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Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2014. On December 31, 2014 the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened to the market rate of interest?


A) The market rate increased.
B) The market rate decreased.
C) The market rate stayed the same.
D) The change in the market rate can not be determineD.The bonds sold for par value on January 1, 2014 so the stated interest rate equaled the market rate of interest. As of December 31, 2014, the bonds were selling at a premium, which means that the stated rate was greater than the market rate on December 31, 2014. Therefore, the market rate of interest decreased.

E) A) and B)
F) A) and C)

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B

Northridge Company prepared a bond issue dated January 1, 2014. On January 1, 2014, the company issued $100,000 of its par value bonds for $103,000. The bonds mature in thirty years and have a stated rate of interest of 8% per year. Interest is payable annually on December 31. Straight-line amortization is used (round to the nearest dollar). Required: A. Prepare the journal entry to record the sale of bonds on January 1, 2014. B. Prepare the journal entry to record interest expense at December 31, 2014 (end of the annual accounting period). No adjusting journal entries have been made during the year. C. Show how the bonds would be reported on the balance sheet of Northridge Company dated December 31, 2016.

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In a recent year, Tommy Toys reported the following amounts (in millions). Identify where these items would be classified on the statement of cash flows (operating, investing or financing)? Also, indicate whether each amount would be added (+) or subtracted (-) in those sections of the cash flow statement.

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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 stated (coupon) rate.

A) True
B) False

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Which of the following statements best describes callable bonds?


A) They can be turned in for early retirement at the option of the bondholder.
B) They can be converted to common stock at the option of the bondholder.
C) They can be called for early retirement at the option of the issuer.
D) They can be called for early retirement at the option of the lien holder.

E) All of the above
F) A) and B)

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C

A bond will sell at its par value when the market rate of interest equals the stated rate of interest.

A) True
B) False

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When a bond payable is issued at a premium, subsequent amortization of the premium does which of the following?


A) Increases interest expense.
B) Decreases the book value of the bonds.
C) The amortization for each year the bond approaches maturity, when the effective-interest method is used, would decrease.
D) Decreases the amount reported as a cash flow from operating activities.

E) C) and D)
F) B) and C)

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The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate of interest debits premium on bonds payable.

A) True
B) False

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On January 1, 2014, a corporation issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interest rate. Assuming the effective-interest method of amortization is used, what is the book value of the bond liability as of June 30, 2014 (to the nearest dollar) ?


A) $400,000.
B) $416,495.
C) $409,811.
D) $403,342.

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

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Which of the following statements best describes convertible bonds?


A) They can be turned in for early retirement at the option of the bondholder.
B) They can be converted to common stock at the option of the bondholder.
C) They can be called for early retirement at the option of the issuer.
D) They can be converted to common stock at the option of the issuer.

E) A) and C)
F) A) and B)

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Which of the following statements regarding the debt-to-equity ratio is correct?


A) A high ratio means that the company is primarily financed through stockholder investments.
B) A higher ratio is preferred.
C) The debt-to-equity ratio is a measure of a company's ability to pay its debt.
D) The debt-to-equity ratio is a measure of investor and creditor risk.

E) C) and D)
F) B) and D)

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Assuming no adjusting journal entries have been made, the journal entry to record the cash interest payment on the due date for bonds issued at a discount results in which of the following?


A) An increase in expenses and a decrease in liabilities.
B) An increase in expenses and an increase in liabilities.
C) A decrease in both liabilities and stockholders' equity.
D) A decrease in both assets and liabilities.

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

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Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

A) True
B) False

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True

Fence Company reported the following information for 2015 (in millions). Identify where these items would be classified on the statement of cash flows, (operating, investing, or financing) and whether they would be added (+) or subtracted (-) in those sections.

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Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2013, for $102,360 on April 1, 2013. The bonds pay interest annually on April 1. Straight-line amortization is used by the company. What entry is required at April 1, 2014 for the first interest payment? Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2013, for $102,360 on April 1, 2013. The bonds pay interest annually on April 1. Straight-line amortization is used by the company. What entry is required at April 1, 2014 for the first interest payment? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) None of the above
F) All of the above

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On January 1, 2014, Mendez Corporation issued 400 of its $1,000, ten-year, 9% bonds. The bonds were dated January 1, 2014, and interest is paid annually each December 31. The bonds were issued at 99. Required: Part A: Prepare the entry to record the issuance of the bonds on January 1, 2014: Part B: Were the bonds issued at par, at a premium, or at a discount? How did you arrive at your answer?

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Part A: Part B: The bonds were issued at...

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Amortization of discount on bonds payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

A) True
B) False

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On July 1, 2014, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bonds were dated July 1, 2014, and semi-annual interest will be paid each December 31 and June 30. Garden Works Inc. uses the straight-line method of amortization. How much is the semi-annual interest expense?


A) $14,000.
B) $14,150.
C) $10,350.
D) $11,000.

E) C) and D)
F) All of the above

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Which of the following is not a reason that a corporation would want to issue bonds instead of stock?


A) Interest payments can be deducted for income tax purposes.
B) Stockholders maintain control.
C) The impact on earnings from using borrowed money may be positive.
D) There is less risk associated with a bond issue.

E) A) and B)
F) A) and C)

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Which of the following statements regarding the effective-interest method of amortization is incorrect?


A) The amount of interest expense is different each period.
B) The amount of discount or premium, on which amortization is calculated, increases each period.
C) The effective-interest method is one of the options allowed by generally accepted accounting principles for all bond issues.
D) The total interest expense over the life of a bond is the same as that reported under the straight-line method of amortization.

E) None of the above
F) All of the above

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