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On November 1,2009,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2009,and interest is payable each November 1 and May 1.How much is the book value of the bonds after the November 1,2010 interest payment was recorded,assuming the straight-line method of amortization is utilized?


A) $29,010
B) $29,100
C) $29,190
D) $29,280

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

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The journal entry to record the interest cash payment for a bond issued at a premium results in a decrease in the bond.

A) True
B) False

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Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

A) True
B) False

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On July 1,2010,Garden Works,Inc.issued $300,000 of ten-year,7% bonds for $303,000.The bonds were dated July 1,2010,and semi-annual interest will be paid each December 31 and June 30.Garden Works Inc.uses straight-line amortization.Which of the following statements is incorrect?


A) The market rate of interest was less than the stated rate of interest on July 1, 2010.
B) The interest expense during the life of the bonds is $3,000 less than the cash interest payments during the life of the bonds.
C) The book value of the bond liability decreases by $300 per year.
D) The semi-annual interest expense is $300 less than the semi-annual interest payment.

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

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Eaton Company issued $5 million of bonds.The stated rate of interest was 10% and the market rate was 11%.Which of the following statements is correct?


A) The bonds were issued at a premium.
B) Annual interest expense will exceed the company's actual cash payments for interest.
C) Annual interest expense will be $500,000.
D) The book value of the bond will decrease as the bond matures.

E) B) and D)
F) All of the above

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On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% effective (market) interest rate.Assuming the effective-interest method of amortization is used,what is the interest expense for the six-month period ending December 31,2010 (to the nearest dollar) ?


A) $24,000
B) $20,491
C) $20,000
D) $20,825

E) B) and C)
F) All of the above

Correct Answer

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On January 1,2010,a corporation issued a $400,000,12% bond.The interest is payable semi-annually on June 30 and December 31.The issue price was $413,153 based on a 10% market interest rate.Assuming the effective-interest method of amortization is used,what is the interest expense for the six-month period ending June 30,2010 (to the nearest dollar) ?


A) $24,000
B) $24,789
C) $20,000
D) $20,658

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

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Mayberry,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,2009,for $102,360 on April 1,2009.The bonds pay interest annually on April 1.Straight-line amortization is used by the company.What entry is needed at April 1,2010 for the first interest payment?


A)  Interest expense 11,764 Premium on bonds payable 236 Cash 12,000\begin{array} { l r r } \text { Interest expense } & 11,764 & \\\text { Premium on bonds payable } & 236 & \\\text { Cash } & & 12,000\end{array}
B)  Interest expense 12,236 Premium on bonds payable 236 Cash 12,000\begin{array} { l r } \text { Interest expense } & 12,236 \\\quad \text { Premium on bonds payable } && 236 \\\text { Cash } & &12,000\end{array}
C)  Interest expense 12,000 Premium on bonds payable 236 Cash 12,236\begin{array} { l r r } \text { Interest expense } & 12,000 & \\\text { Premium on bonds payable } & 236 & \\\quad \text { Cash } & & 12,236\end{array}
D)

 Interest expense 12,000 Cash 12,000\begin{array} { l r r } \text { Interest expense } & 12,000 & \\\quad \text { Cash } & & 12,000\end{array}

E) C) and D)
F) All of the above

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Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?


A) Interest expense is computed by adding the portion of amortized discount to the cash interest paid.
B) The amount of interest expense recognized each period increases over time.
C) The amount of discount amortized each period decreases over time.
D) The book value of the bonds payable liability decreases.

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

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Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

A) True
B) False

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False

The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon)rate.

A) True
B) False

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Which of the following is not an advantage of issuing bonds versus issuing stock to finance expansion?


A) Stockholders remain in control as bondholders cannot vote or share in the company's earnings.
B) Interest expense is tax deductible but dividends are not.
C) Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets.
D) The fixed payment dates for the interest and maturity value.

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

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Assuming no adjusting journal entries have been made during the year,the journal entry to record the cash interest payment on the due date for bonds issued at a premium results in which of the following?


A) An increase in expenses and a decrease in liabilities.
B) An increase in expenses and an increase in liabilities.
C) A decrease in both liabilities and stockholders' equity.
D) A decrease in both assets and liabilities.

E) All of the above
F) B) and C)

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A company prepared the following journal entry: Interest expense Premium on bonds payable \quad Cash Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?


A) The bonds payable book value decreases by the amount of the debit to premium on bonds payable.
B) Assets decrease by the amount of the credit to cash.
C) Stockholders' equity decreases by the amount of the debit to interest expense.
D) The cash payment is reported as a cash flow from financing activities.

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

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Issues of bonds in exchange for cash are reported as a cash flow from financing activities on the statement of cash flows.

A) True
B) False

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True

Halverson's times interest earned ratio was 2.98 in 2010,2.79 in 2009,and 2.31 in 2008.Which of the following statements about their ratio is possibly correct?


A) Their increasing ratio indicates decreasing levels of debt on which interest is incurred.
B) Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments.
C) The increasing ratio implies increased long-term debt financing.
D) Their increasing ratio would be considered by creditors to be an indicator of higher risk.

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

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On March 1,2010,Halbur Corporation,issued $500,000 of 8%,five-year bonds at par.The bonds were dated March 1,2010,and the first annual interest payment will be on February 28,2011.The accounting period ends December 31.Assuming no adjusting entries have been made during the year. Complete the journal entry grid for each of the following dates (round to the nearest dollar): On March 1,2010,Halbur Corporation,issued $500,000 of 8%,five-year bonds at par.The bonds were dated March 1,2010,and the first annual interest payment will be on February 28,2011.The accounting period ends December 31.Assuming no adjusting entries have been made during the year. Complete the journal entry grid for each of the following dates (round to the nearest dollar):

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Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.

A) True
B) False

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Which of the following statements doesn't correctly describe the accounting for bonds that were issued at their maturity value?


A) The market rate of interest equals the stated interest rate.
B) The interest expense over the life of the bonds will equal the cash interest payments.
C) The present value of the bonds' future cash flows equals the bonds' maturity value.
D) The book value of the bond liability decreases when interest payments are made on the due dates.

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

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D

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammel Company uses the straight-line method of amortization.Which of the following statements is incorrect?


A) The market rate of interest exceeded the stated rate of interest when the bonds were issued.
B) The annual interest expense exceeds the annual cash interest payment by $200.
C) The annual increase in the bond book value is $200.
D) The annual interest expense is $4,300.

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

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