Toa 41 42 PDF

TOA – Bonds Payable and Effective Interest Method (JM)
1. How should an entity calculate the net proceeds to be received from the bond issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond issuance cost.
d. Discount the bonds at the market rate of interest and deduct bond issuance
(Valix 2015)
2. Which is a true statement for electing the fair value option for valuing bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.
(Valix 2015)
3. What method may be used to report the bonds payable at year-end?

a. Amortized cost
b. Fair value through other comprehensive income
c. Amortized cost and fair value through other comprehensive income
d. Amortized cost and fair value through profit or loss
(Valix 2015)
4. Issued convertible bonds are

a. Separated into debt and equity components with the liability component recorded at fair
value and the residual assigned to the equity component
b. Always recorded using the fair value option
c. Recorded at face value for the liability along with the associated premium or discount
d. Recorded at face value without consideration of a premium or discount.
(Valix 2015)
5. What is the effective interest rate of a debt instrument measured at amortized cost?
a. The stated rate of the debt instrument.

b. The interest rate currently charged by the entity or by others for similar debt instrument.
c. The interest rate that exactly discounts estimated future cash payments through the
expected life of the debt instrument to the net carrying amount of the instrument.
d. The basic, risk-free interest rate.
(Valix 2015)
6. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
(IFRS based 2014)
7. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
(IFRS based 2014)
8. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
(IFRS based 2014)
9. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
(IFRS based 2014)
10. If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
(IFRS based 2014)
11. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
(IFRS based 2014)
12. The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
(IFRS based 2014)
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.
13. One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
(IFRS based 2014)
14. Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. none of these.
(IFRS based 2014)
15. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
(IFRS based 2014)
16. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization
been used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortization
been used.
d. be less than the stated (nominal) rate of interest.
(IFRS based 2014)
17. Under the effective-interest method of bond discount or premium amortization, the
periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
(IFRS based 2014)
18. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
(IFRS based 2014)
19. If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
(IFRS based 2014)
20. When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
(IFRS based 2014)
21. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
(IFRS based 2014)
22. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
(IFRS based 2014)
23. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
(IFRS based 2014)
24. An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
(IFRS based 2014)
25. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption
(IFRS based 2014)
.
26. "In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing
purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
(IFRS based 2014)
27. A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security
for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay
the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
(IFRS based 2014)
28. A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair value of the property
becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
(IFRS based 2014)
29. When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
(IFRS based 2014)
30. When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current fair value of the note.
d. any of these.
(IFRS based 2014)
31. If a company chooses the fair value option, a decrease in the fair value of the liability is
recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these
(IFRS based 2014)
32. Which of the following is an example of "off-balance-sheet financing"?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."
(IFRS based 2014)
33. Statement 1: Companies usually make bond interest payments semiannually, although the interest rate
is generally expressed as an annual rate
Statement 2: A mortgage bond is referred to as a debenture bond
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are false
(IFRS based 2014)
34. Statement 1: Bond issues that mature in installments are called serial bonds
Statement 2: If the market rate is greater than the coupon rate, bonds will be sold at a premium
(IFRS based 2014)
35. Statement 1: The interest rate written in the terms of the bond indenture is called the effective yield or
market rate
Statement 2: The stated rate is the same as the coupon rate
(IFRS based 2014)
36. Statement 1: Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense
Statement 2: A bond may only be issued on an interest payment date
(IFRS based 2014)
37. Statement 1: The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond
Statement 2: Bond issue costs are capitalized as a deferred charge and amortized to expense over the life
of the bond issue.
(IFRS based 2014)
38. Statement 1: The replacement of an existing bond issue with a new one is called refunding
Statement 2: If a long-term note payable has a stated interest rate, that rate should be considered to be the
effective rate
(IFRS based 2014)
39. Statement 1: The implicit interest rate is the rate that equates the cash received with the amounts
received in the future
Statement 2: An unrealized holding gain or loss is the net change in the fair value of the liability from one
period to another, exclusive of interest expense recognized but not recorded
(IFRS based 2014)
40. Statement 1: Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize
the reporting of debt on the balance sheet
Statement 2: The debt to total assets ratio will go up if an equal amount of assets and liabilities are added
to the balance sheet
(IFRS based 2014)
41. Statement 1: If a company plans to retire long-term debt from a bond retirement fund, it should report
the debt as current
Statement 2: The times interest earned ratio is computed by dividing income before interest expense by
interest expense
(IFRS based 2014)
42. Statement 1: The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan
Statement 2: In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor
(IFRS based 2014)
43. Coupon payment is calculated with help of interest rate, then this rate considers as
A. payment interest
B.par interest
C. coupon interest
D. yearly interest rate
(Mc Grawhill 2014)
44. Second mortgages pledged against bond's security are referred as
A. loan mortgages
B. medium mortgages
C. senior mortgages
D. junior mortgage (Mc Grawhill 2014)
45. Long period of bond maturity leads to

A. more price change
B. stable prices
C. standing prices
D. mature prices (Mc Grawhill 2014)
46. Falling interest rate leads change to bondholder income which is

A. reduction in income
B. increment in income
C. matured income
D. frequent income (Mc Grawhill 2014)
47. Bonds issued by corporations and exposed to default risk are classified as
A. corporation bonds
B. default bonds
C. risk bonds
D. zero risk bonds (Mc Grawhill 2014)
48. Bond which is offered below its face value is classified as
A. present value bond
B. original issue discount bond
C. coupon issued bond
D. discounted bond (Mc Grawhill 2014)
49. Redemption option which protects investors against rise in interest rate is considered as
A. redeemable at deferred
B. redeemable at par
C. redeemable at refund
D. redeemable at finding (Mc Grawhill 2014)
50.An official entity that represents bondholders and ensures stated rules in indenture is classified as
A. trustee
B. trust
C. stated entity
D. owner entity (Mc Grawhill 2014)
51. When an entity issued bonds payable for working capital needs, the proceeds from the sale of the
bonds payable
a. Will always be equal to the face amount.

b. Will always be less than to the face amount.
c. Will always be more than to the face amount.
d. May be equal, more or less than the face amount depending on market interest rate.
(Valix 2015)
52. Which of the following statements concerning discount on note payable is incorrect?
a. Discount on note payable may be debited when an entity discounts its own note with the bank.
b. The discount on note payable is a contra liability account which is shown as a deduction from
note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable causes the carrying amount of the liability to
gradually decrease over the life of the note.
(Valix 2015)
53. In a debt restructuring that is considered an asset swap, the gain on extinguishment is equal to the
a. Excess of the fair value of the asset over its carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset.
c. Excess of the fair value of the asset over the carrying amount of the debt.
d. Excess of the carrying amount of the debt over the carrying amount of the asset.
(Valix 2015)
54. The discount resulting from the determination of the present value of a note payable shall be reported
in the statement of financial position as
a. Deferred credit separate from the note.
b. Direct deduction from the face amount of the note.
c. Deferred charged separate from the note.
d. Addition to the face amount of the note.
(Valix 2015)
55. On September 1, 2012, an entity borrowed cash and signed a 2-year interest-bearing note on which
both the principal and interest are payable on September 1, 2014. How many months of accrued interest
would be included in the liability for accrued interest on December 31, 2012 and December 31, 2013?
December 31, 2012 December 31, 2013
a. 4 months 16 months
b. 4 months 4 months
c. 12 months 24 months
d. 20 months 8 months
(Valix 2015)
56. The difference between the carrying amount of a financial liability extinguished and the consideration
given shall
a. Be recognized in profit or loss
b. Be included in equity
c. Be included in retained earnings
d. Not be recognized
(Valix 2015)
57. Costs incurred in connection with the issuance of 10-year bonds which is sold at a slight premium
shall be
a. Charged to retained earnings when the bonds are issued

b. Expensed in the year in which incurred
c. Capitalized as organization cost
d. Reported in the statement of financial position as a deduction from bonds payable and
amortized over the 10-year bond term
(Valix 2015)
58. Which of the following statements is true in relation to the fair value option of measuring a bond
payable?
I.At initial recognition, an entity may revocably designate a bond payable at fair value through profit
or loss.
II.The bond payable is remeasured at every year-end at fair value and any changes in fair value are
recognized in other comprehensive income
a. I only
b. II only
c. Both I and II
d. Neither I nor II
(Valix 2015)
59. After initial recognition, bonds payable shall be measured at
I.Amortized cost using the effective interest method.
II.Fair value through profit or loss
a. I only
b. II only
c. Either I or II
d. Neither I nor II
(Valix 2015)
60. An entity shall measure initially a note payable not designated at fair value through profit or loss at
a. Face amount
b. Fair value
c. Fair value plus transaction cost
d. Fair value minus transaction cost
(Valix 2015)
61. Bonds payable issued with scheduled maturities at various dates are called
A. Term bonds
B. Convertible bond
C. Serial bonds
D. Callable bonds (Valix 2015)
62. Debentures are

A. Secured bonds
B. Unsecured bonds
C. Ordinary bonds
D. Serial bond (Valix 2015)
63. The market interest rate related to a bond is also called the
A. effective interest rate
B. contract interest rate
C. straight-line rate
D. stated interest rate (Valix 2015)
64. The amortization of discount on bonds purchased as a long-term investment

A. increases the amount of the investment account
B. decreases the amount of interest expense
C. decreases the amount of the investment account
D. increases the amount of interest expense (Valix 2015)
65. Debtors are interested in the times-interest-earned ratio because they want to
A. know what rate of interest the corporation is paying
B. have adequate protection against a potential drop in earnings jeopardizing their interest
payments
C. know the tax effect of lending to a corporation
D. be sure their debt is backed by collateral (Valix 2015)
66. Sinking Fund Cash would be classified on the balance sheet as

A. a current asset
B. an intangible asset
C. an investment
D. a fixed asset (Valix 2015)
67. When a corporation issues bonds, the price that buyers are willing to pay for the bonds does not
depend on which of the following below
A. face value of the bonds
B. periodic interest to be paid on the bonds
C. market rate of interest
D. denominations the bonds are sold (Valix 2015)
68. A 20 year bond was issued at a premium with a call provision to retire the bonds. When the bond
issuer exercised the call provision on an interest date, the call price exceeded the carrying value of the
bonds. The amount of the bond liability removed from the accounts should have equaled the
A. Call price plus unamortized premium
B. Face amount plus unamortized premium
C. Current market price
D. Cash paid (Valix 2015)
69. The bond indenture may provide that funds for the payment of bonds at maturity be accumulated over
the life of the issue. The amounts set aside are kept separate from other assets in a special fund called a(n)
A. sinking fund
B. special assessments fund
C. enterprise fund
D. general fund (Valix 2015)
70. If bonds are issued at a discount, it means that the

A. market interest rate is lower than the contractual interest rate.
B. market interest rate is higher than the contractual interest rate.
C. bondholder will receive effectively less interest than the contractual rate of interest.
D. financial strength of the issuer is suspect. (Valix 2015)
71.When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
A. their face value
B. a discount
C. their maturity value
D. a premium (Valix 2015)
72. If the market rate of interest is 10%, a P10,000, 12%, 10-year bond that pays interest semiannually
would sell at an amount
A. greater than face value.
B. less than face value.
C. that cannot be determined.
D. equal to the face value. (Valix 2015)
73.If bonds payable are not callable, the issuing corporation

A. is more likely to repurchase them if the interest rates increase
B. can repurchase them in the open market
C. cannot repurchase them before maturity
D. must get special permission from the SEC to repurchase them (Valix 2015)
74. Bonds usually sell at a discount when investors are willing to invest in the bonds
A. At rate higher than the stated interest rate
B. At rate lower than the stated interest rate
C. At the coupon interest rate
D. When the need arises. (Valix 2015)
75. The account Investment in Bonds is reported

A. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond Investments
B. at fair market value because that is all that is required
C. at cost as a long-term asset
D. at cost as a long-term liability along with the current portion reported as a current liability
(Valix 2015)
76. A bond indenture is
A. a contract between the corporation issuing the bonds and the underwriters selling the bonds
B. the amount for which the corporation can buy back the bonds prior to the maturity date
C. the amount due at the maturity date of the bonds
D. a contract between the corporation issuing the bonds and the bond trustee, who is acting on
behalf of the bondholder
(Valix 2015)
77. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to
A. face value minus the unamortized premium
B. face value plus the unamortized discount
C. face value
D. face value plus the unamortized premium
(Valix 2015)
78. An unsecured bond is the same as a

A. bond indenture.
B. zero coupon bond.
C. debenture bond.
D. term bond.
(Valix 2015)
79. The issuer of a 10 year term bond sold at par three years ago with interest payable May 1 and
November 1 each year shall report in its December 31 balance sheet
A. Addition to bonds payable
B. Liability for accrued interest
C. Increase in deferred charges
D. Contingent liability
(Valix 2015)
80. The amortization of premium on bonds purchased as a long-term investment
A. increases the amount of interest revenue
B. increases the amount of the investment account
C. decreases the amount of interest expense
D. decreases the amount of the investment account (Valix 2015)
81. Bonds that are subject to retirement at a stated peso amount prior to maturity at the option of the
issuer are called
A. early retirement bonds.
B. options.
C. debentures
D. callable bonds (Valix 2015)
82. The interest rate specified in the bond indenture is called the
A. effective rate
B. contract rate
C. discount rate
D. market rate
(Valix
2015)
83. Bonds with a face value of P3 million and a stated interest rate of 12% payable semi-annually on
March 1 and September 1 were purchased on August 1. The total payments for the purchase equal
P3,000,000. The best explanation for the excess amount paid over face value is that
A. The bonds were purchased at a premium
B. The bonds were purchased at a discount plus accrued interest
C. No explanation is possible without knowing the maturity date of the bond issue.
D. The bonds were purchased at face value plus accrued interest
(Valix 2015)
84. Any unamortized premium should be reported on the balance sheet of the issuing corporation as
A. a direct deduction from the face amount of the bonds in the liability section
B. as paid-in capital
C. an addition to the face amount of the bonds in the liability section
D. a direct deduction from retained earnings
(Valix 2015)
85. The balance in Discount on Bonds Payable

A. would be subtracted from the related bonds payable on the balance sheet
B. would be added to the related bonds payable to determine the carrying amount of the bonds
C. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if
the results obtained by that method materially differ from the results that would be obtained by the
interest method
D. should be reported on the balance sheet as an asset because it has a debit balance
(Valix
2015)
86. One potential advantage of financing corporations through the use of bonds rather than common stock is
A. the interest on bonds must be paid when due
B. a higher earnings per share is guaranteed for existing common shareholders
C. the interest expense is deductible for tax purposes by the corporation
D. the corporation must pay the bonds at maturity
(Valix2015)
87. A bond issued and supported only by the general credit standing of the issuing corporation is called a (an):
A. debenture
B. indenture
C. term bond
D. serial bond
(Larson 10th Ed)
88. Which of the following statements is not true?

A. every bond has a face amount
B. every bond has a maturity date
C. every bond has a bond rate of interest
D. every bond is a coupon bond
(Larson 10th Ed)
89. Which is a disadvantage of bonds?
A. interest on bonds is tax deductible
B. bonds can increase return on equity
C. bonds require payment of periodic interest and maturity value
D. bonds do not affect shareholder control
(Larson 10th Ed)
90. Which type of bond gives the issuing corporation the option of retiring the bond, at a predetermined price,
prior to the maturity date of the bond?
A. callable bond
B. convertible bond
C. serial bond
D. secured bond
(Larson 10th Ed)
91. Which is not true of bonds sold at a discount?

A. the bond carrying amount gets larger each year
B. the Discount on Bonds Payable account gets smaller each year
C. at maturity, the face value and carrying amount will be equal
D. the balance of Bonds Payable account will get larger each year
(Larson 10th Ed)
92. Statement 1: The par value of the bond is the amount to be paid at maturity, but the face amount of the
bond is the current issue price of the bond.
Statement 2: Unlike installment notes or notes payable which involve a single lender, bonds offer
companies the opportunity to borrow money from several lenders, rather than one.
(Larson 10th Ed)
93. Statement 1: A company can increase its rate of return on common shareholders' equity through issuing
bonds rather than selling more shares of common stock.
Statement 2: An advantage of issuing bonds over stock, as a means of financing, is that bond interest is a
deductible expense but dividends to shareholders are not.
(Larson 10th Ed)
94. Statement 1: When the bonds in a bond issue have different maturity dates, the bonds are known as serial
bonds.
Statement 2: Registered bonds provide more security than bearer bonds, should the bondholder lose the
bonds by accident or theft.
(Larson 10th Ed)
95. Statement 1: One reason why coupon bonds are seldom issued anymore by corporations is that there is no
readily available record of who actually receives the interest
Statement 2Convertible bonds contain an exercisable option for the issuer.
(Larson 10th Ed)
96. Statement 1: The formal name of the contract between the issuing company and its bondholders is called a
debenture.
Statement 2: It is the responsibility of the underwriter for a bond issue to monitor the corporation's actions
to ensure that the corporation fulfills its obligations as stated in the bond indenture.
(Larson 10th Ed)
96. Statement 1: Market rate tends to go up when the demand for bonds decreases or the supply increases.
Statement 2: When the market rate of interest is greater than the contract rate of bond interest, the bonds
will sell for an amount in excess of the bond par value.
(Larson 10th Ed)
97. Statement 1: The Discount on Bonds Payable will appear as a contra-liability account in the long-term
liability section of the balance sheet.
Statement 2: When a bond with a contract rate of bond interest of 10% is sold at a discount, the
bondholder's rate of return will be greater than 10%.
(Larson 10th Ed)
98. Statement 1: Straight-line amortization is an acceptable method for amortizing bond discounts when the
term of the bonds is less than five years.
Statement 2: The effective-interest method (or interest method) of amortizing bond discount yields a
constant rate of interest.
(Larson 10th Ed)
99. Statement 1: When bonds are sold at a premium, the carrying amount of the bonds payable will become
progressively larger as the bonds near the maturity date.
Statement 2: When five-year bonds are sold with an 8% contract rate of interest, with interest payments
made semi-annually, the present value factor that is used to determine the present value of the bonds
would be at 10 time periods for one-half the market rate of interest on the date of the bond issue.
(Larson 10th Ed)
100. Statement 1: When a bond with a contract rate of bond interest of 10% is sold at a premium, the
corporation's cost to borrow is less than 10%.
Statement 2: When bonds are sold between interest dates, the purchaser pays the accrued interest to the
bond issuer.
(Larson 10th Ed)
101. Statement 1: When bonds are redeemed at a price below the carrying amount of the bonds, the gain is
credited to contributed capital.
Statement 2: A non-interest-bearing note is desired by issuers who wish to avoid periodic interest
payments.
(Larson 10th Ed)
102. Statement 1: When an installment note of equal payments includes interest, the unpaid principal is
reduced at a faster rate than if the installment note required equal payments on principal plus interest.
Statement 2: To determine the amount of equal payments which would include principal and interest on
an installment note, divide the face value of the note (the original principal) by the appropriate present
value factor from a present value table for a single amount.
(Larson 10th Ed)
103. Statement 1: The mortgage and the mortgage contract are not the same document.
Statement 2: Unsecured bonds are the same as debenture bonds.
(Larson 10th Ed)
104. Cost incurred in connection with the issuance of 10 year bonds which h sold at a slight premium should
be
A. Charged to retained earnings when the bonds are issued
B. Expensed in the year in which incurred
C. Capitalized as organization cost
D. Reported as a deduction from bonds payable and amortized over 1- year term
(Valix 2015)
105. Unamortized debt discount should be reported as
A. Direct deduction from the face amount of the debt
B. Direct deduction from the present value of the debt
C. Deferred charge
D. Part of the issue cost
(Valix 2015)
106. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for
the current year ended December 31 is for the period of
A. Three months
B. Four months
C. Six months
D. Seven months
(Valix 2015)
107. How would the amortization of premium on bonds payable affect each of the following?
Carrying Amount of Bond Net Income
A. Increase Decrease
B. Increase Increase
C. No effect No effect
D. Decrease Increase
(Valix 2015)
108. How would the amortization of discount on bonds payable affect each of the following?
Carrying Amount of Bond Net Income
A. Increase Decrease
B. Increase Increase
C. No effect No effect
D. Decrease Increase
(Valix 2015)
109. When bonds are sold between interest dates, any accrued interest is credited to
A. Interest payable
B. Interest revenue
C. Interest receivable
D. Bonds payable
(Valix 2015)
110. Bond issue cost should be

A. Expensed in the period incurred
B. Recorded as deduction in the carrying amount of bonds payable
C. Deferred and amortized over the life of the bonds
D. none of these
(Valix 2015)
111. In theory, the proceeds from the sale of bond would be equal to
A. The face amount of the bond
B. the present value of the principal amount due at the end of the life of the bond plus the present value
of interest payments made during the life of the bond
C. The present value of principal
D. None of these
(Valix 2015)
112. Under international accounting standards, the valuation method used for bonds payable is
A. Historical cost
B. Discounted cash flow valuation at current yield rate
C. Maturity amount
D. Discounted cash flow valuation at yield rate at issuances
(Valix 2015)
113. Cost of issuing bonds payable

A. is included in the measurement of the bonds payable
B. Is amortized using the interest method over the life of the bonds
C. Will effectively increase the market rate of interest
D. All of these relate to bond issue cost
(Valix 2015)
114.What is the interest rate written on the face of the bonds?

A. Coupon rate
B. Nominal rate
C. Stated rate
D. Coupon rate, nominal rate, or stated rate
(Valix 2015)
115.What is the rate of interest actually incurred?

A, Market rate
B. Yield rate
C. Effective rate
D. Market, yield or effective rate
(Valix 2015)
116. Bonds that can be exchanged for equity shares of the issuing entity
A. Convertible bonds
B. Coupon bonds
C. Bearer bonds
D. Treasury bonds
(Valix 2015)
117. Bonds which are high risk and high yield bonds issued by entities that are heavily indebted or otherwise
in weak financial position
A. junk bonds
B. Coupon bonds
C. High bonds
D. Treasury bonds
(Valix 2015)
118. Bonds which are redeemable in term of commodities such as oil or precious metals
A. Commodity-backed bonds
B. Debenture bonds
C. Registered bonds
D. Coupon bonds
(Valix 2015)
119. Bonds secured by investments in stocks and bonds

A. Collateral trust bonds
B. Debenture bonds
C. Coupon bonds
D. Treasury bonds
(Valix 2015)
120. A formal unconditional promise, made under seal, to pay a specified sum of money at a determinable
future date and to make periodic interest payments at a stated rate until the principal sum is paid
A. Bonds
B. Notes
C. Commercial paper
D. none of the above
(Valix 2015)
121. A corporation would not be successfully trading on equity if it gathered funds by

a. issuing common stock
b. issuing preferred stock
c. issuing notes
d. issuing bonds
(Warren 2012)
122. Which of the following is not an advantage of issuing bonds instead of common stock?
a. Tax savings result
b. Income to common shareholders may increase.
c. Earnings per share on common stock may be lower.
d. Stockholder control is not affected.
(Warren 2012)
123. Debenture bonds are
a. bonds secured by specific assets of the issuing corporation
b. bonds that have a single maturity date
c. issued only by the federal government
d. issued on the general credit of the corporation and do not pledge specific assets as collateral
(Warren 2012)
124. A corporation issues for cash $8,000,000 of 8%, 30-year bonds, interest payable semiannually. The
amount received for the bonds will be
a. present value of 60 semiannual interest payments of $320,000, plus present value of $8,000,000 to
be repaid in 30 years
b. present value of 30 annual interest payments of $640,000
c. present value of 30 annual interest payments of $640,000, plus present value of $8,000,000 to be repaid
in 30 years
d. present value of $8,000,000 to be repaid in 30 years, less present value of 60 semiannual interest
payments of $320,000
Warren 2012)
125. A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time
when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond
discount or premium. Which of the following statements is true?
a. The amount of the annual interest expense is computed at 10% of the bond carrying
amount at the beginning of the year.
b. The amount of the annual interest expense gradually decreases over the life of the bonds.
c. The amount of unamortized discount decreases from its balance at issuance date to
a zero balance at maturity.
d. The amount of unamortized premium decreases from its balance at issuance date to a zero
balance at maturity.
(Warren 2012)
126. If the straight-line method of amortization of bond premium or discount is used, which of the
following statements is true?
a. Annual interest expense will increase over the life of the bonds with the amortization of
bond premium.
b. Annual interest expense will remain the same over the life of the bonds with the
amortization of bond discount.
c. Annual interest expense will decrease over the life of the bonds with the amortization of
bond discount.
d. Annual interest expense will increase over the life of the bonds with the amortization of
bond discount.
(Warren 2012)
127. A corporation issues for cash $1,000,000 of 8%, 20-year bonds, interest payable annually, at
a time when the market rate of interest is 7%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?
a. The carrying amount increases from its amount at issuance date to $1,000,000 at
maturity.
b. The carrying amount decreases from its amount at issuance date to $1,000,000 at
maturity.
c. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.
d. The amount of annual interest expense decreases as the bonds approach maturity.
(Warren 2012)
128. A corporation issues for cash $14,000,000 of 8%, 20-year bonds, interest payable annually,
at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization
of bond discount or premium. Which of the following statements is true?
a. The amount of annual interest paid to bondholders remains the same over the life of
the bonds.
b. The amount of annual interest expense decreases as the bonds approach maturity.
c. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.
d. The carrying amount decreases from its amount at issuance date to $14,000,000 at
maturity.
(Warren 2012)
129. The entry to record the amortization of a premium on bonds payable is
a. debit Premium on Bonds Payable, credit Interest Expense
b. debit Interest Expense, credit Premium on Bond Payable
c. debit Interest Expense, debit Premium on Bonds Payable, credit Cash
d. debit Bonds Payable, credit Interest Expense
(Warren 2012)
130. The entry to record the amortization of a discount on bonds payable is

a. debit Discount on Bonds Payable, credit Interest Expense
b. debit Interest Expense, credit Discount on Bonds Payable
c. debit Interest Expense, credit Cash
d. debit Bonds Payable, credit Interest Expense
(Warren 2012)
131. The journal entry a company records for the issuance of bonds when the contract rate and the
market rate are the same is
a. debit Bonds Payable, credit Cash
b. debit Cash and Discount on Bonds Payable, credit Bonds Payable
c. debit Cash, credit Premium on Bonds Payable and Bonds Payable
d. debit Cash, credit Bonds Payable
(Warren 2012)
132. The journal entry a company records for the issuance of bonds when the contract rate is
greater than the market rate would be
(Warren 2012)
133. The journal entry a company records for the issuance of bonds when the contract rate is less
than the market rate would be
(Warren 2012)
134. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond discount is
a. debit Interest Expense, credit Cash and Discount on Bonds Payable
b. debit Interest Expense, credit Cash
c. debit Interest Expense and Discount on Bonds Payable, credit Cash
d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable
(Warren 2012)
135. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond premium is
a. debit Interest Expense, credit Cash and Premium on Bonds Payable
b. debit Interest Expense, credit Cash
c. debit Interest Expense and Premium on Bonds Payable, credit Cash
d. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable
(Warren 2012)
136. The Tomas Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1,
2007, at 97. The journal entry to record the issuance will show a
a. debit to Cash of $1,000,000.
b. credit to Discount on Bonds Payable for $30,000.
c. credit to Bonds Payable for $970,000.
d. debit to Cash for $970,000.
(Warren 2012)
137. The Royce Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1,
a. debit to Discount on Bonds Payable for $30,000.
b. debit to Cash of $1,000,000.
c. credit to Bonds Payable for $970,000.
d. credit to Cash for $970,000.
(Warren 2012)
138. The Torrez Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1,
a. credit to Discount on Bonds Payable for $30,000.
b. debit to Cash of $1,000,000.
c. credit to Bonds Payable for $1,000,000.
d. credit to Cash for $970,000.
(Warren 2012)
139. The cash and securities comprising a sinking fund established to redeem bonds at maturity in
2015 should be classified on the balance sheet as
a. fixed assets
b. current assets
c. intangible assets
d. investments
(Warren 2012)
140. The bond indenture may provide that funds for the payment of bonds at maturity be
accumulated over the life of the issue. The amounts set aside are kept separate from other assets in a
special fund called a(n)
a. enterprise fund
b. sinking fund
c. special assessments fund
d. general fund
(Warren 2012)

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TOA – Bonds Payable and Effective Interest Method (JM)

3. What method may be used to report the bonds payable at year-end?

4. Issued convertible bonds are

a. The stated rate of the debt instrument.

21. Theoretically, the costs of issuing bonds could be

23. Treasury bonds should be shown on the balance sheet as

45. Long period of bond maturity leads to

46. Falling interest rate leads change to bondholder income which is

a. Will always be equal to the face amount.

a. Charged to retained earnings when the bonds are issued

62. Debentures are

64. The amortization of discount on bonds purchased as a long-term investment

66. Sinking Fund Cash would be classified on the balance sheet as

70. If bonds are issued at a discount, it means that the

73.If bonds payable are not callable, the issuing corporation

75. The account Investment in Bonds is reported

78. An unsecured bond is the same as a

85. The balance in Discount on Bonds Payable

88. Which of the following statements is not true?

91. Which is not true of bonds sold at a discount?

110. Bond issue cost should be

113. Cost of issuing bonds payable

114.What is the interest rate written on the face of the bonds?

115.What is the rate of interest actually incurred?

119. Bonds secured by investments in stocks and bonds

121. A corporation would not be successfully trading on equity if it gathered funds by

130. The entry to record the amortization of a discount on bonds payable is

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