1. Reich, Inc.

issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
2. If bonds are initially sold at a discount and the straight-line method of amortization is
used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of
amortization been used.
b. be less than what it would have been had the effective-interest method of
amortization been used.
c. be the same as what it would have been had the effective-interest method of
amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.

3. Under the effective-interest method of bond discount or premium amortization, the

periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the
bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the
bonds.
4. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium

5. If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

6. When the effective-interest method is used, the amortization of the bond premium
a. has no effect on the interest expense in any period
b. increases interest expense each period
c. increases interest expense in some periods and decreases interest expense in
other periods
d. decreases interest expense each period
7. The Torrez Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1,
2017, at 97. The journal entry to record the issuance will show a
a. debit to Cash of P1,000,000
b. credit to Cash for P970,000
c. credit to Bonds Payable for P1,000,000
d. credit to Discount on Bonds Payable for P30,000

8. If the market rate of interest is greater than the contractual rate of interest, bonds will
sell
a. at a discount
b. at face value
c. at a premium
d. only after the stated rate of interest is increased

9. On January 1, 2017, P1,000,000, 5-year, 10% bonds, were issued for P970,000. 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. P6,000
b. P3,000
c. P5,000
d. P5,808

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

a. gain on sinking fund transactions
b. other income
c. income from operations
d. extraordinary