Bakersfield College

ACG 2021

1)Bonds usually sell at their:

1. 1. Maturity value.
   2. Face value.
   3. Present value.
   4. Statistical expected value.

 

 

 

 

2. Straight-line amortization of bond discount or premium:
   1. Can be used for amortization of discount or premium in all cases and circumstances.
   2. Provides the same amount of interest expense each period as does the effective interest method.
   3. Is appropriate for deep discount bonds.
   4. Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

 

 

 

 

3. An amortization schedule for bonds issued at a premium:
   1. Summarizes the amortization of the premium, a contra-asset account with a credit balance.
   2. Is reported in the balance sheet.
   3. Is a schedule that reflects the changes in the debt over its term to maturity.
   4. All of these answer choices are correct.

 

 

 

Use the following to answer questions:

 

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2016. LPC's accountant has projected the following amortization schedule from issuance until maturity:

Date	Cash interest	Effective interest	Decrease in balance	Outstanding balance
1/1/2016				$207,020
6/30/2016	$7,000	$6,211	$789	206,230
12/31/2016	7,000	6,187	813	205,417
6/30/2017	7,000	6,163	837	204,580
12/31/2017	7,000	6,137	863	203,717
6/30/2018	7,000	6,112	888	202,829
12/31/2018	7,000	6,085	915	201,913
6/30/2019	7,000	6,057	943	200,971
12/31/2019	7,000	6,029	971	200,000

 

4. LPC issued the bonds:
   1. At par.
   2. At a premium.
   3. At a discount.
   4. Cannot be determined from the given information.

 

 

 

 

5. What is the annual stated interest rate on the bonds? a.         3.5%

2. 6%
3. 7%
4. None of the answer choices is correct.

 

 

 

 

6. What is the annual effective interest rate on the bonds?
   1. 3%

b.     3.5%

3. 6%
4. 7%

 

 

7. LPC calls the bonds at 103 immediately after the interest payment on 12/31/2017 and retires them. What gain or loss, if any, would LPC record on this date?
   1. No gain or loss
   2. $3,717 gain
   3. $6,000 loss
   4. $2,283 loss

 

 

 

 

8. Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2016, is for a period of:
   1. Three months.
   2. Four months.
   3. Six months.
   4. Seven months.

 

 

 

 

9. Ordinarily, the proceeds from the sale of a bond issue will be equal to:
   1. The face amount of the bond.
   2. The total of the face amount plus all interest payments.
   3. The present value of the face amount plus the present value of the stream of interest payments.

1. 4. The face amount of the bond plus the present value of the stream of interest payments.

 

 

 

 

 

10. A $500,000 bond issue sold at 98. Therefore, the bonds:
    1. Sold at a discount because the stated rate of interest was lower than the effective rate.
    2. Sold for the $500,000 face amount less $10,000 of accrued interest.
    3. Sold at a premium because the stated rate of interest was higher than the yield rate.
    4. Sold at a discount because the effective interest rate was lower than the face rate.

 

 

 

 

11. When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:
    1. Six months.
    2. Four months.
    3. 10 months.
    4. 12 months.

 

 

 

 

12. How would the book value of bonds payable be affected by the amortization of each of the following?

Premium                   Discount

1. 1. No effect                   No effect
   2. No effect                    Increase
   3. Increase                    Decrease
   4. Decrease                    Increase

 

 

 

13. For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

Discount                    Premium

1. 1. No                                No
   2. No                               Yes
   3. Yes                               Yes
   4. Yes                                No

 

 

 

 

14. For a bond issue that sells for more than the bond face amount, the effective interest rate is:
    1. The rate printed on the face of the bond.
    2. The Wall Street Journal prime rate.
    3. More than the rate stated on the face of the bond.
    4. Less than the rate stated on the face of the bond.

 

 

 

 

15. When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:
    1. Less than the effective interest.
    2. Equal to the effective interest.
    3. Greater than the effective interest.
    4. More than if the bonds had been sold at a discount.

 

 

 

 

16. When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:
    1. More than the effective interest.
    2. Less than the effective interest.
    3. Equal to the effective interest.
    4. More than if the bonds had been sold at a premium.

 

 

 

 

17. When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense:
    1. Increases.
    2. Decreases.
    3. Remains the same.
    4. Is equal to the change in book value.

 

 

 

 

18. When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:
    1. Remains constant.
    2. Is equal to the change in book value.
    3. Increases.
    4. Decreases.

 

 

 

 

19. When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:
    1. Higher than the effective interest amount every year.
    2. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
    3. Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
    4. Less than the effective interest amount every year.

 

 

 

 

20. When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:
    1. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
    2. Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
    3. Higher than the effective interest amount every year.
    4. Less than the effective interest amount every year.

 

 

 

 

21. Bonds were issued at a discount. In the bond amortization schedule:
    1. The interest expense is less with each successive interest payment.
    2. The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.
    3. The outstanding balance (book value) of the bonds declines eventually to face value.
    4. The reduction in the discount is less with each successive interest payment.

 

 

 

 

22. On January 1, 2016, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2016, in the amount of:

a.      $ 8,850.

b.      $10,000.

c.       $10,620.

d.      $12,000.

 

 

 

 

23. A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:
    1. Equal to $500,000.
    2. More than $500,000.
    3. Less than $500,000.
    4. The answer cannot be determined from the information provided.

 

 

 

 

24. On January 1, 2016, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2026. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is:

a.     $80,000.

b.     $82,000.

c.     $87,000.

d.     $89,000.

 

 

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25. On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2016 (assume annual interest payments and amortization)?

a.     $23,280.

b.     $29,100.

c.     $24,000.

d.     $30,000.

 

 

 

 

26. Zero-coupon bonds:
    1. Offer a return in the form of a deep discount off the face value.
    2. Result in zero interest expense for the issuer.
    3. Result in zero interest revenue for the investor.
    4. Are reported as shareholders’ equity by the issuer.

 

 

 

27. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:
    1. Less the present value of all future interest payments at the rate of interest stated on the bond.
    2. Plus the present value of all future interest payments at the rate of interest stated on the bond.
    3. Plus the present value of all future interest payments at the market (effective) rate of interest.
    4. Less the present value of all future interest payments at the market (effective) rate of interest.

 

 

 

 

28. On January 31, 2016, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2015, and mature on December 31, 2025. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2016, balance sheet?

a.    $18,000.

b.   $36,000.

c.     $54,000.

d.   $48,000.

 

Use the following to answer questions

 

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2016. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

 

Payment	Cash	Effective	Decrease in	Outstanding
		Interest	Balance	Balance
				8,640,967
1	300,000	345,639	45,639	8,686,606
2	300,000	347,464	47,464	8,734,070
3	300,000	349,363	49,363	8,783,433
4	300,000