ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 10
Reporting & Analyzing Long-Term Liabilities
Dr. Fred Barbee
Part I: Multiple-Choice Questions
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1. A bond traded at 102 1/2 means that:
a.  The bond pays 2.5% interest.
b.  The bond traded at $1,025 per $1,000 bond.
c.  The market rate of interest is 2.5%
d.  The bonds were retired at $1,025 each.
e.  The market rate of interest is 2 1/2% above the contract rate.
2. Bonds that have interest coupons attached to their certificates, which the bondholders detach during each interest period and present to a bank for collection, are called:
a.  Coupon Bonds
b.  Callable Bonds
c.  Serial Bonds
d.  Convertible Bonds
e.  Registered Bonds
3. A company borrowed $300,000 cash from the bank by signing a 5-year, 8% installment note. (The present value of an annuity of 8% for 5 years is 3.9927). Each annuity payment equals $75,137. The present value of the note is:
a.  $75,137
b.  $94,013
c.  $300,000
d.  $375,685
e.  $1,197,810
4. An advantage of bond financing is:
a.  Bonds do not affect owners' control.
b.  Interest on bonds is tax deductible.
c.  Bonds can increase return on equity.
d.  It allows firms to trade on the equity.
e.  All of the above.
5. A disadvantage of bonds is:
a.  Bonds require payment of periodic interest.
b.  Bonds require payment of principal.
c.  Bonds can decrease return on equity.
d.  Bond payments can be burdensome when income and cash flow are low.
e.  All of the above.
6. When a bond sells at a premium:
a.  The contract rate is above the market rate.
b.  The contract rate is equal to the market rate.
c.  The contract rate is below the market rate.
d.  It means the bond is a zero coupon bond.
e.  The bond pays no interest.
7. Amortizing a bond discount:
a.  Allocates a part of the total discount to each interest period.
b.  Increases the market value of the Bonds Payable.
c.  Decreases the Bonds Payable account.
d.  Decreases interest expense each period.
e.  Increases cash flows from the bond.
8. The Premium on Bonds Payable account is a(n):
a.  Revenue Account.
b.  Adjunct liability account.
c.  Contra Revenue Account.
d.  Asset account.
e.  Contra expense account.
9. A company may retire bonds by:
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.  All of the above.
10. 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.

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Part II: Short Problems

Short Problem #1

Match each of the following terms a through j with the appropriate definitions 1 through 10:

  1. Bond
  2. Callable bonds
  3. Annuity
  4. Contract rate
  5. Sinking fund bonds
  6. Secured bonds
  7. Carrying value
  8. Premium on bonds
  9. Bond indenture
  10. Pledged assets to secured liabilities

1.
_____
 Bonds that have specific assets of the issuer pledged as collateral.
2.
_____
 A series of equal payments at equal intervals.
3.
_____
 The difference between the par value of a bond and its higher issue price or carrying value.
4.
_____
 Bonds that give the issuer an option of retiring them at a stated amount prior to maturity.
5.
_____
 The interest rate specified in the bond indenture.
6.
_____
 The contract between the bond issuer and the bondholder(s); it identifies the rights and obligations of the parties.
7.
_____
 Bonds that require the issuer to make deposits to a separate account; the bondholders are repaid at maturity from this account.
8.
_____
 The net amount at which bonds are reported on the balance sheet.
9.
_____
 The ratio of the book value of a company's pledged assets to the book value of its secured liabilities.
10.
_____
 A written promise to pay an amount identified as the par value of the bond along with interest at a stated rate.

Short Problem #2

On January 1, 2002, 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.








Short Problem #3

A company purchased two new trucks for a total of $250,000 on January 1, 2002. The company paid $40,000 cash and gave a $210,000, 3-year, 8% note for the remaining balance. The note is to be paid in three annual end-of-year payments beginning December 31, 2002. Assume the annual installment payments are to consist of equal amounts of principal plus accrued interest. Prepare a not amortization table using the format below:

Note Amortization Table


Date
Beginning
Balance
 Debit:
Interest
Expense
 Debit
Notes
Payable
Credit
Cash
Ending
Balance
12/31/02  
  
  
  
  
12/31/03  
  
  
  
  
12/31/04  
  
  
  
  

Part III: Problems

PDQ Properties issues bonds dated January 1, 2003, that pay interest semiannually on June 30 and December 31. The bonds have a $100,000 par value, the annual contract rate is 10% and the bonds mature in 10 years.

Required:

For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2003, and (b) prepare the journal entry to record their issuance.

  1. Market rate at the date of issuance is 8%.
  2. Market rate at the date of issuance is 10%.
  3. Market rate at the date of issuance is 12%.

         

Last Modified September 19, 2002