Multiple-Choice Questions

1. When noninterest-bearing bonds are issued, the discount is

a. Disregarded for financial reporting purposes.

b. Expensed immediately.

c. Amortized to interest expense each period.

d. Credited to revenue.

2. When interest-bearing bonds are issued at a discount, the interest expense for the period is

a. The amount of interest payment for the period plus the discount amortization for the period.

b. The amount of interest payment for the period minus the discount amortization for the period.

c. The amount of interest payment for the period plus the premium amortization for the period.

d. The amount of interest payment for the period minus the premium amortization for the period.

3. When interest-bearing bonds are issued at a premium, the interest expense for the period is

a. The amount of interest payment for the period plus the discount amortization for the period.

b. The amount of interest payment for the period minus the discount amortization for the period.

c. The amount of interest payment for the period plus the premium amortization for the period.

d. The amount of interest payment for the period minus the premium amortization for the period.

4. Installment bonds differ from typical bonds in what way?

a. Essentially they are the same.

b. Installment bonds do not have a stated rate.

c. A portion of each installment bond payment pays down the principal balance.

d. The entire principal balance is paid off at maturity for installment bonds.

5. In 2008, Drew Company issued $200,000 of bonds for $189,640. If the stated rate of interest was 8 percent and the yield was 6.73 percent, how would Drew calculate the interest expense for the first year on the bonds using the effective interest method?

a. $189,640 3 6.73%

b. $189,640 3 8%

c. $10,000 3 6.73%

d. $10,000 3 8%

6. The result of using the effective interest method of amortization of the discount on bonds is that the

a. Interest expense for each amortization period is constant.

b. A constant interest rate is charged against the debt carrying value.

c. Amount of interest expense decreases each period.

d. Cash interest payment is greater than the interest expense.

7. Serenity Company issued $100,000 of 6 percent, 10-year bonds when the market rate of interest was 5 percent. The proceeds from this bond issue were $107,732. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually.

a. Interest payments to bondholders each period will be $6,464.

b. Interest payments to bondholders each period will be $5,000.

c. Amortization of the premium for the first interest period will be $613.

d. Amortization of the premium for the first interest period will be $1,464.

8. Bonds are a popular source of financing because:

a. Bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

b. Financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.

c. A company having cash flow problems can postpone payment of interest to bondholders.

d. The bondholders can always convert their bonds into stock if they choose.