Learning Objective 9.3 Questions
1) Which of the following is false? The discount on bonds payable is
A) amortized over the life of the bond.
B) deducted from bonds payable.
C) a contra account to bonds payable.
D) reported in liabilities section of the balance sheet.
E) an adjunct account to bonds payable.
2) The discount on bonds payable
A) serves to reduce interest expense on the income statement.
B) serves to increase interest expense on the income statement.
C) is never allowed by investment bankers when debt is issued.
D) serves to increase the cash interest payment.
E) is an adjunct account to bonds payable.
3) Which of the following is not true of bonds issued at a premium?
A) The cash proceeds exceed the face amount of the bonds.
B) The amortization of bond premium decreases the interest expense.
C) The amount of the Premium on Bonds Payable account is subtracted from the face amount of the bonds to determine the net liability reported in the balance sheet.
D) The market rate was below the coupon rate.
E) Amortization of the premium decreases the carrying value of the bond.
4) Early extinguishment of debt
A) is not allowed by the FASB during the first 2 years bonds are outstanding
B) will never have related gains or losses recorded on the books.
C) occurs when the issuer redeems its own bonds by purchases on the open market or by exercising their rights to redeem callable bonds.
D) is not permitted.
E) is permitted only in the banking industry.
5) The issuance of bonds is shown on the statement of cash flows as
A) a cash inflow from financing activities.
B) a cash inflow from investing activities.
C) a cash inflow from operating activities.
D) a cash outflow from financing activities.
E) a cash outflow from investing activities.
6) The spreading of bond discount over the life of the bonds as interest expense is called
A) discount amortization.
B) effective-interest amortization.
C) compound interest amortization.
D) premium amortization.
7) Which statement is true regarding zero coupon bonds?
A) They provide cash interest payments during their life.
B) They are sold for more than the face or maturity value.
C) The investor determines their market value at the issuance date by calculating the present value of their maturity value, using the market rate of interest for bonds having similar terms and risks.
D) They are also called callable debentures.
E) They are also called junk bonds.
8) The market interest rate that equates the proceeds from a loan with the present value of the loan payments is called
A) implicit interest rate.
B) nominal interest rate.
C) imputed interest rate.
D) coupon interest.
E) both A and C.
9) Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to
A) the amount of interest expense plus the cash paid for interest.
B) the amount of interest expense less the cash paid for interest.
C) the total discount divided by the number of interest payments to be made.
D) the total amount of interest expense divided by the number of interest payments to be made.
E) the amount of the decrease from the cash payment.
10) Boling, Inc., just made the interest payment on its $4,000,000 of outstanding bonds. The bonds are callable at 101 5/8 and the unamortized premium is currently $167,400. The entry to retire half of the bonds would include a
A) debit to premium on bonds payable for $167,400.
B) credit to cash for $2,000,000.
C) credit to gain on early extinguishment of debt for $51,200.
D) debit to loss on early extinguishment of debt for $52,500.
E) debit to loss on early extinguishments of debt for $167,400.