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Exam 10: Reporting and Interpreting Bond Securities

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Question 51

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Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

A) True
B) False

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Question 52

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Zero coupon bonds are bonds that are issued:

A) With a zero effective interest rate.
B) At a rate that provides a large discount at issuance.
C) At a rate that has zero difference between the coupon rate and the market rate of interest.
D) As bonds that will have zero amortization recorded over the life of the bond.

E) A) and D)
F) A) and C)

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Question 53

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A bond's interest payments are determined by multiplying the bond's principal amount by the coupon rate.

Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammell Company uses the straight-line method of amortization. - Which of the following statements is incorrect?

Steamboat Company issued the following ten-year bonds on January 1,2019: $100,000 maturity value,6% interest payable annually on each December 31.The bonds were dated January 1,2019 and the accounting period ends December 31.The bonds were issued for $93,000.Steamboat uses the effective-interest method for amortization.The amortization for 2019 was $510. A. B.Assuming instead that the accounting period ends on June 30,prepare the adjusting entry related to interest expense and the interest accrual at June 30.No adjusting entries have been made during the year.

The annual interest rate specified within a bond indenture is called which of the following?

On March 31,2019,Topper Corp.retired bonds early by repurchasing them in the market for $9,700,000.The total face value of the bonds retired at March 31,2019 was $10 million for which there remained a balance of $450,000 of unamortized discount. Prepare the journal entry to retire the bonds.

Newton Company issued its $1,000,000,7%,ten-year bonds to the public on January 1,2019.The bonds pay interest annually,beginning on December 31,2019.Newton Company received $1,154,420 in cash at the issuance of the bonds.The market rate of interest when the bonds were issued was 5%.Newton Company has a December 31 year-end.Assume that no adjusting journal entries have been made during the year. A.Compute the amount of the premium that Newton Company should amortize on December 31,2019,assuming the effective-interest method is used. B.Compute the amount of the premium that Newton Company should amortize on December 31,2019,assuming the straight-line method is used. C.Which method above is theoretically the better method to use for amortizing a bond premium?

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?

A company retired $500,000 of bonds,which have an unamortized discount of $10,000,by repurchasing them for $500,000.What is the amount of the gain or loss on the retirement of the bonds?

Which of the following is correct when using the effective-interest method of amortizing the discount on bonds payable?

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

When the market rate of interest is greater than the coupon rate,the bond will sell at a discount.

Which of the following statements best describes convertible bonds?

The issuance price of a bond is the present value of both the principal,plus the cash interest to be received over the life of the bond,discounted at the coupon rate.

Interest expense decreases over time when a bond is initially issued at a premium and the effective-interest method is used.

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds,the market rate of interest was 8%.Which of the following statements is incorrect?

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

A company has a December 31 fiscal year-end and a bond on which interest is paid annually on December 31.When the bond initially sells at par value,the bond interest expense on the income statement equals the amount of the interest cash payment.

Which of the following statements best describes callable bonds?