Chapter 17 - Results for Multiple Choice Quiz

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Chapter 17 - Results for Multiple Choice Quiz
3/9/19, 5(34 PM
Results for Multiple Choice Quiz
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You correctly answered 9 questions for a score of 45 percent.
Unanswered questions were counted as incorrect in the calculation.
45%
17-1. 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
The question was not answered. The correct answer is "a".
(Coaching responses are only available for answered questions)
17-2. 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
You answered correctly! While some bonds may be coupon bonds
(indicating a method by which the bond interest is paid to the
bondholder), they may also be registered bonds which pay interest
directly to the bondholder.
17-3. 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
The correct answer is "c". Your choice of "a" was incorrect. There
are two major disadvantages to bond financing: (1) bonds require
periodic interest payments and payment at maturity, and (2) bonds can
decrease return on equity when a company earns a lower return on
borrowed funds than it is paying in interest.
17-4. 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?
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Chapter 17 - Results for Multiple Choice Quiz
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a. callable bond
b. convertible bond
c. serial bond
d. secured bond
The question was not answered. The correct answer is "a".
(Coaching responses are only available for answered questions)
17-5. 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
The correct answer is "d". Your choice of "c" was incorrect. The
balance of the Bonds Payable account will be constant over the term of
the bonds--at the face amount of the bonds.
17-6. When $100,000 of 5% annual interest, 10-year bonds are sold at 98 (98.0%),
the total interest expense on the bonds will be:
a. $2,000
b. $50,000
c. $48,000
d. $52,000
You answered correctly! The total interest expense can be
determined by multiplying the annual interest of $5,000 (0.05 x
$100,000) by 10, and adding the discount of $2,000 ($100,000 $98,000). The total interest is $50,000 + $2,000 = $52,000.
17-7. When $100,000 of 5% semiannual interest, 10-year bonds are sold at 98
(98.0%), the amount of periodic bond discount using the straight-line method of
discount amortization will be:
a. $100
b. $10,000
c. $200
d. $9,900
The correct answer is "a". Your choice of "c" was incorrect. The
amortization can be determined by dividing the discount by the number
of interest periods. The periodic bond discount will be: $2,000 / 20 =
$100.
17-8. $100,000 of 5% annual interest, 10-year bonds were sold at 98 (98.0%) when
the market rate of interest was 6%. The amount of periodic bond discount using the
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Chapter 17 - Results for Multiple Choice Quiz
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effective interest method of discount amortization for the first annual interest period
will be:
a. $880
b. $5,880
c. $4,120
d. $440
You answered correctly! The amortization can be determined by
subtracting the cash interest paid from the interest recognized (market
rate x carrying value). Recognized interest expense: $98,000 x .06 =
$5,880. Cash interest paid: $100,000 x .05 = $5,000. Bond discount
amortization: $5,880 - $5,000 = $880.
17-9. When $100,000 of 5% annual interest, 10-year bonds are sold at 103.5
(103.50%), the total interest expense on the bonds will be:
a. $3,500
b. $46,500
c. $50,000
d. $53,500
You answered correctly! The total interest expense can be
determined by subtracting the amount of the premium from the result of
multiplying the annual interest by the number of periodic interest
payments. The total interest is $50,000 - $3,500 = $46,500.
17-10. $100,000 of 8% annual interest, 10-year bonds were sold at 105.5
(105.50%) when the market rate of interest was 7%. The amount of periodic bond
premium using the effective interest method of bond premium amortization for the
first interest period will be:
a. $880
b. $615
c. $7,365
d. $440
You answered correctly! The amortization can be determined by
subtracting the interest recognized (market rate x carrying value) from
the cash interest paid. Recognized interest expense: $105,500 x .07 =
$7,385. Cash interest paid: $100,000 x .08 = $8,000. Bond premium
amortization: $8,000 - $7,385 = $615.
17-11. Bonds with a par value of $100,000, which pay 9% annual interest and pay
interest on June 30 and December 31, were sold on July 31 at par value. What is
the amount of cash the issuer will receive?
a. $100,000
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Chapter 17 - Results for Multiple Choice Quiz
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b. $109,000
c. $104,500
d. $100,750
The correct answer is "d". Your choice of "a" was incorrect. When
bonds are sold between interest dates, the buyer pays the interest
accrued from the last interest date to the date of purchase. The accrued
interest is $750 (($100,000 x .09)/12) for one month. The bond issuer
will receive $100,750.
17-12. Selected accounts of the corporation had the following balances:
Bonds Payable $200,000
Discount on Bonds Payable 3,000
The corporation retired the $1,000, 8%, 10-year bonds at a price of $1,010 per
bond, three years prior to maturity. The bond redemption resulted in a:
a. gain on retirement of $2,000
b. gain on retirement of $1,000
c. loss on retirement of $3,000
d. loss on retirement of $5,000
You answered correctly! The carrying amount of the bonds is
$197,000 ($200,000 - $3,000). The retirement cost is $202,000
($200,000 x 101.0%). The loss on the bond retirement is $5,000
($202,000 - $197,000).
17-13. Ten-year bonds with a par value of $100,000, 8% annual interest, were sold
for $106,000 on September 30, when the market rate of interest was 7%. The
issuer uses straight-line amortization of premium. The December 31, year-end
adjusting entry for accrued interest will include a:
a. debit to Interest Payable for $2,000
b. credit to Interest Payable for $1,850
c. debit to Premium on Bonds Payable for $150
d. debit to Bond Interest Expense of $1,850
The question was not answered. The correct answer is "c".
(Coaching responses are only available for answered questions)
17-14. When $500,000 of 10-year, 10% bonds that pay interest semiannually are
sold when the market rate of interest is 14%, which of the following lines describes
the calculation of the selling price of the bonds? (Pv = present value of $1, Pva =
present value of $1 annuity).
a. (Pv of 5% x $500,000) + (Pv of 5% x $50,000) = bond selling price
b. (Pva of 14% x $500,000) + (Pv of 7% x $50,000) = bond selling price
c. (Pv of 7% x $500,000) + (Pva of 10% x $50,000) = bond selling price
d. (Pv of 7% x $500,000) + (Pva of 7% x $25,000) = bond selling
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Chapter 17 - Results for Multiple Choice Quiz
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price
You answered correctly! Selling price: present value of the par value
of the bonds plus the present value of a single interest payment treated
as an annuity, where present value rate = market rate/number of times
interest is compounded per year.
17-15. $100,000 bonds with a carrying value of $103,600 were retired at a call
price of $101,000. The journal entry to retire the bonds would include a:
a. credit to Cash for $101,000
b. debit to Bonds Payable for $101,000
c. credit to Gain on Retirement of Bonds for $3,600
d. debit to Premium on Bonds Payable for $2,600
You answered correctly! The journal entry to retire the bonds is:
Bonds Payable, dr., $100,000; Premium on Bonds Payable, dr.,$3,600;
Cash, cr., $101,000; Gain on Retirement of Bonds, dr., $2,600.
17-16. Ignacious Construction purchased a tractor by issuing a 5-year non-interestbearing note for $100,000 when the market rate of interest was 10%. The note's
fair value when issued using a 10% rate is $62,090. When the note was issued, the
tractor was recorded at a value of:
a. $100,000
b. $62,090
c. $90,000
d. $37,910
You answered correctly! The tractor would be recorded at the fair
value of the note. The difference is accounted for as a discount on
notes payable which is amortized over the term of the note. The first
year amortization of the $37,910 discount would be $6,209 (0.10 x
$62,090).
17-17. Lack-Luster Corporation borrowed money by issuing a $100,000 installment
note payable that required $10,000 annual payments, plus interest of 12% on the
unpaid balance prior to the payment. The interest expense at the end of the third
year was:
a. $8,400
b. $7,200
c. $9,600
d. $18,400
The question was not answered. The correct answer is "c".
(Coaching responses are only available for answered questions)
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Chapter 17 - Results for Multiple Choice Quiz
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17-18. A $40,000 installment note requires the borrower to repay the note with five
(5) annual payments of equal amounts of principal plus 8% accrued interest on the
unpaid balance. The recorded interest expense for the third payment will be
a. $1,920
b. $1,280
c. $3,200
d. $3,100
The question was not answered. The correct answer is "a".
(Coaching responses are only available for answered questions)
17-19. A $40,000 installment note requires the borrower to repay the note with five
(5) equal payments of principal and 8% interest on the unpaid balance. Each
payment is $10,018. The amount applied to the unpaid principal from the second
payment will be (to the nearest dollar)
a. $6,818
b. $7,363
c. $4,000
d. $2,655
The question was not answered. The correct answer is "b".
(Coaching responses are only available for answered questions)
17-20. The legal agreement that offers protection to a lender by giving the lender
the right to be paid from the cash proceeds from the sale of specified assets that
belong to the borrower and are identified in the agreement is called a(an):
a. mortgage contract
b. mortgage
c. bond certificate
d. debenture
The question was not answered. The correct answer is "b".
(Coaching responses are only available for answered questions)
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