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Exam 10: Reporting and Interpreting Bonds

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Question 21

True/False

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

A) True
B) False

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Question 22

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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) True
B) False

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Question 23

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Which of the following statements is incorrect?

Consider the following statement: "Issuing bonds at a discount is bad for the issuing corporation." Discuss the statement and comment on its validity.

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. How much is the annual interest expense?

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

On January 1, 2014, Lauren Corporation issued $40,000, 9%, ten-year bonds payable at 108. Interest is payable each December 31. Required: A. Prepare the journal entry to record the issuance of the bonds on January 1, 2014. B. Prepare the journal entry to record the first interest payment on December 31, 2014. Use straight-line amortization. No adjusting journal entries have been made during the year. C. What would the carrying value of the bonds be on December 31, 2015?

On January 1, 2014, Clintwood Corporation issued a $1,000, ten-year, 10% bond payable (interest payable each December 31). Required: For the three assumptions below, complete the following schedule if the fiscal year end is December 31, and straight-line amortization is used:

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 10%. Which of the following statements is incorrect?

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

The issuing company and the bond underwriter determine the selling price of a bond.

On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. Which of the following is incorrect assuming the straight-line method of amortization is utilized?

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

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

The following information is available for Sell-for-Less for the years 2013 - 2015 (in millions): Required: A. Compute the Sell-for-Less times interest earned ratio for 2015, 2014 and 2013. Round your answers to two decimal places. B. Briefly interpret the times interest earned ratio for the three years.

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 their par value results in which of the following?

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

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 straight-line amortization. Which of the following statements is incorrect?

If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when the book value is $950,000, a loss of $20,000 will be reported.