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On January 1, 2013, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate to be paid annually. The following present value factors have been provided: What was the issuance price of the bonds if the market rate of interest was 8%?  Time Period  Interest  PV of $1 PV of a $1 Annuity 1010%.3866.145108%.4636.7101012%.3225.650\begin{array}{cccc}\text { Time Period } &\text { Interest } &\text { PV of } \$ 1 & \text { PV of a } \$ 1 \text { Annuity }\\\hline10 & 10 \% & .386 & 6.145 \\10 & 8 \% & .463 & 6.710 \\10 & 12 \% & .322 & 5.650\end{array}


A) $5,000,000.
B) $5,670,000.
C) $5,387,500.
D) $5,712,500.

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

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The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus stockholders' equity.

A) True
B) False

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On July 1, 2015, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2010. Which of the following statements is correct?


A) Stockholders' equity is not affected by the bond retirement.
B) A gain of $2,500 will be reported on the income statement.
C) A loss of $2,500 will be reported on the income statement.
D) A gain of $402,500 will be reported on the income statement.

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

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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. Gammel Company uses the straight-line method of amortization. Which of the following statements is incorrect?


A) The market rate of interest exceeded the stated rate of interest when the bonds were issued.
B) The annual interest expense exceeds the annual cash interest payment by $200.
C) The annual increase in the bond book value is $200.
D) The annual interest expense is $4,300.

E) A) and D)
F) B) and D)

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

A) True
B) False

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A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements? Interest expense Discount on bonds payable Cash


A) The bonds payable book value increases by the amount of the credit to discount on bonds payable.
B) The bonds payable book value decreases by the amount of the credit to cash.
C) Stockholders' equity decreases by the amount of the credit to cash.
D) The cash payment is reported as a cash flow from financing activities.

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

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A convertible bond can be called for early retirement at the option of the issuing company.

A) True
B) False

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The journal entry to record the interest cash payment for a bond issued at a discount results in an increase in the book value of the bond liability.

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 on December 31, 2014 is closest to:


A) $400,000.
B) $413,320.
C) $406,302.
D) $407,432.

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

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Halverson's times interest earned ratio was 2.98 in 2014, 2.79 in 2013, and 2.31 in 2012. Which of the following statements about the ratio is possibly correct?


A) The increasing ratio indicates decreasing levels of debt on which interest is incurred.
B) The increasing ratio indicates the strategy of pursuing growth by investment in other companies, which has increased debt, but Halverson's profits have not yet increased from those investments.
C) The increasing ratio implies increased long-term debt financing.
D) The increasing ratio would be considered by creditors to be an indicator of higher risk.

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

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Which of the following statements incorrectly describes the accounting for bonds that were issued at a premium?


A) The market rate of interest is less than the stated interest rate.
B) The interest expense over the life of the bonds will be less than the cash interest payments.
C) The present value of the bonds' future cash flows is less than the bonds' maturity value.
D) The book value of the bond liability decreases when interest payments are made on the due dates.

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

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On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the interest expense on the income statement for the year ended December 31, 2014 is closest to:


A) $677.
B) $883.
C) $773.
D) $700.

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

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A bond issued at a premium will pay cash interest in excess of the amount of interest expense recognized for accounting purposes.

A) True
B) False

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Which of the following statements is correct?


A) An outflow of cash for interest payments is reported as a cash flow from financing activities.
B) The conversion of bonds to stock is reported as a cash flow from financing activities.
C) An outflow of cash when callable bonds are recalled by the issuer is reported as a cash flow from financing activities.
D) Amortization of discounts and premiums on bonds payable are reported as a cash flow from financing activities.

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

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Which of the following types of bonds has specific assets pledged to guarantee repayment?


A) Debenture bond.
B) Callable bond.
C) Secured bond.
D) Convertible bonD.A secured bond has specific assets pledged as a guarantee of repayment at maturity.

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

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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% market interest rate. Assuming the effective-interest method of amortization is used, and rounding all calculations to the nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2014?


A) $24,000.
B) $24,789.
C) $20,000.
D) $20,658.

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

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On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming the effective-interest amortization is used, and rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2014 interest expense? On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming the effective-interest amortization is used, and rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2014 interest expense? 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) B) and C)
F) A) and D)

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Straight-line amortization of a premium related to a bond issuance would result in which of the following?


A) Interest expense to be calculated by multiplying the market interest rate times the book value of the bonds.
B) Higher premium amortization in the early years and lower interest expense over the life of the bonds.
C) Calculating the constant amount of premium to be amortized and then subtracting it from cash interest to calculate interest expense.
D) Lower premium amortization in the early years and higher interest expense over the life of the bonds.

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

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On January 1, 2014, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the 2015 interest expense is closest to:


A) $779.
B) $796.
C) $677.
D) $700.

E) B) and D)
F) A) and B)

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The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

A) True
B) False

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