Bonds

Question 1

True or False:
When extinguishing debt, if the net carrying amount is greater than the reacquisition price, the difference is recorded as a gain.

Answer 1

True

Question 2

True or False:
Long term debts are usually issued with debt covenant to protect the issuing company’s stockholders.

Answer 2

False
These protect the lenders

Question 3

True or False:
A commodity backed bond is a debt security that the payment of its principal and interests is tied to the price of an underlying commodity such as oil, metal, etc.

Answer 3

True

Question 4

True or False:
The interest rate on revenue bonds depends on the revenue generated by the bonds’ issuing company.

Answer 4

False
Revenue bonds are usually governmental and have interest derived from specified revenue sources.

Question 5

True or False:
Bonds are debt securities issued to raise funds from the public or institutional investors, typically with a long term maturity.

Answer 5

True

Question 6

True or False:
When purchasing bonds between interest dates, the investor pays the interest accrued for the period from the original issuance date of the bonds till the purchase date.

Answer 6

False
When bonds are issued between interest dates, the debtor usually collects from the investor the interest accrued from the last interest payment date to the purchase date. Then, at the next interest payment date, the debtor pays the investor interest for the entire interest period, for example for a period of six months, assuming the bonds are paying semi-annual interests.

Question 7

True or False:
The stated rate of interest on bonds is often referred to as the contractual interest rate. This rate is set by the issuer of the bonds and is used to compute the actual interest payments.

Answer 7

True

Question 8

True or False:
When the effective rate is higher than the coupon rate, the bond is issued at a premium.

Answer 8

False
This means it is issued at a discount.

Question 9

True or False:
The bond discount arises from the issuance of a bond at a price lower than its face value. It should be reported on the balance sheet as a direct deduction from the bond’s face value.

Answer 9

True

Question 10

True or False:
In each reporting period, the amount of interest expense reported on the income statement is increased by the amortization of the bond discount during that period.

Answer 10

True

Question 11

True or False:
​When using the effective interest method, the amount of interest expense to be reported on the income statement is calculated by multiplying the initial carrying value of the bond, at the issuance date, times the effective interest rate.

Answer 11

False
When using the effective interest method, the amount of interest expense to be reported on the income statement is computed at the end of each interest period, by multiplying the effective interest rate by the carrying value of the bond for that period.

Question 12

Which of the following statements about debenture bonds is correct?

a. Debenture bonds are unsecured
b. Bonds that mature in installments are called “debenture bonds”.
c. Debenture bonds are secured by the common stock of other companies operating in the same industry as the issuing company
d. Debenture bonds give their holder the right to convert them into other securities within a specific period of time

Answer 12

a. Debenture bonds are unsecured

Question 13

​Which of the following types of bonds pay interest only if the issuing company is making profits?

Serial bonds
Revenue bonds
Income bonds
Debenture bonds

Answer 13

Income bonds

Question 14

​When bonds are secured by bonds or stock of other corporations, they are referred to as:

Debenture bonds
Collateral trust bonds
Revenue bonds
Treasure bonds

Answer 14

Collateral trust bonds

Question 15

​When a bond is issued at a discount,

The actual interest rate earned by the bondholder is higher than the interest rate stated on the bond
The actual interest rate earned by the bondholder is lower than the interest rate stated on the bond
The actual interest rate earned by the bondholder is equal to the interest rate stated on the bond
The actual interest rate earned by the bondholder is either lower than or equal to, the interest rate stated on the bond

Answer 15

The actual interest rate earned by the bondholder is higher than the interest rate stated on the bond

Question 16

​On April 1, year 2, company A issued bonds at $406,000. The face value of these bonds is $400,000, and they pay semi-annual interest, each February 1 and August 1, at a rate of 9 percent. Which of the following statements best explain why the issuance price of these bonds exceeded their face amount?

These bonds were sold at a premium
These bonds were sold at par plus accrued interest
The interest rate on these bonds is higher than the market rate
The interest rate on these bonds is lower than the market rate

Answer 16

These bonds were sold at par plus accrued interest

Question 17

​Company B issued a bond at a premium and used the effective interest method of amortization. The following statement about the interest expenses reported by company B is correct:

During the first year of the bond’s life, the interest expense reported by company B was greater than what would have been reported, had the company used the straight-line method of amortization
During the first year of the bond’s life, the interest expense reported by company B was lower than what would have been reported, had the company used the straight-line method of amortization
During the first year of the bond’s life, the interest expense reported by company B was equal to what would have been reported, had the company used the straight-line method of amortization
During the first year of the bond’s life, the interest expense reported by company B was equal to the interest payment made to the bondholders.

Answer 17

During the first year of the bond’s life, the interest expense reported by company B was greater than what would have been reported, had the company used the straight-line method of amortization

Question 18

​On November 1, year 1, Glam company sold 5-year bonds, issued on February 1, year 1. These bonds pay semiannual interest each February 1 and August 1, at a rate of 8%. What is the number of months for which the bondholder pays accrued interest, and the number of months over which any bond premium is amortized?

3 months of accrued interest and 60 months of amortization
10 months of accrued interest and 51 months of amortization
3 months of accrued interest and 51 months of amortization
10 months of accrued interest and 60 months of amortization

Answer 18

3 months of accrued interest and 51 months of amortization

Question 19

​How is the bond premium reported in the balance sheet?

The bond premium is reported as an addition to the face value of the bond
The bond premium is reported as a credit to a revenue account
The bond premium is reported as a deferred credit
The bond premium is reported in the same account with other premiums or discounts

Answer 19

The bond premium is reported as an addition to the face value of the bond

Question 20

On March 1, year 1, Sienna corporation issued 4%, 5-year bonds, at 105. These bonds have a face value of $500,000 and pay semi-annual interest on March 1 and September 1. Sienna Corporation uses the straight-line amortization method to amortize bonds discounts or premiums, if any. What would the journal entry prepared to record the bond issuance include?

A debit to cash for $500,000
A credit to Bonds payable for $525,000
A credit to bonds premium for $25,000
A debit to bonds discount for $25,000

Answer 20

A credit to bonds premium for $25,000

Question 21

On March 1, year 1, Sienna corporation issued 4%, 4-year bonds, at 105. These bonds have a face value of $500,000 and pay semi-annual interest on March 1 and September 1. Sienna Corporation uses the straight-line amortization method to amortize bonds discounts or premiums, if any. What is the amount of interest expense that would be reported on the income statement of Sienna corporation for year 1?

$16,667
$11,459
$13,750
$14,792

Answer 21

$11,459

Question 22

The following statement about bonds issued with discounts or premiums is correct:

A bond issuer has an advantage when the bond is issued at a discount because the interest payments would be based on a carrying value that is lower than the face value
Bonds discounts and premiums arise from the difference between the effective interest rate and the market interest rate
A bonds discount represents a loss for the bondholder and a bond premium represents a gain for the bond issuer
Ignoring issuance costs, when bonds are issued at a premium, the sum of the bond’s maturity value and interest payments exceeds the seller’s net cash outflow

Answer 22

Ignoring issuance costs, when bonds are issued at a premium, the sum of the bond’s maturity value and interest payments exceeds the seller’s net cash outflow

Question 23

When bonds remain outstanding until their maturity date, bonds’ issuance costs as well as bond’s premium or discount, if any, would be:

written off at the maturity date to a bond retirement account
fully amortized because the bond’s life coincides with the period over which these items are amortized
used to compute any gain or loss realized at the bond’s maturity date
reported as a net deduction or a net addition to the carrying value of the bond

Answer 23

fully amortized because the bond’s life coincides with the period over which these items are amortized

Question 24

How should a company account for the difference between the reacquisition price of outstanding debt and its net carrying amount on the books when the debt is extinguished before its maturity date through a refunding transaction?

Amortize the difference over the remaining original life of the extinguished debt.
Amortize the difference over the term of the new debt.
Recognize the entire difference immediately in earnings as a gain or loss.
Amortize the difference over the remaining life of the old debt or the term of the new debt, whichever is shorter.

Answer 24

Recognize the entire difference immediately in earnings as a gain or loss.

Question 25

Which statement accurately describes a bond’s sinking fund? A bond-sinking fund can be used to ensure that funds are available to redeem or retire the bond when it matures. A bond-sinking fund can be a means of reducing the risk associated with defaulting on bond payments, making it an important financial safeguard. A bond-sinking fund is an investment made by a corporation that is restricted for the purpose of retiring its bonds payable. All of the above.

Answer 25

All of the above.

Question 26

Patch Corp. issued $200,000 worth of 5% bonds on July 1, Year 10, with a maturity date of June 30, Year 20. These bonds were sold for $185,500 to provide a 7% yield and interest payments were made annually on June 30. Patch Corp. employs the effective interest method to gradually amortize the discount. As of December 31, Year 10, what is the carrying value of Patch Corp.’s bonds? (round to the nearest number) $185,500 $186,993 $189,328 $200,000

Answer 26

$186,993

Question 27

Mega Corp issued 10-year bonds at 103 with a $500,000 face value and semiannual interest payments at a 5% stated interest rate. The initial journal entry to record the bond issuance by Mega Corp should include a: Debit to Cash for $500,000 Credit to Bonds Payable for $515,000 Credit to Bond Premium for $15,000 Credit to Bond Premium for $25,000

Answer 27

Credit to Bond Premium for $15,000

Question 28

On July 1, Year 1, Dun Corp. sold to Bee Corp. 100 of its $1,000 bonds at 97 in addition to accrued interest. The bonds have a stated interest of 5% and a maturity date of June 1, Year 10. Assuming that the interest is paid semiannually on June 1 and December 1, how much did Dun Corp. receive from the issuance of the bonds? $100,000 $99,500 $97,417 $97,000

Answer 28

$97,417

Question 29

Alex Corp. issued bonds on January 2, Year 10, with a 7% interest rate and a $500,000 face value, maturing on January 2, Year 17. These bonds make semiannual interest payments on June 30 and December 31. They were issued when the market interest rate was 10%, which resulted in a bond discount. If Alex employs the effective interest method for discount amortization, the calculation for the interest expense on the first interest payment date, June 30, Year 1, would be as follows: The face value of the bond multiplied by the stated interest rate. The face value of the bond multiplied by the market interest rate. The carrying amount of the bond multiplied by the market interest rate. The difference between the cash received and the face value.

Answer 29

The carrying amount of the bond multiplied by the market interest rate.

Question 30

When considering a $500 bond with a 10-year maturity, issued at a price of 101 on January 1, Year 11, and making semiannual interest payments on June 30 and December 31, the 6% stated interest rate should be used to compute: The yield to maturity. The bond's present value. The amount of interest payment. The bond's book value.

Answer 30

The amount of interest payment.

Question 31

Mega Corp issued 10-year bonds at 103 with a $500,000 maturity value and semiannual interest payments at a 5% stated interest rate. In which of the following ways would the amortization of the bond premium affect the financial statements? The interest expense would be greater than the interest paid. The carrying value of the bond would decrease each period until it reaches the fair value. The cash paid for interest would be greater than the interest expense on the income statement. The carrying value of the bond would increase each period until it reaches the face value.

Answer 31

The cash paid for interest would be greater than the interest expense on the income statement.

Question 32

Phill Corp. issued five-year bonds on July 1, 20X4 with a face value of $1,000,000 and a 5% interest rate. Assuming that interest payment dates are June 1 and December 1, how much is the accrued interest that Phill Corp. should recognize on its books as of December 31, 20X4? $0. $4,166.67. $8,333.34. $25,000.

Answer 32

$4,166.67.

Question 33

Ben Corp. issued five-year bonds on July 1, 20X4 with a face value of $1,000,000 and a 5% interest rate. Assuming that interest payment dates are June 1 and December 1, how much is the accrued interest that Ben Corp. should recognize on its books as of July 1, 20X4? $0. $4,166.67. $20,833.35. $25,000.

Answer 33

$4,166.67.

Question 34

Opera Inc. releases bonds with a 7% stated interest rate. These bonds will be sold at a premium if: They have a longer maturity period compared to similar bonds in the market. The market interest rate is more than 7%. The market interest rate is equal to 7%. The market interest rate is below 7%.

Answer 34

The market interest rate is below 7%.

Question 35

Ben Corp. issued five-year bonds on July 1, 20X4 with a face value of $1,000,000 and a 5% interest rate. Assuming that interest payment dates are June 1 and December 1, what should be the total interest expense that Ben Corp. should report in relation to these bonds in its income statement for the year 20X4? $4,166.67. 20,833.33 $25,000. $50,000

Answer 35

$25,000.

Question 36

Alex Corp. issued bonds on January 2, Year 10, with a 7% interest rate and a $500,000 face value, maturing on January 2, Year 17. These bonds make semiannual interest payments on June 30 and December 31. They were issued when the market interest rate was 10%, which resulted in a bond discount. If Alex chooses to amortize the discount using the straight-line method, how should the interest expense for the first interest payment date on June 30, Year 10, be calculated? By deducting the period’s bond discount amortization from the total interest expense. By deducting the period’s bond discount amortization from the period’s interest payment. By adding the period’s bond discount amortization to the period’s interest payment. By multiplying the face value of the bonds by the market interest rate.

Answer 36

By adding the period’s bond discount amortization to the period’s interest payment.

Question 37

On January 31, Year 15, Day Corp. issued bonds with a stated interest rate of 10% at their face value of $500,000. These bonds are dated December 31, Year 10, and they make semiannual interest payments on June 30 and December 31. What is the accrued interest payable that Day Corp. should disclose on its balance sheet as of October 31, Year 15? $4,166.67 $8,333.33 $16,666.67 $41,666.67

Answer 37

$16,666.67

Question 38

Which of the following are costs associated with the issuance of a bond that should be capitalized and amortized over the outstanding term of the bonds? Legal fees. Accounting fees. Underwriting commissions. All of the above.

Answer 38

All of the above.

Question 39

On February 1, Year 10, Epson Corp. issued $1,000,000 worth of 5% nonconvertible bonds at 103, with a maturity date of March 1, Year 31. Each $1,000 bond came with 10 detachable stock warrants, and each warrant allowed the holder to buy one share of Epson’s $15 par common stock for $50. On February 1, Year 10, the market price of each warrant was $10. By which amount would the stockholder’s equity increase as a result of the bond issuance? $50,000. $100,000. $150,000 $0

Answer 39

$100,000.

Question 40

If a bond is issued on June 1 of the current year with interest payment dates on April 1 and October 1, how many months would the accrual for bond interest expense on December 31 cover? 9 months 6 months 3 months 2 months

Answer 40

3 months

Question 41

If Euro Corp. releases bonds with a stated interest rate of 6% and the market rate for similar bonds is 8%, which of the following may result? Euro Corp. will incur additional issuance costs. Euro Corp. will experience increased demand for its bonds due to the higher market rate. Euro Corp. will need to sell the bonds at a discount. Euro Corp. will receive a premium.

Answer 41

Euro Corp. will need to sell the bonds at a discount.

Question 42

Patch Corp. issued $200,000 worth of 5% bonds on July 1, Year 10, with a maturity date of June 30, Year 20. These bonds were sold for $185,500 to provide a 7% yield and interest payments were made annually on June 30. Patch Corp. employs the effective interest method to gradually amortize the discount. What is the amount of interest expense that Patch Corp. should recognize on December 31, Year 10? (round to the nearest number) $12,985. $10,000. $6,493. $3,333.

Answer 42

$6,493.

Question 43

Bronze Inc. raised $2,000,000 through bond issuance and was obligated to agree to a debt covenant. Which of the following statements accurately describes the debt covenant? The debt covenant may include restrictions on incurring additional debt beyond a certain limit. The debt covenant may include a requirement to furnish audited financial statements to the lender. The debt covenant may put limitations on how the borrowed money can be used. All of the above.

Answer 43

All of the above.