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The ____________ concept is the idea that cash paid (or received) in the future has less value now than the same amount of cash paid (or received) today.

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An ________________________________ is an obligation requiring a series of payments to the lender.

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The effective interest amortization method:


A) Allocates bond interest expense over the bond's life using a changing interest rate.
B) Allocates bond interest expense over the bond's life using a constant interest rate.
C) Allocates a decreasing amount of interest over the life of a discounted bond.
D) Allocates bond interest expense using the current market rate for each interest period.
E) Is not allowed by the FASB.

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

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B

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a:


A) Credit to Interest Income.
B) Credit to Premium on Bonds Payable.
C) Credit to Discount on Bonds Payable.
D) Debit to Premium on Bonds Payable.
E) Debit to Discount on Bonds Payable.

F) C) and D)
G) A) and B)

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B

A bondholder that owns a $1,000, 10%, 10-year bond has:


A) Ownership rights in the issuing company.
B) The right to receive $10 per year until maturity.
C) The right to receive $1,000 at maturity.
D) The right to receive $10,000 at maturity.
E) The right to receive dividends of $1,000 per year.

F) A) and E)
G) None of the above

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The debt-to-equity ratio:


A) Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B) Is a means of assessing the risk of a company's financing structure.
C) Is not relevant to secured creditors.
D) Can always be calculated from information provided in a company's income statement.
E) Must be calculated from the market values of assets and liabilities.

F) All of the above
G) D) and E)

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A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the effective interest method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

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blured image Cash payment: $500,000 * 9% *...

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A company may retire bonds by all but which of the following means?


A) Exercising a call option.
B) The holders converting them to stock.
C) Purchasing the bonds on the open market.
D) Paying them off at maturity.
E) Paying all future interest and cancelling the debt.

F) A) and B)
G) A) and C)

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E

How are bond issue prices determined?

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The issue price of bonds is found by com...

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On January 1, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1.

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blured image Cash payment: $500,000 * 10% ...

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On January 1, the Rodrigues Corporation leased some equipment on a 2-year lease, paying $15,000 per year each December 31. The lease is considered to be an operating lease. Prepare the general journal entry to record the first lease payment on December 31.

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Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

A) True
B) False

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An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

A) True
B) False

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Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

A) True
B) False

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Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:


A) Convertible bonds.
B) Sinking fund bonds.
C) Callable bonds.
D) Serial bonds.
E) Junk bonds.

F) B) and E)
G) C) and D)

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On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:


A) Debit Bond Interest Expense $14,000; credit Cash $14,000.
B) Debit Bond Interest Expense $28,000; credit Cash $28,000.
C) Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
D) Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.
E) Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.Discount amortized = ($400,000 - $396,000) /20 = $200

F) D) and E)
G) B) and C)

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A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting one year from now. The annual interest rate is 6%. The present value of an annuity factor for 5 periods at 6% is 4.2124. What is the present value of these five payments?

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$3,000 * 4...

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Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond interest, including any applicable amortization.

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The journal entry to record a bond issua...

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Bonds that give the issuer an option of retiring them before they mature are:


A) Debentures.
B) Serial bonds.
C) Sinking fund bonds.
D) Registered bonds.
E) Callable bonds.

F) B) and D)
G) C) and E)

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The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

A) True
B) False

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