IA 2 - Bonds Payable (CHAP 5)

Question 1

Most corporate bonds are

a. Mortgage bonds
b. Debenture bonds
c. Secured bonds
d. Collateral bonds

Answer 1

b. Debenture bonds

Question 2

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

a. Registered or coupon
b. Mortaged or unmortgaged
c. Indebentured or debentured
d. Callable or redeemable

Answer 2

a. Registered or coupon

Question 3

Zero-coupon bonds

a. Offer a return in the form of a deep discount off the face amount

b. Result in zero interest expense for the issuer

c. Result in zero interest revenue for the investor

d. Are reported as shareholders’ equity by the issuer

Answer 3

a. Offer a return in the form of a deep discount off the face amount

Question 4

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

a. Bond ratings provided by investment houses

b. Newspaper articles

c. Bond interest payments

d. The audit report

Answer 4

a. Bond ratings provided by investment houses

Question 5

Bonds payable should be reported as noncurrent at

a. Face amount less any unamortized discount or plus any unamortized premium

b. Current market price

c. face amount less any unamortized premium or plus any unamortized discount

d. Face amount less accrued interest since the last interest payment date

Answer 5

a. Face amount less any unamortized discount or plus any unamortized premium

Question 6

In the amortization of discount on bonds payable

a. The interest expense is less with each successive interest payment

b. The total effective interest is equal to the amount of the discount plus the total cash interest paid

c. The carrying amount of the bonds payable declines eventually to face amount

d. The reduction on the discount is less with each successive interest payment

Answer 6

b. The total effective interest is equal to the amount of the discount plus the total cash interest paid

Question 7

Bonds payable not designated at fair value through loss shall be measured initially at

a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount

Answer 7

c. Fair value minus bond issue cost

Question 8

The amortized cost of bonds payable means

a. Face amount plus premium on bonds payable

b. Face amount minus discount on bonds payable

c. Face amount minus bond issue cost

d. Face amount plus premium on bonds payable or minus discount on bonds payable

Answer 8

d. Face amount plus premium on bonds payable or minus discount on bonds payable

Question 9

Which statement is true about the fair value option measuring bonds payable?

a. The effective interest method of amortization must be used to calculate interest expense must

b. Discount or premium is disclosed in the notes to financial statements

c. The fair value of the bond and the principal obIigation value must be disclosed.

d. If the fair value option is elected, it must be applied to all bonds.

Answer 9

c. The fair value of the bond and the principal obIigation value must be disclosed.

Question 10

An entity has bonds outstanding in which the market rate of interest has risen. The entity elected the fair value option. What will the entity report for the year?

a. Interest expense and a gain
b. Interest expense and a loss
c. A gain and no interest expense
d. A loss and no interest expense

Answer 10

a. Interest expense and a gain

Question 11

Bonds that mature on a single date are called

a. Term bonds
b. Serial bonds
c. Callable bonds
d. Convertible bonds

Answer 11

a. Term bonds

Question 12

Bonds issued with scheduled maturities at various dates are called

a. Convertible bonds
b. Terms bonds
c. Serial bonds
d. Callable bonds

Answer 12

c. Serial bonds

Question 13

Debentures are

a. Unsecured bonds
b. Secured bonds
c. Ordinary bonds
d. Serial bonds

Answer 13

a. Unsecured bonds

Question 14

How would the amortization of premium on bonds payable affect the carrying amount of bond and net income,respectively?

a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase

Answer 14

d. Decrease and Increase

Question 15

How would the amortization of discount on bonds payable affect the carrying amount of bond and net income,respectively?

a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase

Answer 15

a. Increase and Decrease

Question 16

Unamortized bond discount should be reported as

a. Direct deduction from the face amount of the bond

b. Direct deduction from the present value of the bond

c. Deferred charge

d. Part of the bond issue cost

Answer 16

a. Direct deduction from the face amount of the bond

Question 17

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

a. Decreased by accrued interest from June 1 to November 1

b. Decreased by accrued interest from May 1 to June 1

c. Increased by accrued interest from June 1 to November 1

d. Increased by accrued interest from May 1 to June 1

Answer 17

d. Increased by accrued interest from May 1 to June 1

Question 18

The issuer of a bond sold at face amount with interest payable February 1 and August 1 should report

a. Liability for accrued interest
b. An addition to bonds payable
c. Increase in deferred charge
d. Contingent liability

Answer 18

a. Liability for accrued interest

Question 19

A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 31 is for a period of

a. Three months
b. Four months
c. Six months
d. Seven months

Answer 19

d. Seven months

Question 20

A bond was issued at a discount with a call provision. When the bond issuer exercised the call provision on an interest date, the amount of bond liability derecognized should have equaled the

a. Call price

b. Call price less unamortized discount

c. Face amount less unamortized discount

d. Face amount plus unamortized discount

Answer 20

c. Face amount less unamortized discount

Question 21

When bonds are sold between interest dates, any accrued interest is credited to

a. Interest payable
b. Interest revenue
c. Interest receivable
d. Bonds payable

Answer 21

a. Interest payable

Question 22

Which statement is true about accrued interest on bonds sold between interest dates?

a. The accrued interest is computed at the effective rate.

b. The accrued interest will be paid to the seller when the bonds mature.

c. The accrued interest is extra income to the buyer.

d. All of the statements are not true.

Answer 22

d. All of the statements are not true.

Question 23

Which statement is true about a premium on bonds payable?

a. The premium or bonds payable is a contra shareholders equity account.

b. The premium on bonds payable is an account that appears only on the books of the investor.

c. The premium on bonds payable increases when amortization entries are made until maturity date.

d. the premium on bonds payable decreases when amortization entries are made until the balance reaches zero at maturity date.

Answer 23

d. the premium on bonds payable decreases when amortization entries are made until the balance reaches zero at maturity date.

Question 24

The amortization of discount on bonds payable

a. Decreases the face amount of bonds payable.

b. Decreases the amount of interest expense.

c. Decreases the carrying amount of bonds payable.

d. Increases the carrying amount of bonds payable.

Answer 24

d. Increases the carrying amount of bonds payable.

Question 25

The carrying amount of a bond liability is

a. Call price of the bond plus bond discount or minus bond premium.

b. Face amount of the bond plus related premium or minus related discount.

c. Face amount of the bond plus related discount or minus related discount.

d. Maturity value of the bond plus related discount or related premium.

Answer 25

b. Face amount of the bond plus related premium or minus related discount.

Question 26

An extinguishment of bonds payable originally issued at a premium is made by purchase of the bonds between interest dates. Which statement is true at the time of extinguishment?

a. Any costs of issuing the bonds payable must be amortized up to the purchase date.

b. The premium on bonds payable must be amortized up to the purchase date.

c. Interest must be accrued from the last interest date to the purchase date.

d. All of these statements are true.

Answer 26

d. All of these statements are true.

Question 27

When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from the early extinguishment should be

a. Amortized over the remaining original life of the retired bond issue.

b. Amortized over the life of the new bond issue.

c. Recognized in retained earnings

d. Recognized in income from continuing operations.

Answer 27

d. Recognized in income from continuing operations.

Question 28

An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying amount, respectively?

a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated

Answer 28

a. Understated and understated

Question 29

An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the failure to record premium amortization on interest expense and bond carrying amount, respectively?

a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated

Answer 29

c. Overstated and overstated

Question 30

The proceeds from the issue of the bonds payable

a. Will always be equal to the face amount.

b. Will always be less than the face amount.

c. Will always be more than the face amount.

d. May be equal, more or less than the face amount depending on market interest rate.

Answer 30

d. May be equal, more or less than the face amount depending on market interest rate.