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| 1 | |
The price of a corporate bond is the present value of its face amount at the market or effective rate of interest: |
| | A) | Plus the present value of all future interest payments at the market or effective rate of interest. |
| | B) | Plus the present value of all future interest payments at the stated rate of interest. |
| | C) | Reduced by the present value of all future interest payments at the market or effective rate of interest. |
| | D) | Reduced by the present value of all future interest payments at the stated rate of interest. |
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| 2 | |
When a bond issue sells for less than its face value, the market rate of interest is: |
| | A) | Dependent on the stated rate of interest. |
| | B) | Equal to the stated rate of interest. |
| | C) | Higher than the stated rate of interest. |
| | D) | Less than the stated rate of interest. |
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| 3 | |
On June 30, 2016, Mabry Corporation issued $5 million of its 8% bonds for $4.6 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2016? |
| | A) | $16,000 |
| | B) | $20,000 |
| | C) | $23,000 |
| | D) | $30,000 |
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| 4 | |
A discount on bonds should be reported on the balance sheet: |
| | A) | At the present value of the future addition to bond interest expense due to the discount. |
| | B) | As a reduction in bond issue costs. |
| | C) | As a reduction of the face amount of the bond. |
| | D) | As a deferred credit. |
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| 5 | |
If bonds are issued between interest dates the entry to record the issuance of the bonds will: |
| | A) | Include a credit to accrued interest payable. |
| | B) | Include a debit to interest expense. |
| | C) | Include a debit to cash that has been reduced by accrued interest from the last interest date. |
| | D) | Be unaffected by the timing of sale. |
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| 6 | |
On January 1, 2016, Blair Company sold $800,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $708,000, priced to yield 12%. Blair records interest at the effective rate. Blair should report bond interest expense for the six months ended June 30, 2016 in the amount of: |
| | A) | $35,400 |
| | B) | $40,000 |
| | C) | $42,480 |
| | D) | $48,000 |
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| 7 | |
In a bond amortization table for bonds issued at a discount: |
| | A) | The effective interest expense is less with each successive interest payment. |
| | B) | The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. |
| | C) | The outstanding balance (book value) of the bonds declines eventually to face value. |
| | D) | The reduction in the discount is less with each successive interest payment. |
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| 8 | |
Bonds will sell at: |
| | A) | Their face value if the stated rate is equal to the nominal rate. |
| | B) | Their face value unless the stated rate is less than the market rate. |
| | C) | A discount if the stated rate exceeds the market rate. |
| | D) | A premium if the stated rate exceeds the market rate. |
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| 9 | |
When bonds are issued at a discount and interest expense is recorded at the effective interest rate, interest expense in the earlier years of the term to maturity will be: |
| | A) | Less than the cash interest payments made. |
| | B) | Less than if the straight-line method were used. |
| | C) | Greater that if the straight-line method were used. |
| | D) | The same as if the straight-line method were used. |
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| 10 | |
AMC Corporation issued bonds at a discount. The long-term liability reported in AMC's balance sheet will: |
| | A) | Increase each year during the term to maturity. |
| | B) | Decrease each year during the term to maturity. |
| | C) | Remain the same each year during the term to maturity. |
| | D) | Increase or decrease each year depending upon the market rate of interest. |
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| 11 | |
When a firm records bond interest at the effective rate for bonds issued at a discount, its net income in the bond's first year will be: |
| | A) | Less than if the straight-line method were used. |
| | B) | Higher than if the straight-line method were used. |
| | C) | The same as if the straight-line method were used. |
| | D) | None of the above. |
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| 12 | |
Douglas-Roberts has bonds outstanding during a year in which the market rate of interest has risen. Douglas-Roberts has elected the fair value option for the bonds. What will the company report for the bonds in its statement of comprehensive income for the year? |
| | A) | Interest expense and a gain. |
| | B) | Interest expense and a loss. |
| | C) | No interest expense and a gain. |
| | D) | No interest expense and a loss. |
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| 13 | |
Brubaker Company issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2016. The bonds sold for $369,908 and mature in 2035 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Brubaker determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2016, the fair value of the bonds was $365,000 as determined by their market value on the NYSE. Brubaker's statement of comprehensive income for the year will include: |
| | A) | A gain from change in the fair value of debt of $5,309. |
| | B) | A loss from change in the fair value of debt of $5,309. |
| | C) | A gain from change in the fair value of debt of $5,102. |
| | D) | A loss from change in the fair value of debt of $5,102. |
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| 14 | |
BVA Corporation exchanged a $96,000, noninterest-bearing, 3-year note for land with a fair value of $60,000. The $36,000 difference represents: |
| | A) | A loss on the purchase of land. |
| | B) | A premium on notes payable. |
| | C) | Interest expense to be recorded over three years. |
| | D) | None of the above. |
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| 15 | |
When a note is issued in exchange for a machine, and interest on the note is not stated: |
| | A) | The machine should be depreciated over the term to maturity of the note. |
| | B) | The note should be recorded at its present value, discounted at an appropriate market rate of interest, if fair values of the note and machine are unavailable. |
| | C) | The note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable. |
| | D) | The note is recorded at its face amount unless the fair market value of the machine is readily available. |
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| 16 | |
Brown Corporation exercised its call option to retire long-term notes. The excess of the cash paid over the book value of the notes should be reported as a(an): |
| | A) | Gain from discontinued operations. |
| | B) | Gain from continuing operations. |
| | C) | Loss from discontinued operations. |
| | D) | Loss from continuing operations. |
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| 17 | |
National Storage issued $90 million of its 10% bonds on April 1, 2016, at 99 plus accrued interest. The bonds are dated January 1, 2016, and mature on December 31, 2035. Interest is payable semiannually on June 30 and December 31. What amount did National receive from the bond issuance? |
| | A) | $86.85 million |
| | B) | $89.10 million |
| | C) | $90.00 million |
| | D) | $91.35 million |
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| 18 | |
On March 1, 2016, Big Brands Corporation issued $600,000 of 10% bonds at 105. Each $1,000 bond was sold with 50 detachable stock warrants, each permitting the investor to purchase one share of common stock for $35. On that date, the market value of the common stock was $30 per share and the market value of each warrant was $4. Big Brands should record what amount of the proceeds from the bond issue as an increase in liabilities? |
| | A) | $510,000 |
| | B) | $600,000 |
| | C) | $630,000 |
| | D) | $0 |
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| 19 | |
On June 30, 2016, Kerr Industries had outstanding $40 million of 8%, convertible bonds that mature on June 30, 2017. Interest is payable each year on June 30 and December 31. The bonds are convertible into 2 million shares of $10 par common stock. At June 30, 2016, the unamortized balance in the discount on bonds payable account was $2 million. On June 30, 2016, half the bonds were converted when Kerr's common stock had a market price of $25 per share. When recording the conversion using the book value method, Kerr should credit paid-in capital – excess of par: |
| | A) | $8 million |
| | B) | $9 million |
| | C) | $11 million |
| | D) | $12 million |
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| 20 | |
On September 1, 2016, Expert Materials, issued at 98 plus accrued interest, $800,000 of its 10% bonds. The bonds are dated June 1, 2016, and mature on May 30, 2026. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Expert would receive cash of: |
| | A) | $784,000 |
| | B) | $803,600 |
| | C) | $804,000 |
| | D) | $820,000 |
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| 21 | |
On September 1, 2016, Contemporary Products, issued $16 million of its 10% bonds at face value. The bonds are dated June 1, 2016, and mature on May 30, 2026. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Contemporary Products would receive cash proceeds that would include accrued interest of: |
| | A) | Zero. |
| | B) | $200,000. |
| | C) | $400,000. |
| | D) | $1.6 million. |
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| 22 | |
During 2016 Belair Company was encountering financial difficulties and seemed likely to default on a $600,000, 10%, four-year note dated January 1, 2014, payable to Second Bank. Interest was last paid on December 31, 2015. On December 31, 2016, Second Bank accepted $500,000 in settlement of the note. Ignoring income taxes, what amount should Belair report as a gain from the debt restructuring in its 2016 income statement? |
| | A) | $40,000 |
| | B) | $100,000 |
| | C) | $160,000 |
| | D) | $0 |
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| 23 | |
On January 1, 2016, Ventrini International issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ventrini's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ventrini applies International Financial Reporting Standards. Upon issuance, Ventrini should |
| | A) | credit bonds payable $9,900,000. |
| | B) | credit premium on bonds payable $100,000. |
| | C) | credit equity $100,000. |
| | D) | credit bonds payable $10,100,000. |
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| 24 | |
Preston Laird Company issued 5% bonds convertible into shares of the company's common stock. Preston Laird Company applies International Financial Reporting Standards. Upon issuance, Preston Laird Company should record |
| | A) | the proceeds of the bond issue as part debt and part equity. |
| | B) | the proceeds of the bond issue entirely as debt. |
| | C) | the proceeds of the bond issue entirely as equity. |
| | D) | the proceeds of the bond issue entirely as debt if the bonds are manditorily redeemable. |
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