ACC 206 Week 7 Quiz – Strayer

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Quiz 5 Chapter 15

CHAPTER15

LONG-TERMLIABILITIES

CHAPTERSTUDYOBJECTIVES

1.Explainwhybondsareissued.

2.Preparetheentriesfortheissuanceofbondsandinterestexpense.

3.Describetheentrieswhenbondsareredeemedorconverted.

4.Describetheaccountingforlong-termnotespayable.

5.Contrasttheaccountingforoperatingandcapitalleases.

6.Identifythemethodsforthepresentationandanalysisoflong-termliabilities.

7.Computethemarketpriceofabond.

8.Applytheeffective-interestmethodofamortizingbonddiscountandbondpremium.

a9.Applythestraight-linemethodofamortizingbonddiscountandbondpremium.

TRUE-FALSESTATEMENTS

1.     Eachbondholdermayvotefortheboardofdirectorsinproportiontothenumberofbonds held.

2.     Bondinterestpaidbyacorporationisanexpense,whereasdividendspaidarenotan expense of thecorporation.

3.     RegisteredbondsarebondsthataredeliveredtoownersbyU.S.registeredmailservice.

4.     Adebenturebondisanunsecuredbondwhichisissuedagainstthegeneralcreditofthe borrower.

5.     Bondsareaform of interest-bearingnotespayable.

6.     Neithercorporatebond interestnordividendsaredeductiblefor taxpurposes.

7.     A10%stockdividendistheequivalentofa$1,000parvaluebondpayingannualinterest of10%.

8.     Theholderofaconvertiblebondcanconvertaninterestpaymentreceivedintoacash dividend paidoncommonstock if thedividendisgreaterthantheinterestpayment.

9.     Theboardof directorsmayauthorizemorebondsthanare issued.

10.     Thecontractualinterestrateisalwaysequaltothemarketinterestrateonthedatethat bonds areissued.

11.     If$150,000face valuebondsareissuedat 102,theproceedsreceivedwill be$102,000.

12.     Discountonbondsisanadditionalcostofborrowingandshouldberecordedasinterest expense overthe lifeofthebonds.

13.     Ifacorporationissuedbondsatanamountlessthanfacevalue,itindicatesthatthe corporation hasaweakcreditrating.

Long-TermLiabilities     15-5

14.     Acorporationthatissuesbondsatadiscountwillrecognizeinterestexpenseatarate which is greaterthanthemarketinterestrate.

15.     Ifbondsareissuedatadiscount,theissuingcorporationwillpayaprincipalamountless thantheface amountof thebondsonthematuritydate.

16.     Ifbondsareissuedatapremium, thecarryingvalueofthebondswillbegreaterthanthe facevalueof thebondsfor allperiodspriortothebondmaturitydate.

17.     Ifthemarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsellata discount.

18.     If$800,000,8%bondsareissuedonJanuary1,andpayinterestsemiannually,the amount of interestpaidon July1 willbe$32,000.

19.     Ifbonds sell atapremium, theinterestexpenserecognizedeach yearwillbegreaterthan thecontractualinterestrate.

20.     The carryingvalue ofbondsiscalculatedbyadding thebalanceoftheDiscountonBonds Payableaccountto thebalance intheBondsPayableaccount.

21.     Thelossonbondredemptionisthedifferencebetweenthecashpaidandthecarrying value of thebonds.

22.     If$200,000parvalue bondswithacarrying value of$190,400 areredeemedat97,aloss on redemptionwill berecorded.

23.     Gainsandlossesarenotrecognizedwhenconvertiblebondsareconvertedintocommon stock.

24.     Generally,convertiblebondsdonotpayinterest.

25.     Eachpaymentonamortgagenotepayableconsistsofinterestontheoriginalbalanceof theloan andareductionoftheloanprincipal.

26.     Along-term notethatpledgestitletospecificpropertyassecurityforaloanisknown asa mortgagepayable.

27.     A capitalleaserequiresthelesseetorecordthe leaseasapurchaseof anasset.

28.     Thetimesinterestearnedratiois computed bydividingnetincome byinterestexpense.

a29.    Thepresentvalueofabondisafunctionoftwovariables:(1)thepaymentamountsand (2)theinterest(discount)rate.

a30.     Theeffective-interestmethodofamortizationresultsinvaryingamountsofamortization and interestexpenseperperiodbut aconstantinterestrate.

Additional True-FalseQuestions

31.     Bondsthatmatureat asinglespecifiedfuturedatearecalledtermbonds.

15-6      

32.     Thetermsofthebondissuearesetforthinaformallegaldocumentcalledabond indenture.

33.     Thecarryingvalueof bondsatmaturityshouldbe equaltotheface valueof thebonds.

34.     PremiumonBondsPayableisacontraaccounttoBondsPayable.

35.     Whenbondsareconvertedintocommonstock,thecarryingvalueofthebondsis transferredto paid-incapital accounts.

36.     Operatingleasesareleasesthatthelesseemustcapitalizeonitsbalancesheetasan asset.

37.     Underacapitallease,thelease/assetisreportedonthebalancesheetunderplant assets.

38.     Long-termliabilitiesarereportedinaseparatesectionofthebalancesheetimmediately followingcurrent liabilities.

MULTIPLECHOICEQUESTIONS

39.     Eachof thefollowingiscorrectregarding bondsexcepttheyare a.aformofinterest-bearingnotespayable.

b.attractivetomanyinvestors.

c.issuedbycorporations andgovernmentalagencies. d.soldin largedenominations.

40.     Fromthestandpointoftheissuingcompany,adisadvantageofusingbondsasameans oflong-termfinancingisthat

a.bondinterestis deductiblefortaxpurposes.

b.interestmustbepaidonaperiodicbasisregardlessofearnings.

c.incometo stockholdersmayincreaseasaresultof tradingonthe equity. d.thebondholdersdonothavevotingrights.

41.     Ifacorporationissued$2,000,000inbondswhichpay10%annualinterest,whatisthe annual netcashcostof thisborrowingif theincometaxrateis30%?

a.$2,000,000 b.$60,000

c.$200,000 d.$140,000

Long-TermLiabilities     15-7

42.     Securedbondsarebondsthat

a.areinthepossessionof abank.

b.areregisteredinthenameof theowner.

c.havespecificassetsof the issuerpledged ascollateral. d.havedetachableinterestcoupons.

43.     Alegaldocumentwhichsummarizestherightsandprivilegesofbondholdersaswellas theobligationsandcommitmentsof theissuingcompanyiscalled

a.a bondindenture. b.abonddebenture.

c.tradingonthe equity. d.atermbond.

44.     Stockholdersofacompanymaybereluctanttofinanceexpansionthroughissuingmore equitybecause

a.leveragingwithdebtisalwaysa betteridea. b.theirearningspersharemaydecrease.

c.thepriceofthestockwillautomaticallydecrease. d.dividendsmust bepaidonaperiodicbasis.

45.     Whichofthefollowingisnot anadvantageof issuingbondsinsteadof commonstock? a.Stockholdercontrolisnot affected.

b.Earningsper shareoncommonstockmaybelower. c.Incometocommonshareholdersmayincrease.

d.Taxsavingsresult.

46.     Bondsthataresecuredbyrealestate aretermed a.mortgagebonds.

b.serialbonds.c.debentures.d.bearerbonds.

47.     Bondsthatmatureat asinglespecifiedfuturedate arecalled a.couponbonds.

b.termbonds. c.serialbonds. d.debentures.

48.     Bondsthatmaybeexchangedforcommonstockattheoptionofthebondholdersare called

a.options.

b.stockbonds.

c.convertiblebonds. d.callablebonds.

49.     Bondsthataresubjecttoretirementatastateddollaramountpriortomaturityatthe option of theissuerarecalled

a.callablebonds.

b.earlyretirementbonds. c.options.

d.debentures.

15-8       

50.     Investorswhoreceivechecksintheirnamesfor interestearnedonbondsmusthold a.registeredbonds.

b.couponbonds. c.bearerbonds. d.directbonds.

51.     A bondholderthatsendsina coupontoreceiveinterestpaymentsmusthavea(n) a.unsecuredbond.

b.bearerbond.

c.mortgagebond. d.serialbond.

52.     Bondsthatmaybedirectlytransferredtoanotherpartybydeliveryare a.couponbonds.

b.debentures.

c.registeredbonds.

d.transportablebonds.

53.     Bondsthatmustbecancelledandreissuedasnewbondsinordertohaveownership interest transferred are

a.couponbonds. b.bearerbonds. c.serialbonds.

d.registeredbonds.

54.     Corporationsaregrantedthepowertoissuebondsthrough a.taxlaws.

b.statelaws.

c.federalsecuritylaws. d.bonddebentures.

55.     Thepartywhohastherighttoexerciseacalloptionon bondsisthe a.investmentbanker.

b.bondholder. c.bearer.

d.issuer.

56.     A majordisadvantageresultingfromtheuseofbonds isthat a.earningspersharemaybe lowered.

b.interestmustbepaidonaperiodicbasis. c.bondholdershave votingrights.

d.taxesmayincrease.

57.     Bondswillalwaysfall intoallbut which oneof thefollowingcategories? a.Callableorconvertible

b.Termor serial

c.Registeredor bearerd.Securedor unsecured

Long-TermLiabilities     15-9

58.     Whichof thefollowingstatements concerningbonds is notatruestatement? a.Bondsaregenerallysoldthroughaninvestmentcompany.

b.Thebondindentureispreparedafterthebondsare printed.

c.Thebondindenture and bondcertificateare separatedocuments. d.Thetrusteekeepsrecords of eachbondholder.

59.     A bondtrusteedoesnot a.issuethebonds.

b.keeparecord of eachbondholder.

c.holdconditionaltitletopledgedproperty. d.maintaincustody of unsoldbonds.

60.     Thecontractualinterestrate is alwaysstatedasa(n) a.monthlyrate.

b.dailyrate.

c.semiannualrate. d.annualrate.

61.     Whenauthorizingbondsto be issued,theboardof directorsdoesnotspecifythe a.totalnumberof bondsauthorizedtobe sold.

b.contractualinterestrate. c.sellingprice.

d.totalfacevalueof thebonds.

Usethefollowing exhibitforquestions62–63.

        Bonds                            Close Kmart83/8    17                 100¼

Yield             Volume 8.4                  35

NetChange +7/8

62.     Thecontractualinterestrateof theKmartbonds is a.greaterthanthemarketinterestrate.

b.lessthanthemarketinterestrate. c.equaltothemarketinterestrate. d.notdeterminable.

63.    Onthedayof tradingreferred toabove, a.noKmartbondsweretraded.

b.bondswithmarketpricesof $3,500weretraded.

c.at closing,thesellingpriceof thebondwashigherthanthe previousday'sprice. d.thebondsoldfor $100.25

64.     A $1,000face valuebondwitha quotedpriceof98issellingfor a.$1,000.

b.$980. c.$908. d.$98.

65.     A bondwithafacevalueof$100,000andaquotedpriceof102¼ hasasellingpriceof a.$120,225.

b.$102,025. c.$100,225. d.$102,250.

15-10

66.     PremiumonBondsPayable a.hasadebitbalance.

b.isacontraaccount.

c.isconsideredto beareduction inthecostofborrowing. d.is deductedfrombondspayableon thebalancesheet.

67.     If themarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsell a.at apremium.

b.atfacevalue. c.at adiscount.

d.onlyafterthestatedinterestrate is increased.

68.     OnJanuary1,2008,GrantCorporationissued$3,000,000,10-year,8%bondsat102. InterestispayablesemiannuallyonJanuary1andJuly1.Thejournalentrytorecordthis transactiononJanuary1, 2008is

a.Cash....................................................................................3,000,000

BondsPayable............................................................                           3,000,000

b.Cash.................................................................................... BondsPayable............................................................

c.PremiumonBondsPayable................................................ Cash.................................................................................... BondsPayable............................................................

d.Cash.................................................................................... BondsPayable............................................................ PremiumonBondsPayable.......................................

3,060,000

60,000 3,000,000

3,060,000

3,060,000

3,060,000

3,000,000 60,000

69.     Thetotalcost of borrowingis increasedonlyifthe a.bondswereissuedatapremium.

b.bondswereissuedatadiscount. c.bondsweresoldatface value.

d.marketinterestrateislessthanthecontractualinterestrateonthat date.

70.     Ifthemarketinterestrateis10%,a$10,000,12%,10-yearbond,thatpaysinterest semiannually wouldsellat anamount

a.lessthanfacevalue. b.equaltofacevalue.

c.greaterthanfacevalue.

d.thatcannotbedetermined.

71.     Thepresentvalueofa$10,000,5-yearbond,willbelessthan$10,000if the a.contractualinterestrate is lessthanthemarketinterestrate.

b.contractualinterestrate isgreaterthanthemarketinterestrate. c.bondis convertible.

d.contractualinterestrate isequaltothemarket interestrate.

72.     GomezCorporationissues1,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at 98.Thejournalentryto recordtheissuancewillshowa

a.debitto Cashof$1,000,000.

b.creditto DiscountonBondsPayablefor $20,000. c.creditto BondsPayablefor$980,000.

d.debitto Cashfor $980,000.

Long-TermLiabilities     15-11

73.     Themarketinterestrate isoftencalledthe a.statedrate.

b.effectiverate. c.couponrate.

d.contractualrate.

74.     Ifbonds areissuedat adiscount,itmeansthatthe a.financialstrengthof theissuerissuspect.

b.marketinterestrateishigher thanthecontractualinterestrate. c.marketinterestrateis lower thanthecontractualinterestrate.

d.bondholderwillreceiveeffectivelylessinterestthanthecontractualinterestrate.

75.     Eachof thefollowingaccountsis reportedas long-term liabilitiesexcept a.BondInterestPayable.

b.BondsPayable.

c.Discounton BondsPayable. d.Premiumon BondsPayable.

76.     Thestatementthat"Bondpricesvaryinverselywithchangesinthemarketinterestrate" meansthatif the

a.marketinterestrateincreases,thecontractualinterest rate willdecrease. b.contractualinterest rate increases, thenbondpriceswillgo down.

c.marketinterestratedecreases,thenbond priceswillgo up.

d.contractualinterestrate increases,themarketinterestratewilldecrease.

77.     Thecarryingvalueofbondswillequalthemarketprice a.at thecloseof everytrading day.

b.attheendofthefiscalperiod. c.onthedateof issuance.

d.everysixmonthsonthedateinterestispaid.

78.     Thesaleof bondsabovefacevalue a.isa rareoccurrence.

b.willcausethetotalcostof borrowingto belessthanthebondinterestpaid.c.will causethe totalcostof borrowingtobemorethanthebondinterestpaid. d.willhaveno net effectonInterestExpensebythetimethebondsmature.

79.     Inthebalancesheet,theaccount,Premium on BondsPayable, is a.addedtobondspayable.

b.deductedfrom bondspayable.

c.classifiedasastockholders'equityaccount. d.classifiedasarevenueaccount.

80.     Twothousandbondswithafacevalueof$1,000each,aresoldat103.Theentryto record theissuanceis

a.Cash....................................................................................2,060,000

BondsPayable...........................................................                            2,060,000

b.Cash....................................................................................2,000,000 PremiumonBondsPayable................................................             60,000

BondsPayable...........................................................                            2,060,000

15-12

c.Cash...................................................................................2,060,000 PremiumonBondsPayable......................................

BondsPayable...........................................................

60,000 2,000,000

d.Cash...................................................................................2,060,000 DiscountonBondsPayable.......................................

BondsPayable...........................................................

60,000 2,000,000

81.     Bondinterestpaidis

a.higherwhenbondssellat a discount. b.lower whenbondssellat apremium.

c.thesame whetherbondssellat adiscountorapremium.

d.higherwhenbondssellat a discountandlowerwhenbondssellata premium.

82.       MendezCorporationissues2,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at 103.Thejournalentrytorecordtheissuancewillshowa

a.debitto Cashof$2,000,000.

b.creditto Premium onBonds Payablefor $60,000. c.creditto BondsPayablefor$2,030,000.

d.creditto Cashfor$2,060,000.

Usethefollowing informationforquestions83–86.

GoldenCompanyreceivedproceedsof$94,250on10-year,8%bondsissuedonJanuary1, 2007.Thebondshadafacevalueof$100,000,payinterestsemi-annuallyonJune30and December31, andhavea call price of 101.Goldenusesthestraight-linemethodof amortization.

83.     Whatisthe amountof interestGoldenmustpaythebondholdersin2007? a.$7,540

b.$8,000 c.$8,575 d.$7,425

a84.    WhatistheamountofinterestexpenseGoldenwillshowwithrelationtothesebondsfor theyearendedDecember31,2008?

a.$8,000 b.$7,540 c.$8,575 d.$7,425

a85.    Whatisthecarryingvalueof thebonds onJanuary1, 2009? a.$100,000

b.$95,400 c.$98,850 d.$94,825

86.     GoldenCompanydecidedtoredeemthebondsonJanuary1, 2009.Whatamountofgain orlosswouldGoldenreportonits2009incomestatement?

a.$4,600gain b.$5,600gain c.    $5,600loss d.$4,600loss

Long-TermLiabilities     15-13

87.     Bryce Companyhas$500,000ofbondsoutstanding.Theunamortizedpremiumis$7,200. Ifthecompanyredeemedthebondsat101,whatwouldbethegainorlossonthe redemption?

a.$2,200gain b.$2,200loss c.$5,000gain d.$5,000loss

88.     ThecurrentcarryingvalueofJensen’s$600,000facevaluebondsis$597,750.Ifthe bonds are retiredat102, what wouldbetheamountJensenwouldpayits bondholders?a.$597,750

b.$600,000 c.$603,000 d.$612,000

89.     LaheyCorporationretiresits$500,000facevaluebondsat105onJanuary1,following thepaymentofannual interest.The carryingvalueofthebondsatthe redemptiondateis $518,725.Theentrytorecordtheredemptionwillincludea

a.creditof $18,725toLosson BondRedemption. b.debitof $18,725toPremiumon BondsPayable. c.credit of $6,275toGainon BondRedemption.d.debitof $25,000toPremiumon BondsPayable.

90.     A$900,000bondwasretiredat103whenthecarryingvalueofthebondwas$933,000. Theentrytorecordtheretirement wouldincludea

a.gainonbondredemptionof $27,000. b.losson bondredemptionof$6,000.c.lossonbondredemptionof$27,000. d.gainonbondredemptionof $6,000.

91.     Ifforty$1,000 convertiblebondswitha carrying value of$46,000areconvertedinto6,000 shares of$5parvaluecommonstock,thejournalentrytorecordtheconversionis

a.BondsPayable....................................................................               46,000 CommonStock...........................................................                           46,000

b.BondsPayable....................................................................               40,000 PremiumonBondsPayable................................................         6,000

CommonStock...........................................................                               46,000

c.BondsPayable....................................................................               40,000 PremiumonBondsPayable................................................         6,000

CommonStock...........................................................                               30,000 Paid-inCapitalin Excess ofPar.................................                                           16,000

d.BondsPayable....................................................................               46,000

DiscountonBondsPayable.......................................                                     6,000 CommonStock...........................................................                           30,000 Paid-inCapitalin Excess ofPar.................................                            10,000

92.     A corporationrecognizesagainorloss

a.onlywhenbondsareconverted intocommonstock. b.onlywhenbondsareredeemedbeforematurity.

c.whenbondsareredeemedat orbeforematurity.

d.whenbondsareconvertedintocommonstockandwhentheyareredeemedbefore maturity.

15-14

93.     If thereisa lossonbondsredeemedearly,it is a.debiteddirectlyto RetainedEarnings.

b.reportedasan"OtherExpense"onthe incomestatement.

c.reportedas an"ExtraordinaryItem"ontheincomestatement. d.debitedtoInterest Expense,asa cost offinancing.

94.     Ifbondscanbeconvertedintocommonstock,

a.theywill sellat a lower pricethancomparablebondswithoutaconversionfeature.

b.theywillcarryahigherinterestratethancomparablebondswithouttheconversion feature.

c.theywillbeconvertedonlyif the issuercallsthem inforconversion.

d.thebondholdermaybenefitifthemarketpriceofthecommonstockincreases substantially.

95.     Whenbondsareconvertedintocommonstock,

a.themarketpriceofthestockonthedateofconversioniscreditedtotheCommon Stockaccount.

b.themarketpriceofthebondsonthedateofconversioniscreditedtotheCommon Stockaccount.

c.themarketpriceof thestock andthebondsisignoredwhenrecordingtheconversion. d.gainsor lossesontheconversionarerecognized.

96.     Ifbonds withafacevalueof$90,000areconvertedintocommonstockwhenthecarrying value of thebondsis $81,000,theentrytorecordtheconversionwillinclude adebitto

a.BondsPayablefor $90,000. b.BondsPayablefor $81,000.

c.Discounton BondsPayablefor$9,000.

d.BondsPayableequaltothemarketpriceof thebonds onthedateofconversion.

97.     A$900,000bondwasretiredat98whenthecarryingvalueofthebondwas$888,000. Theentrytorecordtheretirement wouldincludea

a.gainonbondredemptionof $12,000. b.losson bondredemptionof$6,000.c.lossonbondredemptionof$12,000. d.gainonbondredemptionof $6,000.

98.     Twenty$1,000bondswithacarryingvalueof$25,600areconverted into2,000sharesof $5parvaluecommonstock.Thecommonstockhadamarketvalueof$9pershareon thedate of conversion.Theentrytorecordtheconversion is

a.BondsPayable...................................................................                25,600 CommonStock..........................................................                            10,000 Paid-inCapitalin Excess ofPar..................................                            15,600

b.BondsPayable...................................................................                20,000 PremiumonBondsPayable...............................................          5,600

CommonStock..........................................................                                18,000 Paid-inCapitalin Excess ofPar.................................                              7,600

c.BondsPayable...................................................................                20,000 Premiumon BondsPayable...............................................          5,600

CommonStock..........................................................                                10,000 Paid-inCapitalin Excess ofPar..................................                                          15,600

d.BondsPayable...................................................................                25,600 CommonStock..........................................................                            18,000 Paid-inCapitalin Excess ofPar..................................                              7,600

Long-TermLiabilities     15-15

99.     Which oneofthefollowingamounts increaseseachperiod whenaccountingforlong-term notes payable?

a.Cashpaymentb.Interestexpense

c.Principalbalance

d.Reductionofprincipal

100.     Inthebalancesheet,mortgagenotespayablearereportedas a.acurrentliability only.

b.a long-termliabilityonly.

c.bothacurrentanda long-term liability.

d.a currentliability exceptfor thereductioninprincipalamount.