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Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market interest rate.

A) True
B) False

Correct Answer

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On January 1,Year 1,Burton Corporation issued bonds with a face value of $200,000 for $196,000 cash.: Which of the following correctly describes the related transaction?


A) Burton issued bonds at 102.
B) Burton issued bonds at 98.
C) Burton issued bonds at a $4,000 premium.
D) Burton signed a note payable for $196,000.

E) A) and C)
F) A) and B)

Correct Answer

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On January 1,Year 1,Strang Incorporated issued bonds with a face value of $500,000,a stated rate of interest of 8%,and a 5-year term to maturity.The effective rate of interest was 10%.Interest is payable in cash on June 30 and December 31 of each year.Which of the following statements is true?


A) This bond was issued at a premium, and each semiannual cash payment is $25,000.
B) This bond was issued at a discount, and each semiannual cash payment is $20,000.
C) This bond was issued at a discount, and the annual interest expense is $40,000.
D) This bond was issued at a premium, and the annual interest expense is $40,000.

E) None of the above
F) C) and D)

Correct Answer

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Indicate whether each of the following statements is true or false.

Premises
Long-term installment notes are repaid all at once two to five years after the issue date.
Interest expense on long-term installment notes increases each year.
Short-term notes payable normally mature within a year.
Cash for machinery or buildings is often obtained by issuing long-term debt.
sMost long-term loans are obtained from the corporation's stockholders.transaction.
Responses
False
True

Correct Answer

Long-term installment notes are repaid all at once two to five years after the issue date.
Interest expense on long-term installment notes increases each year.
Short-term notes payable normally mature within a year.
Cash for machinery or buildings is often obtained by issuing long-term debt.
sMost long-term loans are obtained from the corporation's stockholders.transaction.

Indicate whether each of the following statements about bonds payable is true or false.

Premises
At the time of issue,the effective interest rate of a particular bond is equal to the market rate of interest for bonds with a similar level of risk.
When bonds are sold at 105,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.
When bonds are sold at 95,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.
When bonds are sold at 101,the bonds were issued at a premium.
when bonds are sold at 100,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.
Responses
False
True

Correct Answer

At the time of issue,the effective interest rate of a particular bond is equal to the market rate of interest for bonds with a similar level of risk.
When bonds are sold at 105,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.
When bonds are sold at 95,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.
When bonds are sold at 101,the bonds were issued at a premium.
when bonds are sold at 100,the stated interest rate of the bonds is lower than the market rate for investments with a similar level of risk.

Davis Corporation borrowed $50,000 on January 1,Year 1.The loan is for a 5-year period and has an annual interest rate of 9%.At the end of each year,Davis will make a payment of $7,791,which includes both principal and interest.The amount of the payment for Year 1 that is interest expense is $4,500.

A) True
B) False

Correct Answer

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On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements? On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) A) and D)
F) B) and C)

Correct Answer

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[The following information applies to the questions displayed below.] On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. -Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1,Year 1.Which of the following shows the effect of this event on the elements of the financial statements? [The following information applies to the questions displayed below.] On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. -Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1,Year 1.Which of the following shows the effect of this event on the elements of the financial statements? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) None of the above
F) B) and C)

Correct Answer

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Davis Corporation borrowed $50,000 on January 1,Year 1.The loan is for a 10-year period and has an annual interest rate of 9%.At the end of each year,Davis will make a payment of $7,791,which includes both principal and interest.With this loan,the amount of interest expense that Davis reports on its income statement will be the same for each year of the loan.

A) True
B) False

Correct Answer

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Park Enterprises issued bonds with a face value of $500,000,a stated rate of interest of 7%,and a 5-year term to maturity.The proceeds from the issuance were $508,000.Interest is payable in cash on December 31 of each year.Assuming straight-line amortization,the amount of interest expense for the first year would be $31,600.

A) True
B) False

Correct Answer

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Johansen Company issued a bond at a discount.Which of the following shows how the issuance of the bonds affects the elements of the financial statements? Johansen Company issued a bond at a discount.Which of the following shows how the issuance of the bonds affects the elements of the financial statements? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) A) and D)
F) B) and C)

Correct Answer

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If the stated interest rate for bonds is the same as the effective interest rate,the bonds will be issued at their face value.

A) True
B) False

Correct Answer

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If bonds are issued at a premium,the bond issuer will pay the bondholders an amount lower than the issue price at maturity.

A) True
B) False

Correct Answer

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The effective interest rate method of amortizing bond discounts and premiums results in a constant amount of interest expense every period.

A) True
B) False

Correct Answer

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On January 1,Year 1,O'Keefe Co.issued bonds with a face value of $400,000 and a stated interest rate of 10%.The bonds have a life of ten years and were sold at 108.O'Keefe uses the straight-line method to amortize bond discounts and premiums.On December 31,Year 4,O'Keefe called the bonds at 106.Indicate whether each of the following statements is true or false.

Premises
The interest expense for Year 1 was $40,000.
The carrying value of bonds payable was $419,200 on December 31,Year 4.
When O'Keefe repurchased the bonds,total assets decreased by $419,200.
The balance in the bonds payable account was $400,000 on December 31,Year 1.
When O'Keefe repurchased the bonds,it had to recognize a loss in the amount of $4,800.
Responses
True
False

Correct Answer

The interest expense for Year 1 was $40,000.
The carrying value of bonds payable was $419,200 on December 31,Year 4.
When O'Keefe repurchased the bonds,total assets decreased by $419,200.
The balance in the bonds payable account was $400,000 on December 31,Year 1.
When O'Keefe repurchased the bonds,it had to recognize a loss in the amount of $4,800.

Franklin Company obtained a $160,000 line of credit from State Bank on January 1,Year 1.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table.Assume that Franklin borrows or repays on the first day of each month. Franklin Company obtained a $160,000 line of credit from State Bank on January 1,Year 1.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table.Assume that Franklin borrows or repays on the first day of each month. What is the amount of interest expense recognized in March? A) $232 B) $262 C) $292 D) $408 What is the amount of interest expense recognized in March?


A) $232
B) $262
C) $292
D) $408

E) A) and B)
F) A) and C)

Correct Answer

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[The following information applies to the questions displayed below.] On January 1, Year 1, Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. -Which of the following correctly shows the effects of the December 31,Year 2 payment (rounded to the nearest whole dollar) ? [The following information applies to the questions displayed below.] On January 1, Year 1, Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. -Which of the following correctly shows the effects of the December 31,Year 2 payment (rounded to the nearest whole dollar) ? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) A) and B)
F) None of the above

Correct Answer

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Chico Company borrowed $40,000 on a four-year,8% installment note.How will this transaction affect Chicos financial statements?


A) Cash and installment notes payable increase by $43,200
B) Cash and interest payable increase by $40,000
C) Cash and interest payable increase by $43,200
D) Cash and installment notes payable increase by $40,000

E) A) and B)
F) B) and C)

Correct Answer

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Peak Enterprises issued bonds with a face value of $500,000,receiving cash of $508,000.In this transaction,the liability account,Bonds Payable,will increase by $500,000.

A) True
B) False

Correct Answer

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On January 1,Year 1,Carlyle Corporation issued a 5-year term note.The note requires an annual cash payment on December 31 of each year.The payment includes a principal repayment and interest.Indicate whether each of the following statements is true or false.

Premises
The amount of the principal repayment will increase with each succeeding payment.
Issuing the note will increase assets and liabilities.
Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities.
The first payment on the note will reduce liabilities and assets,but will not affect stockholders' equity.
The second payment on the note will include higher interest expense than did the first payment.
Responses
True
False

Correct Answer

The amount of the principal repayment will increase with each succeeding payment.
Issuing the note will increase assets and liabilities.
Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities.
The first payment on the note will reduce liabilities and assets,but will not affect stockholders' equity.
The second payment on the note will include higher interest expense than did the first payment.

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