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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 41

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The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

A) True
B) False

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Question 42

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One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.

A) True
B) False

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Question 43

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When the effective interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond's carrying value at the beginning of the given period.

Using the following table, what is the present value of $5,000 to be received 5 years, if the market rate is 10% compounded annually?

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.

Selling the bonds at a premium has the effect of

The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking fund.

Debtors are interested in the times-interest-earned ratio because they want to

A bond is simply a form of an interest bearing note.

The market interest rate related to a bond is also called the

Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption?

On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000. Journalize the entry to record the issuance of the bonds.

On January 1, 2011, Citrus Retail Co. issued a $500,000, 5 year, 8% installment note payable with payments of $100,000 principal plus interest due on January 1 of each year for the next 5 years. 1. Prepare the adjusting journal entry at December 31, 2011 to accrue interest for the year. 2. Show the account(s) and amount(s) and where it will appear on a multi-step income statement prepared on December 31, 2011. 3. Show the account(s) and amount(s) and where they will appear on a classified balance sheet prepared on December 31, 2011.

Zero-coupon bonds do provide for interest payments.

Balance sheet and income statement data indicate the following: Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places) ?

Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every 6 months.

On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds.

The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.