Flash Cards Chapter 14

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1. Which of the following is not a typically classified as a long-term liability? Unearned Revenue.
2. All of the following statements related to bonds are correct except bonds: usually pay interest annually.
3. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture.
4. Bonds that are not recorded in the name of the bondholder are called unsecured bonds. False
5. Convertible bonds give the issuer the right to retire bonds prior to maturity. False
6. A bond that matures in installments is called a:
serial bond.
7. Bonds which do not pay interest unless the issuing company is profitable are called: income bonds.
8. A bond for which the issuer has the right to call and retire the bonds prior to maturity is a callable bond.
9. A debenture bond is a (an):
unsecured bond.
10. A bond issued in the name of the owner is a:
registered bond.
11. When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. False
12. If a bond sold at 98 1/2, the market rate was:
greater than the stated rate.
13. Bond issue costs are recorded as a(n):
deferred charge.
14. On January 1, Franco Inc. issued $10,000,000, 9% bonds at 102. The journal entry to record the issuance of the bonds will include a credit to Premium on Bonds Payable for $200,000.
15. When bonds sell between interest payment dates, the purchaser will pay the seller: the price of the bonds plus the accrued interest.
16. The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by using the market rate.
17. The interest rate actually earned by bondholders is called the: effective rate.
18. The interest rate written in the terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate.
19. The printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amortized over the life of the bonds. 20. Stone, Inc. issued bonds with a maturity amount of $2,000,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that the stated rate of interest exceeded the market rate.

21. Hamilton Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

| 2.5%| 3.0%| 5.0%| 6.0%|
Present value of a single sum for 5 periods| .88385| .86261| .78353| .74726| Present value of a single sum for 10 periods| .78120| .74409| .61391| .55839| Present value of an annuity for 5 periods| 4.64583| 4.57971| 4.32948| 4.21236| Present value of an annuity for 10 periods| 8.75206| 8.53020| 7.72173| 7.36009|

($10,000,000 X .78120) + ($300,000 X 8.75206) = $10,437,618
22. The effective interest method is preferred when amortizing bond premiums and discounts True
23. Bonds with a face value of $100,000, stated interest rate of 8%, were sold for $92,278 to yield 10%. Using the effective interest method of amortization, interest expense for the first six months would be $4,000. False

24. The adjusting entry for bond premium amortization increases interest expense and decreases the balance in premium on bonds payable. False
25. The effective interest method calculates interest expense by multiplying the carrying value of the bonds by the stated rate of interest. False
26. Both discount on bonds payable and premium on bonds payable are: valuation accounts.
27. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used. 28. Bangor...
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