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Exam 22: Long-Term Bonds

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Question 1

Multiple Choice

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If market interest rates are higher than the rate offered on the bonds being sold, they will be sold at

A) a premium.
B) a discount.
C) face value.
D) a loss.

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

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Question 2

True/False

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Amortizing bond premiums over the period from the issue date to the maturity date reduces bond interest expense shown on the income statement.

A) True
B) False

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Question 3

Multiple Choice

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The Premium on Bonds Payable account is shown

The Mammoth Corporation issued $800,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. The bonds were issued at a price of 98. Record the transactions to issue the bonds on April 1, 2013, and to pay interest and amortize the bond discount on October 1, on page 9 of a general journal. Omit descriptions.

A bond is ____________________ if the issuing corporation has the right to require the owner to surrender the bond for payment before the maturity date.

Corporations with many bondholders will open a separate checking account because

The difference between the face value and the selling price of a 10-year discounted bond sold two years after authorization, is amortized for

The issuing corporation ___________________ the bond discount from the date of issue to the maturity date. Here a bond issued at a discount will increases the bond interest expense shown on the income statement.

Bond interest is not deducted when a corporation determines its taxable income.

The balance of the Bonds Payable account plus the balance of the Premium on Bonds Payable account or minus the balance of the Discount on Bonds Payable account is called the ____________________ value of the bonds.

Which of the following is not a disadvantage of raising capital through the issue of bonds payable?

When bonds are issued at a price below face value, the Discount on Bonds Payable account is credited for the difference between the issue price and the face value.

Retained earnings may be appropriated for bond retirement by order of the board of directors, by the bond contract, or by vote of the shareholders.

Bonds with a face value of $400,000 were issued at 98. The entry to record the issuance will include a debit to the Discount on Bonds Payable account for

The board of directors of the Merced Corporation authorized the issuance of $200,000 face value of 10-year, 12 percent bonds dated April 1, 2013, and maturing on April 1, 2023. Interest is payable semiannually on April 1 and October 1. Each bond has a face value of $1,000. Because the funds to be raised were not immediately needed, no bonds were issued until 2015. Record the following transactions on page 9 of a general journal. Omit descriptions.

On April 1, 2015, Flummery Corporation purchased on the open market $100,000 of its 10-year 7% (interest paid semiannually) bonds and retired them. They are purchased at $102,000. These bonds were originally sold at their $100,000 face value on January 2, 2013. Prepare the journal entries necessary for this transaction.

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

When bonds are sold by a company, the company assumes debt. The principal of which is the amount of the face value of the bonds sold. Cash to pay this debt must be available when the bonds become due. Discuss things a company can do in order to have the funds available to pay the bond debt on the due date.

Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement.

The Discount on Bonds Payable account will have a(n) ____________________ balance.