Acctg Bond Payable

Chapter 13
Bonds Payable and Investments in Bonds
OBJECTIVES
Obj 1 Compute the potential impact of long-term borrowing on earnings per share.
Obj 2 Describe the characteristics, terminology, and pricing of bonds payable.
Obj 3 Journalize entries for bonds payable.
Obj 4 Describe and illustrate the payment and redemption of bonds payable.
Obj 5 Journalize entries for the purchase, interest, discount and premium amortization, and
sale of bond investments.
Obj 6 Prepare a corporation balance sheet.
QUESTION GRID
True/False
No Objective Difficulty No Objectiv Difficult No. Objective Difficulty
. . e y
1 13-01 Easy 27 13-03 Easy 53 13-04 Easy
2 13-01 Easy 28 13-03 Easy 54 13-05 Easy
3 13-01 Easy 29 13-03 Easy 55 13-05 Easy
4 13-01 Easy 30 13-03 Easy 56 13-05 Easy
5 13-01 Easy 31 13-03 Easy 57 13-05 Easy
6 13-02 Easy 32 13-03 Easy 58 13-05 Easy
7 13-02 Easy 33 13-03 Easy 59 13-05 Easy
8 13-02 Easy 34 13-03 Moderate 60 13-05 Easy
9 13-02 Easy 35 13-03 Easy 61 13-05 Easy
10 13-02 Easy 36 13-03 Easy 62 13-05 Easy
11 13-02 Easy 37 13-03 Easy 63 13-05 Moderate
12 13-02 Easy 38 13-04 Easy 64 13-05 Easy
13 13-02 Easy 39 13-04 Easy 65 13-06 Easy
14 13-02 Easy 40 13-04 Easy 66 13-06 Easy
13 13-02 Easy 41 13-04 Easy 67 13-06 Easy
16 13-02 Moderate 42 13-04 Easy 68 13-06 Easy
17 13-02 Easy 43 13-04 Easy 69 13-06 Easy
18 13-02 Easy 44 13-04 Easy 70 13-06 Easy
19 13-02 Easy 45 13-04 Easy 71 13-06 Easy
20 13-02 Easy 46 13-04 Easy 72 13-06 Easy
21 13-02 Easy 47 13-04 Easy 73 13-06 Easy
22 13-02 Easy 48 13-04 Easy 74 13-06 Easy
23 13-02 Easy 49 13-04 Easy 75 13-06 Easy
24 13-02 Easy 50 13-04 Easy 76 13-APP Moderate
25 13-03 Moderate 51 13-04 Easy 77 13-APP Moderate
26 13-03 Easy 52 13-04 Easy 78 13-APP Easy
631
632  Chapter 13/Bonds Payable and Investments in Bonds
Multiple Choice
No Objective Difficulty No Objectiv Difficult No. Objective Difficulty
. . e y
4 13-01 Moderate 32 13-03 Moderate 60 13-04 Moderate
5 13-02 Easy 33 13-03 Moderate 61 13-04 Moderate
10 13-02 Easy 38 13-03 Easy 66 13-05 Easy
12 13-02 Moderate 40 13-03 Moderate 68 13-05 Easy
13 13-02 Easy 41 13-03 Easy 69 13-05 Easy
16 13-02 Easy 44 13-03 Easy 72 13-06 Easy
17 13-02 Easy 45 13-03 Easy 73 13-06 Easy
18 13-02 Easy 46 13-03 Easy 74 13-06 Easy
24 13-03 Easy 52 13-04 Easy 80 13-APP Easy
25 13-03 Moderate 53 13-04 Easy 81 13-APP Moderate
26 13-03 Easy 54 13-04 Easy 82 13-APP Moderate
27 13-03 Moderate 55 13-04 Easy
28 13-03 Moderate 56 13-04 Easy
Exercise/Other
No Objective Difficulty No. Objective Difficult No. Objectiv Difficulty
. y e
1 13-01 Moderate 7 13-03 Easy 13 13-04 Moderate
2 13-01 Moderate 8 13-03 Moderate 14 13-05 Easy
4 13-02 Easy 10 13-03 Easy 16 13-05 Easy
5 13-2 Moderate 11 13-03 Moderate
6 13-03 Easy 12 13-04 Moderate
Chapter 13/Bonds Payable and Investments in Bonds  633
Problem
No Objective Difficulty No. Objective Difficult No. Objectiv Difficulty
. y e
1 13-01 Easy 7 13-03 Moderate 13 13-05 Difficult
2 13-03 Easy 8 13-03, 13-04 Moderate 14 13-05 Moderate
3 13-03 Moderate 9 13-03, 13-05 Moderate 13 13-06 Moderate
4 13-03 Moderate 10 13-03, 13-05 Moderate 16 13-06 Moderate
5 13-03 Moderate 11 13-03, 13-05 Difficult
6 13-03 Moderate 12 13-04 Easy
Chapter 13—Bonds Payable and Investments in Bonds
TRUE/FALSE
1. A bond is simply a form of an interest bearing note.

ANS: T DIF: Easy OBJ: 13-01
NAT: AACSB Analytic | AICPA BB-Industry
2. Bondholders are creditors of the issuing corporation.

NAT: AACSB Analytic | AICPA FN-Measurement
3. Bonds of major corporations are traded on bond exchanges.

4. Issuing bonds to finance a company's operations generally has a greater impact on earnings per share
than issuing common stock.
5. Bondholders claims on the assets of the corporation rank ahead of stockholders.

6. A bond is usually divided into a number of individual bonds of $500 each.

ANS: F DIF: Easy OBJ: 13-02
7. A secured bond is called a debenture bond and is backed only by the general creditworthiness of the
corporation.
8. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a
convertible bond.
9. The prices of bonds are quoted as a percentage of the bonds' market value.
10. The face value of a term bond is payable at a single specific date in the future.
11. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond
debenture.
12. The market rate of interest is affected by a variety of factors, including investors' assessment of
current economic conditions.
13. The concept of present value is that an amount of cash to be received at some date in the future is the
equivalent of the same amount of cash held at an earlier date.
14. The buyer determines how much to pay for the bonds by computing the present value of these future
cash receipts using the contract rate of interest.
15. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a
premium.
16. Bonds are sold at face value when the contract rate is equal to the market rate of interest.
17. The present value of the periodic bond interest payments is the value today of the amount of interest
to be received at the at the end of each interest period.
18. An equal stream of periodic payments is called an annuity.

19. The present value of an annuity is the sum of the present values of each cash flow.
20. The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded
annually is $3,636.30.
21. If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1)
the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000
payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both
10%.
22. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.
23. One reason a dollar today is worth more than a dollar 1 year from today is the time value of money.
24. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell
at a premium.
25. The total interest expense over the entire life of a bond is equal to the sum of the interest payments
plus the total discount or minus the total premium related to the bond.
ANS: T DIF: Moderate OBJ: 13-03
26. Premium on bonds payable may be amortized by the straight-line method if the results obtained by
its use do not materially differ from the results obtained by use of the interest method.
27. If the straight-line method of amortization is used, the amount of unamortized premium on bonds
payable will decrease as the bonds approach maturity.
28. If the straight-line method of amortization of discount on bonds payable is used, the amount of
yearly interest expense will increase as the bonds approach maturity.
29. There are two methods of amortizing a bond discount or premium: the straight-line method and the
double-declining-balance method.
30. The effective-interest method of amortizing a bond discount or premium is the preferred method
31. The amount of interest expense reported on the income statement will be more than the interest paid
to bondholders if the bonds were originally sold at a discount.
32. The amortization of a premium on bonds payable decreases bond interest expense.
33. If the amount of a bond premium on an issued 11%, 4-year, $100,00 bond is $12,928, the semiannual
straight-line amortization of the premium is $1,416.
34. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual
interest expense is $5,500.
ANS: F DIF: Moderate OBJ: 13-03
35. Zero-coupon bonds do not provide for interest payments.

36. The issue price of zero-coupon bonds is the present value of their face amount.
37. To determine the six month interest payment amount on a bond, you would take one-half of the
market rate times the face value of the bond.
38. Interest payments on 10% bonds with a face value of $10,000 and interest paid semiannually would
be $1,000 every 6 months.
39. Amortization is the allocation process of writing off bond premiums and discounts to interest
expense over the life of the bond issue.
40. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the
unamortized discount.
41. The special fund that is set aside to provide for the payment of bonds at maturity is called a sinking
fund.
42. At 12/31/2007, the cash and securities held in a sinking fund to redeem bonds in 2009 are classified
on the balance sheet as current assets.
43. If sinking fund cash is used to purchase investments, those investments are reported on the balance
sheet as marketable securities.
44. Both callable and non-callable bonds can be purchased by the issuing corporation in the open
market.
45. There is a loss on redemption of bonds when bonds are redeemed above carrying value.
46. When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or
discount must be written off.
47. A corporation often issues callable bonds to protect itself against significant declines in future
interest rates.
48. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.
49. Only callable bonds can be purchased by the issuing corporation before maturity.
50. Callable bonds are redeemable by the issuing corporation within the period of time and at the price
stated in the bond indenture.
51. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized
discount or less any unamortized premium.
52. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on
redemption of bonds is $10,000.
53. Gains and losses on the redemption of bonds are reported as other income or other expense on the
income statement.
54. Bonds may be purchased directly from the issuing corporation or through one of the bond exchanges.
55. As with other assets, the cost of a bond investment includes all costs related to the purchase.
56. The cost of bonds purchased as an investment includes the amount paid to the seller for interest
accrued from the last interest payment date to the date of purchase.
57. When a bond is purchased for an investment, the premium or discount is normally not recorded.
58. When bonds held as long-term investments are purchased at a price other than the face value, the
premium or discount should be amortized over the remaining life of the bonds.
59. The amount of interest paid when buying a bond as an investment should be credited to Interest
Revenue.
60. The amortization of discount on bonds purchased as a long-term investment increases the amount of
the investment account.
61. To record the amortization of a premium on a bond investment, Investment in Bonds would be
debited and Interest Revenue would be credited.
62. When long-term investments in bonds are sold before their maturity date, the seller would receive
the sales price less commissions plus any accrued interest since the last interest payment date.
63. If the proceeds from the sale of bonds held as a long-term investment exceed the carrying amount of
the bonds, a gain is realized.
64. Any gains or losses on the sale of long-term investments normally would be reported in the Other
Income or Other Loss section of the income statement.
65. Investments in bonds that are expected to be held for the long term are listed in the investments
section of the balance sheet.
66. Bonds payable would be listed at their carrying value on the balance sheet.
67. The fair market value of bond investments should be disclosed, either on the face of the financial
statements or in an accompanying note.
68. The unamortized Discount on Bonds Payable account is a contra-liability account.

69. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable
on the balance sheet.
70. The balance in a bond discount account should be reported on the balance sheet as a deduction from
the related bonds payable.
71. Investments in bonds that management intends to hold to maturity are called held-to-maturity
securities.
72. Investment in Bonds are reported on the balance sheet at lower of cost or market.
73. Investment in Bonds is listed on the balance sheet after Bonds Payable.
74. The higher the times interest earned ratio, the better the debtors' protection.
75. The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.
76. When the effective interest method of amortization is used, the amount of interest expense for a
given period is calculated by multiplying the face rate of interest by the bond’s carrying value at the
beginning of the given period.
ANS: F DIF: Moderate OBJ: 13-App
77. The effective interest method produces a constant dollar amount of interest expense to be reported
each interest period.
ANS: F DIF: Moderate OBJ: 13-App
78. When there are material differences between the results of using the straight-line method and using
the effective interest method of amortization, the effective interest method should be used.
ANS: T DIF: Easy OBJ: 13-App
MULTIPLE CHOICE
1. 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. market rate of interest
c. periodic interest to be paid on the bonds
d. denominations the bonds are sold
ANS: D DIF: Easy OBJ: 13-01
2. 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
ANS: A DIF: Easy OBJ: 13-01
3. 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. the corporation must pay the bonds at maturity
c. the interest expense is deductible for tax purposes by the corporation
d. a higher earnings per share is guaranteed for existing common shareholders
ANS: C DIF: Easy OBJ: 13-01
4. 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.
ANS: C DIF: Moderate OBJ: 13-01
5. A bond indenture is
a. a contract between the corporation issuing the bonds and the underwriters selling the bonds
b. the amount due at the maturity date of the bonds
c. a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf
of the bondholders.
d. the amount for which the corporation can buy back the bonds prior to the maturity date
6. 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.
7. When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity
date for a specific price, the bonds are
a. convertible bonds
b. unsecured bonds
c. debenture bonds
d. callable bonds
8. When the maturities of a bond issue are spread over several dates, the bonds are called
a. serial bonds
b. bearer bonds
c. debenture bonds
d. term bonds
9. The market interest rate related to a bond is also called the

a. stated interest rate
b. effective interest rate
c. contract interest rate
d. straight-line rate
ANS: B DIF: Easy OBJ: 13-02
10. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face
value of $100,000 will be
a. Equal to $100,000
b. Greater than $100,000
c. Less than $100,000
d. Greater than or less than $100,000, depending on the maturity date of the bonds
11. The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to
nearest dollar)
a. $37,736
b. $42,400
c. $40,000
d. $2,400
ANS: A DIF: Moderate OBJ: 13-02
12. The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded
to nearest dollar)
a. $23,916
b. $37,632
c. $23,700
d. $30,000
13. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
a. a premium
b. their face value
c. their maturity value
d. a discount
14. 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
15. The interest rate specified in the bond indenture is called the
a. discount rate
b. contract rate
c. market rate
d. effective rate
16. An unsecured bond is the same as a

a. debenture bond.
b. zero coupon bond.
c. term bond.
d. bond indenture.
17. A legal document that indicates the name of the issuer, the face value of the bond and such other data
is called
a. trading on the equity.
b. convertible bond.
c. a bond debenture.
d. a bond certificate.
NAT: AACSB Analytic | AICPA BB-Legal
18. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the
issuer are called
a. debentures
b. callable bonds.
c. early retirement bonds.
d. options.
19. The Mansur Company issued $100,000 of 12% bonds on May 1, 2007 at face value. The bonds pay
interest semiannually on January 1 and July 1. The bonds are dated January 1, 2007, and mature on
January 1, 2011. The total interest expense related to these bonds for the year ended December 31,
2007 is
a. $2,000
b. $4,000
c. $8,000
d. 12,000
20. On January 1, 2007, the Queen Corporation issued 10% bonds with a face value of $100,000. The
bonds are sold for $98,000. The bonds pay interest semiannually on June 30 and December 31 and
the maturity date is December 31, 2011. Queen records straight-line amortization of the bond
discount. The bond interest expense for the year ended December 31, 2007, is
a. $9,600
b. $9,800
c. $10,400
d. $10,200
21. If $1,000,000 of 8% bonds are issued at 102 1/2, the amount of cash received from the sale is
a. $1,080,000
b. $975,000
c. $1,000,000
d. $1,025,000
22. If $3,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is
a. $3,300,000
b. $3,000,000
c. $3,090,000
d. $2,910,000
23. 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.
24. 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.
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.
ANS: B DIF: Moderate OBJ: 13-03
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.
27. 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
28. 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
29. When the market rate of interest was 12%, Newman Corporation issued $1,000,000, 11%, 10-year
bonds that pay interest annually. The selling price of this bond issue was
a. $ 321,970
b. $1,000,000
c. $ 943,494
d. $621,524
30. When the market rate of interest was 11%, Waverly Corporation issued $1,000,000, 12%, 8-year
bonds that pay interest semiannually. The selling price of this bond issue was
a. $1,052,310
b. $1,154,387
c. $1,000,000
d. $ 720,495
31. 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
32. The journal entry a company records for the issuance of bonds when the contract rate is greater than
the market rate would be
33. The journal entry a company records for the issuance of bonds when the contract rate is less than the
market rate would be
34. When the market rate of interest was 11%, Welch Corporation issued $100,000, 8%, 10-year bonds
that pay interest semiannually. Using the straight-line method, the amount of discount or premium to
be amortized each interest period would be
a. $4,000
b. $896
c. $17,926
d. $1,793
35. 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
36. 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
37. On January 1, 2007, the Kings Corporation issued 10% bonds with a face value of $100,000. The
bonds are sold for $96,000. The bonds pay interest semiannually on June 30 and December 31 and
the maturity date is December 31, 2011. Kings records straight-line amortization of the bond
discount. The bond interest expense for the year ended December 31, 2007, is
a. $9,200
b. $9,800
c. $10,400
d. $10,800
ANS: D DIF: Moderate OBJ: 13-03
38. If $1,000,000 of 8% bonds are issued at 103, the amount of cash received from the sale is
a. $1,060,000
b. $970,000
c. $1,000,000
d. $1,030,000
39. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a. at a premium.
b. at face value.
c. at a discount.
d. only after the stated rate of interest is increased.
40. The interest expense recorded on an interest payment date is increased

a. only if the market rate of interest is less than the stated rate of interest on that date.
b. by the amortization of premium on bonds payable.
c. by the amortization of discount on bonds payable.
d. only if the bonds were sold at face value.
41. On January 1, 2007, $1,000,000, 5-year, 10% bonds, were issued for $970,000. Interest is paid
semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to
amortize discount on bonds payable, the semiannual amortization amount is
a. $6,000.
b. $5,808.
c. $3,000
d. $5,000
42. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually
would sell at an amount
a. less than face value.
b. equal to the face value.
c. greater than face value.
d. that cannot be determined.
43. A corporation issues $100,000, 8%, 5-year bonds on January 1, 2007, for $104,200. Interest is paid
semiannually on January 1 and July 1. If the corporation uses the straight-line method of
amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2007,
is
a. $8,420.
b. $4,420.
c. $4,000.
d. $3,580.
44. If bonds are issued at a premium, the stated interest rate is

a. higher than the market rate of interest.
b. lower than the market rate of interest.
c. too low to attract investors.
d. adjusted to a higher rate of interest.
45. 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.
46. The Royce Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1, 2007, at 97.
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.
47. The Torrez Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1, 2007, at 97.
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.
48. If bonds are issued at a discount, it means that the

a. bondholder will receive effectively less interest than the contractual rate of interest.
b. market interest rate is lower than the contractual interest rate.
c. market interest rate is higher than the contractual interest rate.
d. financial strength of the issuer is suspect.
49. Selling the bonds at a premium has the effect of

a. raising the effective interest rate above the stated interest rate.
b. increasing the amount of cash paid for interest each 6 months.
c. causing the total cost of borrowing to be higher than the bond interest paid.
d. causing the total cost of borrowing to be lower than the bond interest paid.
50. Bonds with a face amount $1,000,000, are sold at 103. The entry to record the issuance is
a. Cash 1,000,000
Premium on Bonds Payable 30,000
Bonds Payable 1,030,000
b. Cash 1,030,000
c. Cash 1,030,000
Discount on Bonds Payable 30,000
d. Cash 1,030,000
51. Bonds with a face amount $1,000,000, are sold at 97. The entry to record the issuance is
a. Cash 1,000,000
Bonds Payable 970,000
b. Cash 970,000
c. Cash 970,000
d. Cash 970,000
52. Sinking Fund Cash would be classified on the balance sheet as

a. a current asset
b. a fixed asset
c. an intangible asset
d. an investment
53. Sinking Fund Investments would be classified on the balance sheet as

a. a current asset
b. a fixed asset
c. an investment
d. a deferred debit
54. 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
55. 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
56. Sinking Fund Income is reported in the income statement as

a. income from operations
b. extraordinary
c. gain on sinking fund transactions
d. other income
57. If bonds payable are not callable, the issuing corporation

a. cannot repurchase them before maturity
b. can repurchase them in the open market
c. must get special permission from the SEC to repurchase them
d. is more likely to repurchase them if the interest rates increase
58. When callable bonds are redeemed below carrying value

a. Gain on Redemption of Bonds is credited
b. Loss on Redemption of Bonds is debited
c. Retained Earnings is credited
d. Retained Earnings is debited
59. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of
$12,500. If the issuing corporation redeems the bonds at 98, what is the amount of gain or loss on
redemption?
a. $7,500 loss
b. $34,500 loss
c. $34,500 gain
d. $7,500 gain
60. Bonds Payable has a balance of $900,000 and Premium on Bonds Payable has a balance of $10,000.
If the issuing corporation redeems the bonds at 102, what is the amount of gain or loss on
redemption?
a. $1,100 loss
b. $1,100 gain
c. $8,000 loss
d. $8,000 gain
61. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $296,000. The entry
to record the redemption would include a
a. loss on bond redemption of $4,000.
b. gain on bond redemption of $4,000.
c. gain on bond redemption of $2,000.
d. loss on bond redemption of $2,000.
62. A $300,000 bond was redeemed at 103 when the carrying value of the bond was $311,000. The entry
to record the redemption would include a
a. loss on bond redemption of $2,000.
b. gain on bond redemption of $2,000.
c. gain on bond redemption of $9,000.
d. loss on bond redemption of $9,000.
63. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of
$15,500. If the issuing corporation redeems the bonds at 99, what is the amount of gain or loss on
redemption?
a. $5,500 loss
b. $15,500 loss
c. $15,500 gain
d. $5,500 gain
64. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $8,000.
If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on
redemption?
a. $2,000 loss
b. $2,000 gain
c. $8,000 loss
d. $8,000 gain
65. A long-term investment in debt securities is carried at

a. cost
b. lower of cost or market
c. equity
d. market
66. The amortization of discount on bonds purchased as a long-term investment

a. decreases the amount of interest expense
b. increases the amount of the investment account
c. decreases the amount of the investment account
d. increases the amount of interest expense
67. The amortization of premium on bonds purchased as a long-term investment

a. decreases the amount of interest expense
b. increases the amount of the investment account
c. decreases the amount of the investment account
d. increases the amount of interest revenue
68. On June 1, $400,000 of bonds were purchased as a long-term investment at 97 and $500 was paid as
the brokerage commission. If the bonds bear interest at 12%, which is paid semiannually on January
1 and July 1, what is the total cost to be debited to the investment account?
a. $400,000
b. $388,500
c. $400,500
d. $388,000
69. On June 1, $400,000 of bonds were purchased as a long-term investment at 101 and $500 was paid
as the brokerage commission. If the bonds bear interest at 12%, which is paid semiannually on
January 1 and July 1, what is the total cost to be debited to the investment account?
a. $400,000
b. $404,500
c. $403,500
d. $401,500
70. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to
a. face value
b. face value plus the unamortized discount
c. face value minus the unamortized premium
d. face value plus the unamortized premium
71. The balance in Discount on Bonds Payable

a. should be reported on the balance sheet as an asset because it has a debit balance
b. 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
c. would be added to the related bonds payable to determine the carrying amount of the bonds
d. would be subtracted from the related bonds payable on the balance sheet
72. The balance in Discount on Bonds Payable that is applicable to bonds due in 2015 would be reported
on the balance sheet in the section entitled
a. current liabilities
b. long-term liabilities
c. current assets
d. intangible assets
73. The balance in Premium on Bonds Payable

a. should be reported on the balance sheet as a deduction from the related bonds payable
b. 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
c. would be added to the related bonds payable on the balance sheet
d. should be reported in the paid-in capital section of the balance sheet
74. The account Investment in Bonds is reported

a. at cost as a long-term liability along with the current portion reported as a current liability
b. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond
Investments
c. at cost as a long-term asset
d. at fair market value because that is all that is required
75. 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. be sure their debt is backed by collateral
d. know the tax effect of lending to a corporation
76. 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. a direct deduction from retained earnings
d. an addition to the face amount of the bonds in the liability section
77. Numbers of times interest charges earned is computed as

a. Income before income taxes plus Interest Expense divided by Interest Expense
b. Income before income taxes less Interest Expense divided by Interest Expense
c. Income before income taxes divided by Interest Expense
d. Income before income taxes plus Interest Expense divided by Interest Revenue
78. Balance sheet and income statement data indicate the following:
Bonds payable, 8% (issued 1990, due 2015) $1,200,000

Preferred 8% stock, $100 par
(no change during the year) 200,000
Common stock, $50 par
(no change during the year) 1,000,000
Income before income tax for year 320,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000
Based on the data presented above, what is the number of times bond interest charges were earned
(round to two decimal places)?
a. 5.67
b. 4.33
c. 3.24
d. 3.50
Bonds payable, 6% (issued 2000, due 2020) $1,200,000

(no change during the year) 200,000
(no change during the year) 1,000,000
Income before income tax for year 340,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000
Based on the data presented above, what is the number of times bond interest charges were earned
(round to two decimal places)?
a. 5.72
b. 6.83
c. 4.72
d. 4.83
80. When the effective-interest method is used, the amortization of the bond premium
a. increases interest expense each period
b. decreases interest expense each period
c. increases interest expense in some periods and decreases interest expense in other periods
d. has no effect on the interest expense in any period
ANS: B DIF: Easy OBJ: 13-App
81. The Raymore Company issued 10-year bonds on January 1, 2007. The 15% bonds have a face value
of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on
the market interest rate of 12%. Raymore uses the effective-interest method to amortize bond
discounts and premiums. On July 1, 2007, Raymore should record interest expense (round to the
nearest dollar) of
a. $7,032
b. $7,500
c. $8,790
d. $14,065
ANS: A DIF: Moderate OBJ: 13-App
82. The Saymore Company issued 10-year bonds on January 1, 2007. The 6% bonds have a face value of
$800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on
the market interest rate of 8%. Saymore uses the effective-interest method to amortize bond
discounts and premiums. On July 1, 2007, Saymore should record interest expense (round to the
nearest dollar) of
a. $27,638
b. $24,000
c. $48,000
d. $55,277
ANS: A DIF: Moderate OBJ: 13-App
EXERCISE/OTHER
1. Jones Co., is considering the following alternative plans for financing their company:
Plan I Plan II
Issue 10% Bonds (at face) - $2,000,000
Issue $10 Common Stock $3,000,000 $1,000,000
Income tax is estimated at 40% of income.
Determine the earnings per share of common stock under the two alternative financing plans,
assuming income before bond interest and income tax is $1,000,000.
ANS:
Plan I Plan II
Earnings Before bond interest and income tax $1,000,000 $1,000,000
Bond interest expense 0 200,000*
Balance $1,000,000 $ 800,000
Income tax 400,000** 200,000***
Net income $ 600,000 $ 480,000
Dividends on preferred stock 0 0
Earnings available for common stock $ 600,000 $ 480,000
Number of common shares ÷ 300,000 ÷ 300,000
= $2.00 = $1.60
* $2,000,000  10%
**$1,000,000  40%
**$ 800,000  40%
DIF: Moderate OBJ: 13-01

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 13-1
2. Jake Co., is considering the following alternative plans for financing their company:
Plan I Plan II
Issue 10% Bonds (at face) - $3,000,000
Issue $10 Common Stock $4,000,000 $1,000,000
Determine the earnings per share of common stock under the two alternative financing plans,
assuming income before bond interest and income tax is $1,000,000.
ANS:
Plan I Plan II
Earnings Before bond interest and income tax $1,000,000 $1,000,000
Bond interest expense 0 300,000*
Balance $1,000,000 $ 800,000
Income tax 400,000** 280,000***
Net income $ 600,000 $ 420,000
Dividends on preferred stock 0 0
Earnings available for common stock $ 600,000 $ 480,000
Number of common shares ÷ 400,000 ÷ 400,000
= $1.50 = $1.05
*$3,000,000  10%
**$1,000,000  40%
**$ 700,000  40%

3. Using the following table, what is the present value of $5,000 to be received 5 years, if the market
rate is 7% compounded annually?
Periods 5% 6% 7% 10% 12%

1 .95238 .94340 .93458 .90909
2 .90703 .89000 .87344 .82645
3 .86384 .83692 .81630 .75132
4 .82270 .79209 .76290 .68301
5 .78353 .74726 .71299 .62092
6 .74622 .70496 .66634 .56447
7 .71068 .66506 .62275 .51316
8 .67684 .62741 .58201 .46651
9 .64461 .59190 .54393 .42410
10 .61391 .55840 .50835 .38554
ANS:
X = $5,000  .71299 = $3,564.95
DIF: Easy OBJ: 13-02
4. Using the following table, what is the present value of $5,000 to be received 5 years, if the market
rate is 10% compounded annually?
Periods 5% 6% 7% 10% 12%

1 .95238 .94340 .93458 .90909
2 .90703 .89000 .87344 .82645
3 .86384 .83692 .81630 .75132
4 .82270 .79209 .76290 .68301
5 .78353 .74726 .71299 .62092
6 .74622 .70496 .66634 .56447
7 .71068 .66506 .62275 .51316
8 .67684 .62741 .58201 .46651
9 .64461 .59190 .54393 .42410
10 .61391 .55840 .50835 .38554
ANS:
X = $5,000  .62092 = $3,104.60
5. Use the following tables to calculate the present value of a $20,000 7%, 5 year bond that pays $1,400
($20,000  7%) interest annually, if the market rate of interest is 7%
Present Value of $1 at Compound Interest

Periods 5% 6% 7% 10% 12%
1 .95238 .94340 .93458 .90909
2 .90703 .89000 .87344 .82645
3 .86384 .83692 .81630 .75132
4 .82270 .79209 .76290 .68301
5 .78353 .74726 .71299 .62092
6 .74622 .70496 .66634 .56447
7 .71068 .66506 .62275 .51316
8 .67684 .62741 .58201 .46651
9 .64461 .59190 .54393 .42410
10 .61391 .55840 .50835 .38554
Present Value of Annuity of $1 at Compound Interest

Periods 5% 6% 7% 10% 12%
1 .95238 .94340 .93458 .90909 .89286
2 1.85941 1.83339 1.80802 1.73554 1.69005
3 2.72325 2.67301 2.62432 2.48685 2.40183
4 3.54595 3.46511 3.38721 3.16987 3.03735
5 4.32948 4.21236 4.10020 3.79079 3.60478
6 5.07569 4.91732 4.76654 4.35526
7 5.78637 5.58238 5.38929 4.86842
8 6.46321 6.20979 5.97130 5.33493
9 7.10782 6.80169 6.51523 5.75902
10 7.72174 7.36009 7.02358 6.14457
ANS:
Present value of face value of $20,000 due in 5 years at 7% $14,260*
compounded annually: $20,000  .71299 present value factor
of $1 for 5 periods at 7%)
Present value of 5 annual interest payments of $1,000 at 5%

interest compounded annually: $1,400  4.10020 (present
value of annuity of $1 for 5 periods at 7%) 5,740*
Total present value of bonds $20,000*
*rounded
6. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5 year bond that pays semi-
annual interest of $35,000 ($1,000,000  7%  1/2), receiving cash of $884,171. Journalize the entry
to record the issuance of the bonds.
ANS:
Cash 884,171

7. On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-
annual interest of $20,000 ($500,000  8%  1/2), receiving cash of $437,740. Journalize the entry
ANS:
Cash 437,740

8. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5 year bond that pays semi-
annual interest of $35,000 ($1,000,000  7%  1/2), receiving cash of $884,171. Journalize the first
interest payment and the amortization of the related bond discount. Round answer to the nearest
dollar.
ANS:
Interest expense 46,583
Cash 35,000

to record the first interest payment and the amortization of the related bond discount.
ANS:
Interest expense 34,904
Cash 24,000

ANS:
Cash 520,000

to record the first interest payment and amortization of premium using the straight-line method.
ANS:
Interest Expense 19,000
Premium on Bond Payable 1,000
Cash 20,000

12. A $500,000 bond issue on which there is an unamortized discount of $30,000 is redeemed for
$475,000. Journalize the redemption of the bonds.
ANS:
Loss on Redemption of Bonds 5,000
Cash 475,000

ANS:
Gain on Redemption of Bonds 5,000
Cash 465,000

ANS:
Cash 475,000

ANS:
Cash 475,000

16. On October 1, 2007, Yancy Corporation purchased $20,000 of 6% bonds of Jameson Corporation,
due in 8 1/4 years. The bonds were purchased at a price of $17,561 plus interest of $300 accrued
from July 1, 2007, the date of the last semi-annual interest payments. Journalize the purchase of the
bonds plus interest.
ANS:
Oct. 1 Investment in Jameson Corp. Bonds 17,561
Interest revenue 300
Cash 17,861

PROBLEM
1. Two companies are financed as follows:
X Co. Y Co.
Bonds payable, 9% issued at face $5,000,000 $3,000,000
Common stock, $20 par 3,000,000 3,000,000
Determine for each company the earnings per share of common stock, assuming that the income
before bond interest and income taxes is $1,500,000 each.
ANS:
X Co. Y Co.
Earnings before interest and taxes $1,500,000 $1,500,000
Deduct interest on bonds 450,000 270,000
Income before income tax $1,050,000 $1,230,000
Deduct income tax 420,000 492,000
Net income $ 630,000 $ 738,000
Earnings per share on common stock $ 4.20 $ 4.92

2.
(a) Prepare the journal entry to issue $200,000 bonds which sold for $195,000.
(b) Prepare the journal entry to issue $200,000 bonds which sold for $204,000.
ANS:
(a)
Cash 195,000
(b)
Cash 204,000

3. Doe Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest
payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize
the entries to record the following selected transactions for the current year:
May 1 Issued the bonds for cash at their face amount.

Nov. 1 Paid the interest on the bonds.
Dec. 31 Recorded accrued interest for two months.
ANS:
May 1 Cash 10,000,000
Nov. 1 Interest Expense 400,000

Cash 400,000
Dec. 31 Interest Expense 133,333

Interest Payable 133,333

4. On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable
semiannually, were sold for $1,225,000. Present entries to record the following transactions for the
current fiscal year:
(a) Issuance of the bonds.

(b) First semiannual interest payment.
(c) Amortization of bond discount for the year, using the straight-line method of amortization.
ANS:
(a)
Cash 1,225,000
(b)
(c)

annually, were sold for $2,125,000. Present entries to record the following transactions for the

(b) First annual interest payment.
(c) Amortization of bond premium for the year, using the straight-line method of amortization.
ANS:
(a)
Cash 2,125,000
Bond Payable 2,000,000
(b)
Cash 140,000
(c)

6. On August 1, Stuart Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000.
Interest is payable semiannually on February 1 and August 1. Present the entries to record the
following transactions for the current year:

(b) Accrual of interest and amortization of bond discount for the year, on December 31, using
the straight-line method.
ANS:
(a)
Cash 1,225,000
(b)
Interest Expense 1,562.50

Discount on Bonds Payable 1,562.50

semiannually, were sold for $1,050,000. Present entries to record the following transactions for the

(b) First semiannual interest payment.
(c) Amortization of bond premium for the year, using the straight-line method of amortization.
ANS:
(a)
Cash 1,050,000
(b)
Cash 35,000
(c)

8. Present entries to record the selected transactions described below:
(a) Issued $3,250,000 of 10-year, 8% bonds at 97.

(b) Amortized bond discount for a full year, using the straight-line method.
(c) Called bonds at 98. The bonds were carried at $3,175,500 at the time of the redemption.
ANS:
(a)
Cash 3,152,500
(b)
(c)
Cash 3,185,000
DIF: Moderate OBJ: 13-03 | 13-04

9. A company issued $2,000,000 of 30-year, 8% callable bonds on April 1, 2005, with interest payable
on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries
to record the following selected transactions:
2005
Apr. 1 Issued the bonds for cash at their face amount.
Oct. 1 Paid the interest on the bonds.
2009
Oct. 1 Called the bond issue at 103, the rate provided in the bond indenture. (Omit entry for
payment of interest.)
ANS:
2005
Apr. 1 Cash 2,000,000
Oct. 1 Interest Expense 80,000

Cash 80,000
2009
Oct. 1 Bonds Payable 2,000,000
Cash 2,060,000

10. Arthur Corp. issued $2,500,000 of 20-year, 9% callable bonds on July 1, 2005, with interest payable
on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the
entries to record the following selected transactions:
2005
July 1 Issued the bonds for cash at their face amount.
Dec. 31 Paid the interest on the bonds.
2011
Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for
payment of interest.)
ANS:
2005
July 1 Cash 2,500,000
Dec. 31 Interest Expense 112,500

Cash 112,500
2011
Dec. 31 Bonds Payable 2,500,000
Cash 2,425,000

11. On June 30, 2007, Athens Company issued $1,500,000 of 10-year, 8% bonds, dated June 30, for
$1,540,000. The bonds were purchased by Palermo Co. on the issue date at the issue price. Present
entries to record the following transactions:
(a)
Athens Company
(1) Issuance of bonds.
(2) Payment of first semiannual interest on December 31, 2007.
(3) Amortization by straight-line method of bond premium on December 31, 2007.
(b)
Palermo Company
(1) Purchase of bonds.
(2) Receipt of first semiannual interest amount on December 31, 2007.
(3) Amortization by straight-line method of bond premium on December 31, 2007.
ANS:
(a)
(1) Cash 1,540,000
(2) Interest Expense 60,000

Cash 60,000
(3) Premium on Bonds Payable 2,000

(b)
(1) Investment in Athens Co. Bonds 1,540,000
Cash 1,540,000
(2) Cash 60,000

Interest Revenue 60,000
(3) Interest Revenue 2,000

Investment in Athens Co. Bonds 2,000
DIF: Difficult OBJ: 13-03 | 13-05

12.
(a) Prepare the journal entry to issue $100,000 bonds which sold for $94,000.
(b) Prepare the journal entry to issue $100,000 bonds which sold for $104,000.
ANS:
(a)
Cash 94,000
(b)
Cash 104,000

13. Journalize the entries to record the following selected transactions of Owens Co.:
(a) Purchased $100,000 of Kelly Co. 8% bonds at 102 plus accrued interest of $2,000.
(b) Received first semiannual interest payment.
(c) Amortized $40 on the bond investment at the end of the first year.
(d) Sold the bonds at 97 plus accrued interest of $1,500. The bonds were carried at $101,500 at
the time of the sale.
ANS:
(a)
Investment in Kelly Co. Bonds 102,000
Cash 104,000
(b)
Cash 4,000
(c)
Interest Revenue 40
Investment in Kelly Co. Bonds 40
(d)
Cash 98,500
Loss on Sale of Investments 4,500
Investment in Kelly Co. Bonds 101,500
DIF: Difficult OBJ: 13-05

14. Ace Company purchased as a long-term investment $500,000 of Blue Corporation 10-year, 9%
bonds. Present entries to record the following selected transactions:
(a) Purchased bonds for $475,000.

(b) Amortized $1,800 of discount on bonds for the year.
(c) Sold bonds at 98 plus accrued interest of $8,000. The broker deducted $400 for brokerage
fees and taxes, remitting the balance. The bonds were carried at $489,000 at the time of the
sale.
ANS:
(a)
Investment in Blue Corporation Bonds 475,000
Cash 475,000
(b)
Investment in Blue Corporation Bonds 1,800
(c)
Cash 497,600
Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 600

15. Indicate the section where each of the following items would be reported on the corporation balance
sheet:
Use the following abbreviations to report the relevant balance sheet section:
CA = Current Assets
I = Investments
PPE = Property, Plant, and Equipment
IA = Intangible Assets
CL = Current Liabilities
LTL = Long-Term Liabilities
PIC = Paid-In Capital
RE = Retained Earnings
(a) Deferred income tax payable (due after current year)

(b) Marketable securities
(c) Bond sinking fund
(d) Excess of issue price over par of common stock
(e) Investment in Adkins Co. bonds
(f) Unamortized bond discount (on bonds due in 2008)
ANS:
(a) LTL
(b) CA
(c) I
(d) PIC
(e) I
(f) LTL

Company A Company B
Bonds payable, 8% (issued 1985, due 2009) $1,200,000 $ 900,000
(no change during year) 300,000 400,000
(no change during year) 1,000,000 1,000,000
Income before income tax for year 495,000 130,000
Income tax for year 75,000 12,000
Common dividends paid 50,000 0
Preferred dividends paid 21,000 28,000
(a) For each company, what is the number of times bond interest charges were earned (round to
one decimal place)?
(b) Which company gives potential creditors the most protection?
ANS:
(a) Company A 6.2 Company B 2.8
(b) Company A offers potential creditors the most protection.


Acctg Bond Payable

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Chapter 13

Bonds Payable and Investments in Bonds

Chapter 13—Bonds Payable and Investments in Bonds

1. A bond is simply a form of an interest bearing note.

2. Bondholders are creditors of the issuing corporation.

3. Bonds of major corporations are traded on bond exchanges.

5. Bondholders claims on the assets of the corporation rank ahead of stockholders.

6. A bond is usually divided into a number of individual bonds of $500 each.

18. An equal stream of periodic payments is called an annuity.

35. Zero-coupon bonds do not provide for interest payments.

68. The unamortized Discount on Bonds Payable account is a contra-liability account.

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

6. Debenture bonds are

9. The market interest rate related to a bond is also called the

16. An unsecured bond is the same as a

27. The entry to record the amortization of a premium on bonds payable is

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

40. The interest expense recorded on an interest payment date is increased

44. If bonds are issued at a premium, the stated interest rate is

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

49. Selling the bonds at a premium has the effect of

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

53. Sinking Fund Investments would be classified on the balance sheet as

56. Sinking Fund Income is reported in the income statement as

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

58. When callable bonds are redeemed below carrying value

65. A long-term investment in debt securities is carried at

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

67. The amortization of premium on bonds purchased as a long-term investment

71. The balance in Discount on Bonds Payable

73. The balance in Premium on Bonds Payable

74. The account Investment in Bonds is reported

77. Numbers of times interest charges earned is computed as

Bonds payable, 8% (issued 1990, due 2015) $1,200,000

Bonds payable, 6% (issued 2000, due 2020) $1,200,000

Income tax is estimated at 40% of income.

DIF: Moderate OBJ: 13-01

Income tax is estimated at 40% of income.

DIF: Moderate OBJ: 13-01

Periods 5% 6% 7% 10% 12%

Periods 5% 6% 7% 10% 12%

Present Value of $1 at Compound Interest

Present Value of Annuity of $1 at Compound Interest

Present value of 5 annual interest payments of $1,000 at 5%

DIF: Easy OBJ: 13-03

DIF: Easy OBJ: 13-03

DIF: Moderate OBJ: 13-03

DIF: Moderate OBJ: 13-03

DIF: Easy OBJ: 13-03

DIF: Moderate OBJ: 13-03

DIF: Moderate OBJ: 13-04

DIF: Moderate OBJ: 13-04

DIF: Easy OBJ: 13-05

DIF: Easy OBJ: 13-05

DIF: Easy OBJ: 13-05

1. Two companies are financed as follows:

Income tax is estimated at 40% of income.

DIF: Easy OBJ: 13-01

DIF: Easy OBJ: 13-03

May 1 Issued the bonds for cash at their face amount.

Nov. 1 Interest Expense 400,000

Dec. 31 Interest Expense 133,333

DIF: Moderate OBJ: 13-03