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Exam 10: Reporting and Interpreting Bond Securities

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Question 41

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Which of the following statements regarding the debt-to-equity ratio is correct?

A) A high ratio means that the company is primarily financed through stockholder investments.
B) A higher ratio is preferred.
C) The debt-to-equity ratio is a measure of a company's ability to pay its debt.
D) The debt-to-equity ratio is a measure of investor and creditor risk.

E) A) and C)
F) C) and D)

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Question 42

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A convertible bond can be called for early retirement at the option of the issuing company.

A) True
B) False

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Question 43

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Harriman Company authorized a $1,000,000,10-year,6% bond issue dated January 1,2019,when the market rate was 8%.Annual interest will be paid each December 31.On January 1,2019,the bonds were issued for $866,000.Harriman Company has a December 31 year-end. A.Prepare the journal entry to record the sale of the bonds. B.Prepare the required journal entry on December 31,2019 to record amortization using the effective interest method.No adjusting journal entries were made during the year. C.Was the bond issued at par,at a discount,or at a premium? D.Will interest expense over the life of the bond be greater than,less than,or equal to the total cash payment for interest over the life of the bond?

The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

When a bond payable is issued at a premium,subsequent amortization of the premium does which of the following?

Fence Company reported the following information for 2019 (in millions). Identify the activities section where these items would be reported on the statement of cash flows (operating,investing,or financing).Also,indicate whether each amount would be added (+)or subtracted (-)in those sections of the statement of cash flows.

Mayberry,Inc. ,issued $100,000 of 10-year,12% bonds dated April 1,2019,for $102,360 on April 1,2019.The bonds pay interest annually on April 1,beginning in 2020.Straight-line amortization is used by the company.What entry is required at April 1,2020 for the first interest payment?

When a company needs funds to finance the expansion of its operations,which of the following is not an advantage of issuing bonds rather than issuing stock?

Skylar Company issued $50,000,000 of its 10% bonds at par on January 1,2019.On December 31,2019,the bonds were trading on the bond exchange at 102.5.Since the issue date,what has happened to the market rate of interest?

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

On November 1,2019,Davis Company issued $30,000,ten-year,7% bonds for $29,100.The bonds were dated November 1,2019,and interest is payable each November 1 and May 1.Davis uses the straight-line method of amortization. - How much is the semiannual interest expense when the straight-line method of amortization is utilized?

On January 1,2019,Tonika Company issued a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Tonika uses the effective-interest amortization method. - The December 31,2020 book value after the December 31,2020 interest payment was made is closest to:

On January 1,2019,Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually.The following present value factors have been provided: -Calculate the issuance price if the market rate of interest is 12%.

Which of the following statements does not correctly describe the accounting for bonds that were issued at their face (maturity) value?

On January 1,2019,Simmons Company issued $100,000 of its ten-year,6% bonds payable at $108,000 to yield a market rate of 5%.The bonds were dated January 1,2019,and interest is paid semiannually on each June 30 and each December 31.The effective interest method is used for amortization and no adjusting journal entries were made during the year. A.Prepare the journal entry for the sale of the bonds. B.Prepare the journal entry to record the first interest payment and include the appropriate date before the entry. C.Prepare the journal entry to record the second interest payment and include the appropriate date before the entry.

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

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

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

When recording bond issuance costs for underwriter fees:

On July 1,2019,immediately after recording interest payments,Salsa,Inc.retired one fifth of its $500,000 of bonds payable for $97,500.The bonds were originally issued at par value in 2014.Which of the following statements is correct?