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Exam 14: Long-Term Liabilities: Bonds and Notes

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Question 1

True/False

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

A) True
B) False

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Question 2

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

A) a direct deduction from the face amount of the bonds in the Liabilities section
B) paid-in capital
C) a direct deduction from retained earnings
D) an addition to the face amount of the bonds in the Liabilities section

E) None of the above
F) A) and D)

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Question 3

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Jenson Co.is considering the following alternative plans for financing the company:​ 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.​

A corporation issues for cash $1,000,000 of 10%,20-year bonds,interest payable annually,at a time when the market rate of interest is 12%.The straight-line method is adopted for the amortization of bond discount or premium.Which of the following statements is true?

Discount on Bonds Payable is a contra liability account.

A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000.Journalize the redemption of the bonds.

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000.If the issuing corporation redeems the bonds at 97.5,what is the amount of gain or loss on redemption?

A corporation often issues callable bonds to protect itself against significant declines in future interest rates.

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

The effective interest rate method of amortizing a bond discount or premium is the preferred method.

When the effective interest rate method of amortization is used,the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond's carrying value at the beginning of the given period.

Match each description below to the appropriate term (a-g) . -A measure of income earned by each share of common stock

Dylan Corporation issues for cash $2,000,000 of 8%,15-year bonds,interest payable annually,at a time when the market rate of interest is 9%.The straight-line method is adopted for the amortization of bond discount or premium.Which of the following statements is true?

Designer Company issued 10-year bonds on January 1.The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1.The bonds were sold for $690,960 based on the market interest rate of 8%.Designer uses the effective interest method to amortize bond discounts and premiums.On July 1 of the first year,Designer should record an interest expense (round to the nearest dollar) of

Selling the bonds at a premium has the effect of

The balance in Premium on Bonds Payable

Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.

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 $437,740.Journalize the entry to record the issuance of the bonds.

On August 1,Clayton Co.issued $1,300,000 of 20-year,9% bonds,dated August 1,for $1,225,000.Interest is payable semiannually on February 1 and August 1.Present the entries to record the following transactions for the current year: