Bonds Payable IA 1 and 2 PDF

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BONDS PAYABLEEasy: A bond indenture is a. a contract between the corporation issuing the bonds and the underwriters selling the bonds b. a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf of the bondholders. c. the amount due at the maturity date of th...

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BONDS PAYABLE Easy: 1. A bond indenture is a. a contract between the corporation issuing the bonds and the underwriters selling the bonds b. a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf of the bondholders. c. the amount due at the maturity date of the bonds d. the amount for which the corporation can buy back the bonds prior to the maturity date 2. An unsecured bond is the same as a a. b. c. d.

term bond. zero coupon bond. debenture bond. bond indenture.

3. Bonds that are subject to retirement at a stated peso amount prior to maturity at the option of the issuer are called a. b. c. d.

options. early retirement bonds. Debentures callable bonds.

4. When the effective-interest method is used, the amortization of the bond premium a. has no effect on the interest expense in any period b. increases interest expense each period c. increases interest expense in some periods and decreases interest expense in other periods d. decreases interest expense each period 5. The Torrez Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017, at 97. The journal entry to record the issuance will show a a. b. c. d.

debit to Cash of P1,000,000. credit to Cash for P970,000. credit to Bonds Payable for P1,000,000. credit to Discount on Bonds Payable for P30,000.

6. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a discount.

b. at face value. c. at a premium. d. only after the stated rate of interest is increased. 7. On January 1, 2017, P1,000,000, 5-year, 10% bonds, were issued for P970,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is a. b. c. d.

P6,000 P3,000 P5,000 P5,808

8. Sinking Fund Income is reported in the income statement as a. b. c. d.

gain on sinking fund transactions other income income from operations extraordinary

9. On June 1, P400,000 of bonds were purchased as a long-term investment at 101 and P500 was paid as the brokerage commission. If the bonds bear interest at 12%, which is paid semiannually on January 1 and July 1, what is the total cost to be debited to the investment account? a. b. c. d.

401,500 400,000 403,500 404,500

10.When a corporation issues bonds, the price that buyers are willing to pay for the bonds does not depend on which of the following below a. b. c. d.

market rate of interest face value of the bonds denominations the bonds are sold periodic interest to be paid on the bonds

11.If P1,000,000 of 8% bonds are issued at 102 1/2, the amount of cash received from the sale is a. 1,080,000 b. 975,000 c. 1,000,000 d. 1,025,000 12.Debenture bonds are

a. issued on the general credit of the corporation and do not pledge specific assets as collateral. b. issued only by the federal government c. bonds secured by specific assets of the issuing corporation d. bonds that have a single maturity date 13.When the bonds are sold for more than their face value, the carrying value of the bonds is equal to a. b. c. d.

face face face face

value plus the unamortized discount value minus the unamortized premium value plus the unamortized premium value

14.The balance in Discount on Bonds Payable that is applicable to bonds due in 2020 would be reported on the balance sheet in the section entitled a. b. c. d.

intangible assets current assets long-term liabilities current liabilities

15.Bonds with a face amount P1,000,000, are sold at 97. The entry to record the issuance is a. Cash (970,000); Premium on Bonds Payable (30,000); Bonds Payable (1,000,000) b. Cash (1,000,000); Premium on Bonds Payable (30,000); Bonds Payable (970,000) c. Cash (970,000); Discount on Bonds Payable (30,000); Bonds Payable (1,000,000) d. Cash (970,000); Bonds Payable (970,000) 16.If bonds payable are not callable, the issuing corporation a. b. c. d.

must get special permission from the SEC to repurchase them is more likely to repurchase them if the interest rates increase cannot repurchase them before maturity can repurchase them in the open market

17.Bonds payable issued with scheduled maturities at various dates are called a. b. c. d.

Serial bonds Term bonds Callable bonds Convertible bond

18.If P3,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is

a. b. c. d.

3,300,000 2,910,000 3,090,000 3,000,000

19.The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the same is a. b. c. d.

debit debit debit debit

Cash, credit Premium on Bonds Payable and Bonds Payable Cash and Discount on Bonds Payable, credit Bonds Payable Bonds Payable, credit Cash Cash, credit Bonds Payable

20.The amortization of discount on bonds purchased as a long-term investment a. b. c. d.

decreases the amount of interest expense increases the amount of the investment account increases the amount of interest expense decreases the amount of the investment account

21.The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2020 should be classified on the balance sheet as a. b. c. d.

current assets intangible assets investments fixed assets

22.The balance in Premium on Bonds Payable a. should be reported in the paid-in capital section of the balance sheet b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the interest method c. would be added to the related bonds payable on the balance sheet d. should be reported on the balance sheet as a deduction from the related bonds payable 23.Sinking Fund Cash would be classified on the balance sheet as a. b. c. d.

an investment a current asset a fixed asset an intangible asset

24.If bonds are issued at a discount, it means that the a. market interest rate is lower than the contractual interest rate. b. financial strength of the issuer is suspect.

c. bondholder will receive effectively less interest than the contractual rate of interest. d. market interest rate is higher than the contractual interest rate. 25.If the market rate of interest is 10%, a P10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a. b. c. d.

less than face value. equal to the face value. that cannot be determined. greater than face value.

26.If the straight-line method of amortization of bond premium or discount is used, which of the following statements is true? a. Annual interest expense will decrease over the life of the bonds with the amortization of bond discount. b. Annual interest expense will remain the same over the life of the bonds with the amortization of bond discount. c. Annual interest expense will increase over the life of the bonds with the amortization of bond premium. d. Annual interest expense will increase over the life of the bonds with the amortization of bond discount. 27.The market interest rate related to a bond is also called the a. b. c. d.

straight-line rate contract interest rate effective interest rate stated interest rate

28.A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. b. c. d.

a bond indenture. convertible bond. trading on the equity. a bond certificate.

29.A corporation would not be successfully trading on equity if it gathered funds by a. b. c. d.

issuing common stock issuing bonds issuing notes issuing preferred stock

30.The account Investment in Bonds is reported a. at cost as a long-term asset

b. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond Investments c. at fair market value because that is all that is required d. at cost as a long-term liability along with the current portion reported as a current liability 31.The amortization of premium on bonds purchased as a long-term investment a. b. c. d.

decreases the amount of the investment account increases the amount of interest revenue increases the amount of the investment account decreases the amount of interest expense

32.Any unamortized premium should be reported on the balance sheet of the issuing corporation as a. b. c. d.

a direct deduction from the face amount of the bonds in the liability section a direct deduction from retained earnings an addition to the face amount of the bonds in the liability section as paid-in capital

33.One potential advantage of financing corporations through the use of bonds rather than common stock is a. b. c. d.

the interest expense is deductible for tax purposes by the corporation the interest on bonds must be paid when due the corporation must pay the bonds at maturity a higher earnings per share is guaranteed for existing common shareholders

34.Sinking Fund Investments would be classified on the balance sheet as a. b. c. d.

a current asset an investment a deferred debit a fixed asset

35.If P1,000,000 of 8% bonds are issued at 103, the amount of cash received from the sale is a. b. c. d.

P1,000,000 P 970,000 P1,030,000 P1,060,000

36.If bonds are initially sold at a discount and the straight line method of amortization is used, interest expense in the earlier years a. Will be less than the coupon rate of interest. b. Will be less than what it would have been had the scientific method of amortization been used

c. Will be the same as what it would have been had the scientific method of amortization been used d. Will exceed what it would have been had the scientific method of amortization been used 37.Bonds with a face value of P3 million and a stated interest rate of 12% payable semi-annually on March 1 and September 1 were purchased on August 1. The total payments for the purchase equal P3,000,000. The best explanation for the excess amount paid over face value is that a. The bonds were purchased at face value plus accrued interest b. The bonds were purchased at a premium c. No explanation is possible without knowing the maturity date of the bond issue. d. The bonds were purchased at a discount plus accrued interest 38.The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n) a. b. c. d.

sinking fund special assessments fund general fund enterprise fund

39.If you elect to not take a discount on trade credit, the effective interest rate on the funds thus obtained __________ as the time you take to pay increases a. b. c. d.

remains constant falls falls first, then rises rises

40.If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of P100,000 will be a. b. c. d.

Less than P100,000 Equal to P100,000 Greater than P100,000 Greater than or less than P100,000, depending on the maturity date of the bonds

41.The Royce Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017, at 97. The journal entry to record the issuance will show a a. b. c. d.

credit to Bonds Payable for P970,000. credit to Cash for P970,000. debit to Cash of P1,000,000. debit to Discount on Bonds Payable for P30,000.

42.Debtors are interested in the times-interest-earned ratio because they want to a. know what rate of interest the corporation is paying b. be sure their debt is backed by collateral c. have adequate protection against a potential drop in earnings jeopardizing their interest payments d. know the tax effect of lending to a corporation 43.The interest rate specified in the bond indenture is called the a. b. c. d.

effective rate discount rate contract rate market rate

44.The Tomas Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017, at 97. The journal entry to record the issuance will show a a. b. c. d.

debit to Cash for P970,000. credit to Discount on Bonds Payable for P30,000. debit to Cash of P1,000,000. credit to Bonds Payable for P970,000.

45.The balance in Discount on Bonds Payable a. would be subtracted from the related bonds payable on the balance sheet b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the interest method c. would be added to the related bonds payable to determine the carrying amount of the bonds d. should be reported on the balance sheet as an asset because it has a debit balance 46.A corporation issues for cash P14,000,000 of 8%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straightline method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest paid to bondholders remains the same over the life of the bonds. b. The carrying amount decreases from its amount at issuance date to P14,000,000 at maturity. c. The amount of annual interest expense decreases as the bonds approach maturity. d. The amount of annual interest paid to bondholders increases over the 20year life of the bonds. 47.When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are

a. b. c. d.

callable bonds convertible bonds unsecured bonds debenture bonds

48.When callable bonds are redeemed below carrying value a. b. c. d.

Retained Earnings is credited Loss on Redemption of Bonds is debited Gain on Redemption of Bonds is credited Retained Earnings is debited

49.Bonds usually sell at a discount when investors are willing to invest in the bonds a. b. c. d.

At the coupon interest rate At rate lower than the stated interest rate When the need arises. At rate higher than the stated interest rate

50.On June 1, P400,000 of bonds were purchased as a long-term investment at 97 and P500 was paid as the brokerage commission. If the bonds bear interest at 12%, which is paid semiannually on January 1 and July 1, what is the total cost to be debited to the investment account? a. b. c. d.

400,000 388,000 388,500 400,500

51.A corporation issues for cash P1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of the annual interest expense gradually decreases over the life of the bonds. b. The amount of unamortized premium decreases from its balance at issuance date to a zero balance at maturity. c. The amount of the annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. d. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity. 52.When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at a. their face value b. their maturity value

c. a premium d. a discount 53.If bonds are issued at a premium, the stated interest rate is a. b. c. d.

lower than the market rate of interest. higher than the market rate of interest. adjusted to a higher rate of interest. too low to attract investors.

54.A long-term investment in debt securities is carried at a. b. c. d.

equity market lower of cost or market cost

55.On July 1, 2013, Rex Company purchased as a long-term investment P5,000,000 face value, 8% bonds for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on January 1 and July 1. On December 31, 2013, what amount should be reported as accrued interest receivable? a. 230,750 b. 0 c. 200,000 d. 400,000 SOLUTION: 5,000,000 x 8% x 6/12= 200,000 56.When the maturities of a bond issue are spread over several dates, the bonds are called a. b. c. d.

debenture bonds bearer bonds serial bonds term bonds

57.Sinking Fund Cash would be classified on the balance sheet as a. b. c. d.

a fixed asset an intangible asset an investment a current asset

Average: 58.Bonds that are secured by investment in equity securities are called

a. b. c. d.

Term bonds Collateral trust bonds Debenture bonds Commodity-backed bonds

59.The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be a. b. c. d.

debit debit debit debit

Cash and Discount on Bonds Payable, credit Bonds Payable Cash, credit Premium on Bonds Payable and Bonds Payable Bonds Payable, credit Cash Cash, credit Bonds Payable

60.Long-term debt that matures within one year and is to be converted into stock should be reported a. as noncurrent b. in a special section between liabilities and stockholders’ equity c. as noncurrent and accompanied with a note explaining the method to be used in its liquidation d. as a current liability 61.The present value of P40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest peso) a. 40,000 b. 2,400 c. 42,400 d. 37,736 62.Cedric Company issues P10,000,000 face value of bonds at 96 on January 1, 2009. The bonds are dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2012, P6,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2012? a. b. c. d.

P453,333 P360,000 P272,000 P600,000

loss loss loss loss

SOLUTION: {P9,600,000 + [P400,000 × (3 2/3 ÷ 10)]} × .60 = P5,848,000 P6,120,000 P5,848,000 = P272,000 63.The Saymore Company issued 10-year bonds on January 1, 2017. The 6% bonds have a face value of P800,000 and pay interest every January 1 and July 1. The

bonds were sold for P690,960 based on the market interest rate of 8%. Saymore uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2017, Saymore should record interest expense (round to the nearest peso) of a. b. c. d.

55,277 24,000 27,638 48,000

64.On July 1, 2010, Joven Co. issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable semiannually on April 1 and October 1. What amount did Joven receive from the bond issuance? a. 965,000 b. 1,000,000 c. 1,015,000 d. 990,000 SOLUTION: (P1,000,000 × .99) + (P1,000,000 × .10 × 3/12) = P1,015,000 65.An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the failure to record premium amortization on interest expense and bond carrying value, respectively? a. b. c. d.

Understate and overstate Overstate and understate Understate and understate Overstate and overstate

66.The 10% bonds payable of Francis Company had a net carrying amount of P5,700,000 on December 31, 2012. The bonds, which had a face value of P6,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 1, 2013, s...