Chapter 12 Quiz

Question 1

Bond

Answer 1

form of an interest bearing note used by corporations to borrow on a long term basis

Question 2

Bond Indenture

Answer 2

the contract between a corporation issuing bonds and the bond holders

Question 3

Carrying Amount

Answer 3

the balance of the bonds payable account (fact amount of the bonds) less any unamortized discount or plus any unamortized premium

Question 4

Discount

Answer 4

the excess of the face amount of bonds over their issue price

Question 5

Earnings per Share

Answer 5

measures the income earned by each share of common stock

Question 6

Effective Rate of Interest

Answer 6

the market rate of interest at the time bonds are issued

Question 7

Installment Notes

Answer 7

a debt that requires the borrower to make equal periodic payments to the lender for the term of the debt

Question 8

Mortgage Notes

Answer 8

an installment note that is secured by the assets of the borrower

Question 9

Premium

Answer 9

the excess of the issue price of bonds over their face amount

Question 10

Term Bonds

Answer 10

all bonds of an issue mature at the same time

-as a result the entire principal received from the issue must be paid at once

Question 11

Serial Bonds

Answer 11

maturity of bonds in an issue is spread over several dates

-staggers the repayment of principal over several years

Question 12

Convertible Bonds

Answer 12

may be exchanged for shares of stock or other securities under certain conditions
-convert to common stock usually

Question 13

Callable Bonds

Answer 13

the issuing corporation has the right to pay off the bonds before maturity
-risky because you expect more years of interest payments

Question 14

Secured Bonds

Answer 14

assets are pledged as collateral on the bond

-gives bondholder a claim on specified assets if the company fails to make bond payments

Question 15

Debenture Bonds

Answer 15

the bonds are backed only by the credit of the issuing corporation

Question 16

Junk Bonds

Answer 16

cheap and very risky

Question 17

Zero Coupon Bonds

Answer 17

no interest rate attached- risky

Question 18

Corporate Bonds (characteristics)

Answer 18

• issued with face values of $1,000 (or multiples of it)
• usually pay interest semiannually
• prices quotes as a percentage of face value

Question 19

All of a company’s bonds mature at the same time. These are known as _____bonds

Answer 19

Term Bonds

Question 20

Bonds that may be exchanged for other securities are called ________ bonds

Answer 20

Convertible Bonds

Question 21

When contract rate of interest on bonds equals the market rate of interest, the bonds sell at _______ ________.

Answer 21

Face Value

Question 22

When the contract rate of interest on bonds is lower than the market rate of interest, the bonds sell at a(n) _____

Answer 22

discount

Question 23

When amortizing a discount on bonds payable, the amount of the discount amortization on bonds payable ____________ (increases or decreases) interest expense

Answer 23

increases

Question 24

When amortizing a premium on bonds payable, the amount of the premium amortization on bonds payable ____________ (increases or decreases) interest expense

Answer 24

decreases

Question 25

A debt that requires the borrower to make equal periodic payments to the lender for the term of the note is called a(n) ___ ___

Answer 25

installment note

Question 26

The ratio that measures the income earned by each share of common stock is

Answer 26

earnings per share

Question 27

a bond that gives the bondholder a right to exchange the bond for other securities under certain conditions is called a - convertible bond - sinking bond - term bond - debenture bond

Answer 27

convertible bond

Question 28

bonds that are issued on the basis of the general credit of the corporation are called - callable bonds - convertible bonds - debenture bonds - term bonds

Answer 28

debenture bonds

Question 29

If the market rate of interest is less than the coupon rate of interest, the bonds will sell for a - discount - face value - maturity value - premium

Answer 29

premium

Question 30

the entry to record the amortization of a discount on bonds payable is

Answer 30

debit interest expense, credit discount on bonds payable

Question 31

under the straight line method of bond discount amortization, as a bond payable approaches maturity, the total yearly amount of interest expense - increases - decreases - remains the same - increases or decreases, depending on the size of the original discount

Answer 31

remains the same

Question 32

The entry to record the amortization of a premium on bonds payable is

Answer 32

debit premium on bonds payable, credit interest expense

Question 33

From the first to the final payment, interest expense on an installment note payable behaves as follows - decreases - remains the same - decreases and then increases

Answer 33

decreases

Question 34

t or f- the interest rate specified on the bond indenture is called the contract rate or effective rate

Answer 34

false

Question 35

t or f- if the market rate is lower than the contract rate, the bonds will sell at a discount

Answer 35

false

Question 36

t or f- the amortization of a premium on a bonds payable increases interest expense

Answer 36

false

Question 37

t or f- at the maturity date, the carrying amount of a bond payable will equal its face value

Answer 37

true (both are zero)

Question 38

t or f- the straight line method of allocating bond discount provides for a constant amount of interest expense each period

Answer 38

true

Question 39

t or f- bonds that may be exchanges for other securities under certain conditions are called callable bonds

Answer 39

false

Question 40

t or f- a corporations earnings per share can be affected by whether it finances its operations with common stock, preferred stock, or bonds

Answer 40

true

Question 41

t or f- if the price paid to redeem bonds is below the bond carrying vaule the difference is recorded as a gain

Answer 41

true

Question 42

t or f- the balance in a discount on bonds payable account is reported in the balance sheet as a deduction from the related bonds payable

Answer 42

true

Question 43

t or f- an installment note secured by a pledge of the borrowers assets is called a debenture note

Answer 43

false

Question 44

a corporation issuing bonds enters into a contract with the bondholders. this contract is known as a ____ _____

Answer 44

bond indenture

Question 45

in computing earnings per share on common stock, any ____________ dividends should be subtracted from net income

Answer 45

preferred

Question 46

a corp reserves the right to redeem _____ bonds before they mature

Answer 46

callable bonds

Question 47

bonds issued on the general credit of the issuing corp are called _____ _______

Answer 47

debenture bonds

Question 48

the ____ rate determines the periodic interest paid on a bond

Answer 48

contract/ coupon

Question 49

when the market rate of interest on bonds is lower than the contract rate, the bonds will sell at a(n) _________

Answer 49

premium

Question 50

the two methods for amortizing a bond discount are the _____ ____ method and the ____ _____ _____ method

Answer 50

straight line/ effective interest rate

Question 51

the balance of the bonds payable accounts( face amount of bonds) less any unamortized discount or plus any unamortized premium is called the _________ ______

Answer 51

carrying amount

Question 52

the entry to record a payment on an installment note

Answer 52

debit notes payable debit interest expense credit cash

Question 53

If the balance of bonds payable and discount on bonds payable are $400,000 and $12,000, the carrying amount of the bonds is ______

Answer 53

$388,000

Question 54

If $2,000,000 of bonds are sold at 101 1/2, the amount of cash received is

Answer 54

(2000000x1.015)= $2,030,000

Question 55

Jones co has redeemed bonds at 102. The bonds have a face value of $600,000 and an unamortized premium of $10,000. Jones Co will record a gain/ loss on redemption of

Answer 55

$2,000 loss

Question 56

a firm redeems bonds at 95. bonds have a face value o f$500,000 and an unamortized discount of $15,000. the firm will record a gain/loss on redemption of___

Answer 56

$10,000 gain | 475000 paid vs 485000 value

Question 57

if bp equals $5,000,000 and pobp equals $45,000, the carrying amount of the bonds is _____

Answer 57

$5,045,000

Question 58

bonds payable has a balance of $900,000 and dobp has a balance of $45,000. the carrying amount is____ - $45000 - 855000 - 900,000 - 945000

Answer 58

-$855000

Question 59

A bond issue with a face value of $800,000 on which there is unamortized premium of $30,000 is redeemed for $790,000. the gain or loss on the redemtion of the bonds is a - 10000 gain - 20000 gain - 40000 loss - 40000 gain

Answer 59

- $40,000 gain