Content check — Financial Accounting, Chapter 13: Long-Term Liabilities

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Chapter 13: Long-Term Liabilities

18 problems · 0 figures

Multiple Choice 13.1 §13.1 source ↗

An amortization table ________.

a.
breaks each payment into the amount that goes toward interest and the amount that goes toward the principal
b.
is a special table used in a break room to make people feel equitable
c.
separates time value of money tables into present value and future value
d.
separates time value of money tables into single amounts and streams of cash

Answer

A. breaks each payment into the amount that goes toward interest and the amount that goes toward the principal

Multiple Choice 13.3 §13.1 source ↗

The principal of a bond is ________.

a.
the person who sold the bond for the company
b.
the person who bought the bond
c.
the interest rate printed on the front of the bond
d.
the face amount of the bond that will be paid back at maturity

Answer

D. the face amount of the bond that will be paid back at maturity

Multiple Choice 13.5 §13.1 source ↗

On January 1, a company issued a 5-year $100,000 bond at 6%. Interest payments on the bond of $6,000 are to be made annually. If the company received proceeds of $112,300, how would the bond’s issuance be quoted?

a.
1.123
b.
112.30
c.
0.890
d.
89.05

Answer

B. 112.30

Multiple Choice 13.7 §13.1 source ↗

On January 1 a company issues a $75,000 bond that pays interest semi-annually. The first interest payment of $1,875 is paid on July 1. What is the stated annual interest rate on the bond?

a.
5.00%
b.
2.50%
c.
1.25%
d.
10.00%

Answer

A. 5.00%

Multiple Choice 13.9 §13.1 source ↗

On April 1 a company sells a 5-year, $60,000 bond with a 7% stated interest rate. The market interest on that day was also 7%. If interest is paid quarterly, the company makes interest payments of ________.

a.
$1,050
b.
$3,150
c.
$4,200
d.
$5,250

Answer

A. $1,050

Multiple Choice 13.11 §13.2 source ↗

When a bond sells at a discount, the carrying value ________ after each amortization entry.

a.
increases
b.
decreases
c.
stays the same
d.
cannot be determined

Answer

A. increases

Multiple Choice 13.13 §13.2 source ↗

The cash interest payment a corporation makes to its bondholders is based on ________.

a.
the market rate times the carrying value
b.
the stated rate times the principal
c.
the stated rate times the carrying value
d.
the market rate times the principal

Answer

B. the stated rate times the principal

Multiple Choice 13.15 §13.3 source ↗

Naval Inc. issued $200,000 face value bonds at a discount and received $190,000. At the end of 2018, the balance in the Discount on Bonds Payable account is $5,000. This year’s balance sheet will show a net liability of ________.

a.
$200,000
b.
$180,000
c.
$195,000
d.
$205,000

Answer

C. $195,000

Multiple Choice 13.17 §13.3 source ↗

Huang Inc. issued 100 bonds with a face value of $1,000 and a 5-year term at $960 each. The journal entry to record this transaction includes ________.

a.
a debit to Bonds Payable for $100,000
b.
a debit to Discount on Bonds Payable for $4,000
c.
a credit to cash for $96,000
d.
a credit to Discount on Bonds Payable for $4,000

Answer

B. a debit to Discount on Bonds Payable for $4,000

Multiple Choice 13.19 §13.3 source ↗

Gingko Inc. issued bonds with a face value of $100,000, a rate of 7%, and a 10-yearterm for $103,000. From this information, we know that the market rate of interest was ________.

a.
more than 7%
b.
less than 7%
c.
equal to 7%
d.
equal to 1.3%

Answer

B. less than 7%

Question 13.1 §13.1 source ↗

What is the difference between callable and putable bonds?

Answer

Callable bonds can be bought back by the issuing company whenever they want to, but putable bonds can be cashed in by the holder whenever the holder wants to.

Question 13.3 §13.1 source ↗

What is a junk bond?

Answer

A junk bond is typically titled as a high-yield bond; it sounds less unfavorable than junk. Its rating is below what is typically expected for investment-grade bonds. Investors and speculators might buy these bonds because if they don’t default, the rate of return could be significantly higher than investment grade bonds. However, the possibility of the bonds defaulting and neither paying the interest nor principle at maturity is higher than with investment-grade bonds.

Question 13.5 §13.1 source ↗

What do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?

Answer

In bond pricing problems, if the interest compounds more than one a year, divide the interest rate by the number of compounding periods per year, and multiply the number of years by the number of compounding periods per year. If it is paid quarterly, divide the interest rate by 4 and multiply the number of years by 4.

Question 13.7 §13.2 source ↗

In the amortization table, how is the amortization of discount of premium computed?

Answer

It is the difference between the cash interest payment and the interest on the carrying value.

Question 13.9 §13.2 source ↗

What kind of account is the Discount on Bonds Payable? What kind of account is the Premium on Bonds Payable?

Answer

The Discount on Bonds Payable is a contra liability account and reduces the associated liability. The Premium on Bonds Payable is a liability account and increases the associated liability.

Question 13.11 §13.3 source ↗

If there is neither a premium nor discount present, the journal entry to record bond interest payments is _______.

Answer

DR Interest Expense and CR Cash

Question 13.13 §13.3 source ↗

A company issued bonds with a $100,000 face value, a 5-year term, a stated rate of 6%, and a market rate of 7%. Interest is paid annually. What is the amount of interest the bondholders will receive at the end of the year?

Answer

Bondholders receive the stated rate times the principle, so they would receive $6,000.

Question 13.15 §13.3 source ↗

Does interest expense increase or decrease when a bond premium is amortized?

Answer

Amortizing a bond premium reduces interest expense.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.