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Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM Results for Multiple Choice Quiz Close this window 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? about:blank Page 1 of 7 Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM 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 about:blank Page 2 of 7 Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM 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 about:blank Page 3 of 7 Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM 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 about:blank Page 4 of 7 Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM 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) about:blank Page 5 of 7 Chapter 17 - Results for Multiple Choice Quiz 3/9/19, 5(34 PM 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) Close this window To email a summary of your quiz score to your instructor, fill in the form and click the 'Email' button. Your name: Your email: about:blank Page 6 of 7