# ch 14

### 101 terms by californiafinance

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D Effective Rate

### Most corporate bonds are

B. Debenture Bond

### The method used to pay interest depends on whether the bonds are

A. Registered or Coupon

### The rate of interest that actually is incurred on a bond payable is called the

C. Effective Rate

### Interest Expense is

A. The effective interest rate times the amount of the debt outstanding during the interest period

C. Present Value

### Straight-line amortization of bond discount or premium

D.Provides the same total amount of interest expense over the life of the bond issue as does theeffective interest method

### An amortization schedule for bonds issued at a premium

C. Is a schedule that reflects the changes in the debt over its term to maturity

B. At a premium

C. 7%

C. 6%

D. \$2,283 Loss

D. Seven Months

### Ordinarily, the proceeds from the sale of a bond issue will be equal to

C. The present value of the face amount plus the present value of the stream of interest payments

### A \$500,000 bond issue sold for 98. Therefore, the bonds

A. Sold at a discount because the stated rate of interest was lower than the effective rate

A. Six Months

D. Option D

A. Option A

### For a bond issue that sells for more than the bond face amount, the effective interest rate is

D. Less than the rate stated on the face of the bond

### When bonds are sold at a premium and the effective interest method is used, at each subsequent interestpayment date, the cash paid is

C. Greater than the effective interest

### When bonds are sold at a discount and the effective interest method is used, at each subsequent interestpayment date, the cash paid is

B. Less than the effective interest

A. Increases

D. Decreases

### When bonds are sold at a discount, if the annual straight-line amortization amount is compared to theannual effective interest amortization amount over the life of the bond issue, the annual amount of thestraight-line amortization of discount is

B. Higher than the effective interest amount in the early years and less than the effective interest amountin the later years

### When bonds are sold at a premium, if the annual straight-line amortization amount is compared to theannual effective interest amortization amount over the life of the bond issue, the annual amount of thestraight-line amortization of premium is

A. Higher than the effective interest amount in the early years and less than the effective interest amountin the later years

### Bonds were issued at a discount. In the bond amortization schedule:

B. The total effective interest over the term to maturity is equal to the amount of the discount plus thetotal cash interest paid

C. \$10,620

### A bond issue with a face amount of \$500,000 bears interest at the rate of 10%. The current market rateof interest is 11%. These bonds will sell at a price that is:

C. Less than \$500,000

B. \$82,000

\$29,100

### Zero-coupon bonds

A. offer a return in the form of a deep discount off the face value

### The market price of a bond issued at a discount is the present value of its principal amount at the market(effective) rate of interest

C. Plus the present value of all future interest payments at the market (effective) rate of interest

A. \$18,000

C. 6%

D. 8%

A. \$700,700

A. \$8,834,770

D. \$7,359,033

D. 8%

C. 6%

B. \$680,759

D. \$11,256,109.

A. \$6,512,253

C. At a discount

A. \$6.0 Million

B. \$3,830,535

C. \$256,200,000.

D. \$257,030,000

A. \$330,000

### Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resultingeffect on interest expense and the bond carrying value, respectively

D. Overstated, Overstated

### Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity valueof \$100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond Xmatures in 7 years while bond Y matures in 10 years. Which of the following is correct?

A. Both bonds sell for the same amount

### Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of \$100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. Thecurrent market rate of interest is 8%. Which of the following is correct

C. Bond Y sells for more than bond X

D. \$60,000

D. \$982,000

D. \$29,610

B. \$1,900

### In each succeeding payment on an installment note

B. The amount of principal paid increases

### When a long-term note is given in exchange for equipment, the amount considered as paid for themachine is:

D. The present value of the note payments discounted at the market rate

### When the interest payment dates are March 1 and September 1, and notes are issued on July 1, theamount of interest expense to be accrued at December 31 of the year of issue would

C. Be for four months

### When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes

D. Is credited to sales revenue at the exchange date.

### AMC issues a note in exchange for a machine with no stated interest rate. In accounting for thetransaction

B. If fair values of the note and machine are unavailable, the note should be recorded at its present value,discounted at the market rate of interest

### To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on

A. Bond ratings provided by financial investment services such as Moody's

### Which of the following indicates the margin of safety provided to creditors

B. Times interest earned ratio

### Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporationat the

A. Face amount price less any unamortized discount or plus any unamortized premium.

### The unamortized balance of discount on bonds payable is reported in the balance sheet as:

D. A contra-liability

### Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financialstatements, the discount should be

A. Deducted from bonds payable

### Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financialstatements, the premium should be

D. Added to bonds payable

C. Option C

C. Option C

### The times interest earned ratio indicates

A. The margin of safety provided to creditors

### the debt to equity ratio indicates

B. the extent of "trading on the equity" or financial leverage

### the rate of return on assets indicates

C. profitability without regard to how resources are financed.

### The rate of return on shareholders' equity indicates

D. the effectiveness of employing resources provided by owners

### Heidi Aurora Imports issued shares of the company's Class B stock. Heidi Aurora Imports should reportthe stock in the company's statement of financial position

B. as equity unless the shares are mandatorily redeemable

### On January 1, 2011, Ozark Minerals issued \$10 million of 9%, 10-year convertible bonds at 101. Thebonds pay interest on June 30 and December 31. Each \$1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible,currently are selling at 99. Upon issuance, Ozark should

B. credit premium on bonds payable \$100,000

### Patrick Roch International issued 5% bonds convertible into shares of the company's common stock.Upon issuance, Patrick Roch International should record

B. the proceeds of the bond issue entirely as debt.

### When bonds are retired prior to their maturity date

B. The issuing company probably will report an ordinary gain or loss

B. \$8 million

C. \$72,800 gain

### On March 31, 2011, MDS, Inc.'s bondholders exchanged their convertible bonds for common stock.The carrying amount of these bonds on Ashley's books was less than the fair value but greater thanthe par value of the common stock issued. If Ashley used the book value method of accounting for theconversion, which of the following statements correctly states an effect of this conversion

A. Shareholders equity is increased

### On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds wereconverted into common stock when the market price of Doll's common stock was 500 percent aboveits par value. On March 1, 2011, cash proceeds from the issuance of the convertible bonds should bereported as

A. a liability for the entire proceeds

A. Option A

### When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds fromthe bond issue

A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values

B. \$300,000

### MSG Corporation has \$100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bondshave 3 years remaining to maturity. The unamortized premium remaining on these bonds was \$6,000.MSG uses straight-line amortization. On May 1, 2011, \$10,000 of the bonds were retired at 112. Howmuch, and what type of gain or loss, most likely results from this retirement

A. \$667 extraordinary loss

### Nickel Inc. owns \$100,000 of 10-year, 6% bonds as an investment on December 31, 2010. The bondshave 3 years remaining to maturity. The unamortized premium remaining on these bonds was \$6,000.Nickel uses straight-line amortization. On May 1, 2011, \$10,000 of the bonds were redeemed at 110.How much, and what type of gain or loss, most likely results from this redemption

A. \$467 extraordinary gain

C \$7,241

\$120,000

B. Option B

B. \$160,000

A. \$16,000 gain

### Crawford Inc. has bonds outstanding during a year in which the market rate of interest has risen.Crawford elected the fair value option for the bonds upon issuance. What will the company report forthe bonds in its income statement for the year

A. Interest expense and a gain

### Pierce Company issued 11% bonds, dated January 1, with a face amount of \$800,000 on January1, 2011. The bonds sold for \$739,816 and mature in 2030 (20 years). For bonds of similar risk andmaturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Piercedetermines interest at the effective rate and elected the option to report these bonds at their fair value.On December 31, 2011, the fair value of the bonds was \$730,000. Pierce's earnings for the year willinclude

A. A gain from change in the fair value of debt of \$10,617.

### On January 1, 2011, Ozark Minerals issued \$20 million of 9%, 10-year convertible bonds at 101. Thebonds pay interest on June 30 and December 31. Each \$1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible,currently are selling at 99. Ozark applies International Financial Reporting Standards. Upon issuance,Ozark should

A. credit bonds payable to \$18,800,000

### Patrick Roch International issued 5% bonds convertible into shares of the company's common stock.Roch applies International Financial Reporting Standards. Upon issuance, Patrick Roch Internationalshould record

A. the proceeds of the bond issue as part debt and part equity

### When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees,are referred to as debt issuance costs (called transaction costs under IFRS). If Brown Imports preparesits financial statements using IFRS

A. the increase in the effective interest rate caused by the transaction costs is reflected in the interestexpense

### On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds wereconverted into common stock when the market price of Doll's common stock was 500 percent aboveits par value. Doll prepares its financial statements according to International Accounting Standards(IFRS). On March 1, 2011, cash proceeds from the issuance of the convertible bonds should be reportedas

C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liabilityfor the balance

### When a company issues bonds between interest dates, the entry to record the issuance of the bonds will

A. Include a credit to interest payable

A. \$50.5 million

C. \$354,667

C. \$80,000

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