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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 71

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When the market rate of interest on bonds is higher than the contract rate,the bonds will sell at

A) a premium
B) their face value
C) their maturity value
D) a discount

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

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Question 72

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The market rate of interest is affected by a variety of factors,including investors' assessment of current economic conditions.

A) True
B) False

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Question 73

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Balance sheet and income statement data indicate the following: $\begin{array}{l}\begin{array}{lll}\text { Bonds payable, } 6 \% \text { this is year } 4 \text { of } 20 \text { years }\\\text { Preferred 8 \% stock,\$ 100 par } \\ \text { no change during the year } \\\text { Common stock, \$ 50 par } \\\text { no change during the year } \\\text { Income before income tax for year } \\\text { Income tax for year } \\\text { Common dividends paid } \\\text { Preferred dividends paid }\\\end{array}\begin{array}{lll} \$1,200,000\\\\200,000\\\\1,000,000 \\320,000\\80,000 \\60,000 \\16,000\end{array}\end{array}$ Based on the data presented above,what is the number of times bond interest charges were earned round to two decimal places?

When a portion of a bond issue is redeemed,a related proportion of the unamortized premium or discount must be written off.

Jenson Co.is considering the following alternative plans for financing the company: $\begin{array}{lccc}& \text { Plan I } & \text { Plan II } \\\hline \text { Issue 10 \% bonds at face } & --& \$ 2,000,000 \\ \text { Issue \$ 10 par common stock } & \$3,000,000 & 1,000,000 \\\end{array}$ Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans,assuming income before bond interest and income tax is $1,000,000.

The Freeman Corporation issues 2,000,10-year,8%,$1,000 bonds dated January 1 at 96.The journal entry to record the issuance will show a

On the first day of the fiscal year,Hawthorne Company obtained an $88,000,7-year,5% installment note from Sea Side Bank.The note requires annual payments of $15,208,with the first payment occurring on the last day of the fiscal year.The first payment consists of interest of $4,400 and principal repayment of $10,808.The journal entry Hawthorne would record to make the first annual payment due on the note would include a

When the effective interest method is used,the amortization of the bond premium

If the amount of a bond premium on an issued 11%,4-year,$100,000 bond is $12,928,the semiannual straight-line amortization of the premium is $1,416.

On the first day of the fiscal year,a company issues a $500,000,8%,10-year bond that pays semiannual interest of $20,000 $500,000 × 8% × 1/2,receiving cash of $520,000.Journalize the entry to record the first interest payment and amortization of premium using the straight-line method.

Any unamortized premium should be reported on the balance sheet of the issuing corporation as

If the straight-line method of amortization of discount on bonds payable is used,the amount of yearly interest expense will increase as the bonds approach maturity.

A legal document that indicates the name of the issuer,the face value of the bond and such other data is called

On January 1,$2,000,000,5-year,10% bonds,were issued for $1,960,000.Interest is paid semiannually on January 1 and July 1.If the issuing corporation uses the straight-line method to amortize discount on bonds payable,the semiannual amortization amount is

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

The present value of an annuity is the sum of the present values of each cash flow.

If the bondholder has the right to exchange a bond for shares of common stock,the bond is called a convertible bond.

There are two methods of amortizing a bond discount or premium: the straight-line method and the double-declining-balance method.

The number of times interest charges are earned ratio is calculated by dividing Bonds Payable by Interest Expense.

If bonds are sold for a discount,the carrying value of the bonds is equal to the face value less the unamortized discount.