquidation of assets in
relationship to other creditor claims
Trang 1033 Which of the following statements is false?
A Because junk bonds are higher risk than higher rated investment grade bonds, many banks, mutual funds and trusts are not allowed to invest in them
B Callable bonds can be retired before maturity at the option of the bondholder for a
predetermined cash call price
C A debenture bond is one that is not secured by specific assets of the company
D A debenture bond is also known as an unsecured bond
A Their increasing ratio indicates decreasing levels of debt on which interest is incurred
B Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments
C The higher ratio was adversely affected by the net loss they reported in 2007
D Their increasing ratio would be considered by creditors to be an indicator of higher risk
AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2
35 Which of the following is true?
A A higher times interest earned ratio could indicate a growing company
B A lower times interest earned ratio is desired by creditors
C A more important indicator that a company is able to meet its debt obligations would be
the sufficiency of its cash flow from operating activities
D A more important indicator that a company is able to meet its debt obligations would be the sufficiency of the current ratio
Trang 1136 In 2009, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million In 2008, they reported net income of
$3,568 million, interest expense of $163 million and income tax expense of $1,424 million Calculate the times interest earned ratio for 2009and 2008 respectively
A NTV and Home Movie Channel have more than adequate ratios demonstrating their ability
to cover interest charges with their earnings levels
B Home Movie Channel's ratio is significantly higher than NTV's ratio
C Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion
D All statements are true
Trang 1239 On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds at 97 The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1 The amount of discount amortization at each semi-annual interest date would be (assume straight-line amortization):
Trang 1342 Moore Company issued $100 million of fixed interest rate bonds payable at $98 million
At year-end, the bonds were selling in the bond market at $98 million What entry would Moore Company make at year-end to record the change in selling price?
A Debit Bonds Payable $3 million; credit Interest Expense $3 million
B Debit Interest Expense $3 million; credit Bonds Payable $3 million
C Debit Investment in Bonds $3 million; credit Investment Revenue $3 million
B increases each year
C decreases each year
D changes from year to year depending upon the market rate of interest each year
Trang 1445 On January 1, 2009, Dorley Corporation issued $1 million of bonds for $1,073,613 when the market rate of interest was 6% They are 10-year bonds paying 8% interest annually If Dorley Corporation is using the straight-line amortization method, interest expense on
47 If a bond is issued at 98, its stated rate of interest would be
A higher than the market rate
B lower than the market rate
C equal to the market rate
D unrelated to the market rate
Trang 1548 On January 1, 2009, Tonika Corporation issued a four-year, $10,000, 7% bond The interest is payable annually each December 31 The issue price was $9,668 based on an 8% effective interest rate Assuming effective-interest amortization is used, the interest expense
on the income statement for the year ended December 31, 2009 would be (to the nearest dollar)
49 When a bond investment is issued at a discount, subsequent amortization of the discount
A increases interest expense
B decreases interest expense
C has no effect upon interest expense
D decreases interest in the bond
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3
50 Which of the following is true when using the effective interest amortization method when
a bond has been issued at a discount?
A Interest expense is computed by adding the portion of amortized discount to the cash interest paid
B The amount of interest expense recognized each period increases over time
C The amount of discount amortized each period decreases over time
D All of the answers are true
Trang 1651 Of the following statements, which is false regarding the effective-interest method of amortization?
A The amount of interest expense is different each period
B The amount of discount or premium that is amortized is the same each period
C The amount of cash interest paid is constant each period
D None of the other answers are false
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3; 4
52 Which of the following statements is true?
A Bonds are always issued at their par value
B Bonds issued at more than par value are said to be issued at a discount
C Once bonds are issued; the bonds will trade in the bond market above or below par
depending on changes in interest rates
D Bondholders must hold their bonds to maturity to receive cash for their investment
A The bonds were issued at a premium
B Annual interest expense will exceed the company's actual cash payments for interest
C Annual interest expense will be $500,000
D Eaton Company cannot issue bonds if the market rate is higher than the stated rate
Trang 1754 On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually The following present value factors have been provided to answer the subsequent questions:
Calculate the issuance price if the market rate of interest is 8%
Trang 1856 On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually The following present value factors have been provided to answer the subsequent questions:
Trang 1958 On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually The following present value factors have been provided to answer the subsequent questions:
If Jason issued the bonds for $5,325,000, the amount of interest expense on December 31,
2009 under the straight-line amortization method equals
Trang 2060 Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2009 On December 31, 2009 the bonds were trading on the bond exchange at 102½ Since the issue date, the market rate of interest on similar risk bonds has
A Increased
B Decreased
C Stayed the same
D None of the other answers is correct
Trang 2163 Straight-line amortization of a premium related to a bond issuance would
A require interest expense be calculated by multiplying the market interest rate times the book value of the bonds
B lead to higher premium amortization in the early years and lower interest expense over the life of the bonds
C require computing the constant amount of premium to be amortized and then deducting it
from cash interest to calculate interest expense
D require interest expense be calculated by multiplying the market interest rate times the book value of the bonds and lead to higher premium amortization in the early years and lower interest expense over the life of the bonds
AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4
64 The amortization of bond premium by the issuer will
A increase interest expense
B decrease interest expense
C have no effect on interest expense
D determine the cash paid for interest
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4
65 On December 31, 2009, Roberts Company issued $100,000, ten-year, 8% bonds for
$104,500 The bonds were dated January 1, 2009, and interest is payable annually on
December 31 Roberts Company uses the straight-line amortization method Roberts
Company should report the book value, or carrying value, for the bonds on the December 31,
Trang 2266 If a bond is issued at 101, the stated rate of interest was
A higher than market rate
B lower than market rate
C equal to market rate
D not related to market rate
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4
67 Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2009, for $102,360
on April 1, 2009 The bonds pay interest annually on April 1 Straight-line amortization is used by the company What entry is needed at April 1, 2010 for the first interest payment?
Trang 2368 In 2009, Tommy's Toys had total liabilities of $5,443 million and total assets of $9,768 million In 2008, their total liabilities were $6,291 million and total assets were $10,265 million Which of the following statements is true?
A The company had a decrease in their debt to equity ratio from 2008 to 2009
B The company had more creditor financing versus stockholder equity financing in 2009
C Their debt to equity ratio in 2009 means they have less than half their financing provided
A General Tech has a larger portion of its assets financed by equity than American Bio does
B When compared to General Tech, American Bio's use of more debt funding increases
financial risk and causes their stockholders to have a lower return on equity when return on assets exceeds the after-tax interest rate
C General Tech's ratio implies that less than 20% of its assets are financed by equity
D American Bio's ratio implies that less than 25% of its assets are financed by equity
AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 5
70 In 2008, The Mickey Co had total liabilities of $20,645 million and total assets of
$43,699 million In 2007, they had total liabilities of $20,918 million and total assets of
$45,027 million Calculate their debt to equity ratio for 2008 and 2007 respectively
Trang 2471 In 2010, Western Wear Inc reported total liabilities of $382 million and total
stockholders' equity of $1,967 million In 2009, their total liabilities were $343 million and total stockholders' equity was $1,900 million Which statement about their debt to equity position is true?
A While their debt level increased, their debt to equity ratio decreased slightly
B Western Wear Inc has a very low debt to equity ratio
C Stockholders' equity increased at a faster rate than the rate of increase in liabilities
D All answers are true
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5
72 If a company retires bonds payable early by purchasing the bonds in the open market,
A any gain or loss would be reported in the income statement as an extraordinary item
B the amount paid would always equal the par value
C any unamortized premium or discount would be reclassified to stockholders' equity as contributed capital
D the gain or loss would be presented in the asset section of the balance sheet
in 2006 Which statement is correct?
A Cash of $100,000 will be paid to the bondholders
B A gain of $2,500 will be reported in the income statement
C A loss of $2,500 will be reported in the income statement
D A loss of $2,500 will be reported as a separate component of stockholder's equity in the balance sheet
Trang 2574 On the maturity date of bonds payable after interest has been paid, the issuing company will
A record a loss if the market rate of interest on the maturity date exceeds the stated rate of interest
B pay bondholders the original amount the bondholders paid to purchase the bonds
C debit Bonds Payable and credit Cash for the par value of the bonds
D debit Cash and credit Bonds Payable for the carrying amount of the bonds
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6
75 Which of the following is true?
A Bonds can be retired early through calling them or repurchasing them in the market
B Early retirement of bonds will always be at face value as any premium or discount would have been amortized
C Bondholders cannot sell their bonds prior to maturity
D When interest rates rise, bond prices also rise