Introductory to Financial Accounting - Chapter 10

Annual interest expense for a bond continues to increase over the life of the bonds. Which of the following explains this?

• a. The market rate of interest has increased since the bonds were sold.

• b. The coupon rate has increased since the bonds were sold.

• c. The bonds were sold at a discount.

• d. The bonds were sold at a premium.

Which of the following is an advantage of issuing bonds when compared to issuing additional shares of stock in order to raise additional capital?

• a. When the bonds are issued, bondholders obtain voting rights.

• b. Dividends are not tax deductible.

• c. Up to a cap, interest expense is tax deductible.

• d. All of the above are advantages associated with bonds.

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the

• a. Face value of the bonds.

• b. Coupon rate stated in the bond certificate.

• c. Market rate of interest on the date the bonds were issued.

• d. Both (a) and (b).

When using the effective-interest method of amortization, the book value of a bond changes by what amount on each interest payment date?

• a. Interest expense.

• b. Cash interest payment.

• c. The difference between interest expense and the cash interest payment.

• d. None of the above.

A bond with a face value of $100,000 has a coupon rate of 8 percent. The bond matures in 10 years and pays interest annually. When the bond is issued, the market rate of interest is 10 percent. What amount will investors pay for this bond when it is issued?

• a. $100,000

• b. Less than $100,000

• c. More than $100,000

• d. Can be either a,b or c

Which account would not be included in the debt-to-equity ratio calculation?

• a. Unearned Revenue.

• b. Retained Earnings.

• c. Income Taxes Payable.

• d. All of the above are included

Which of the following is false when a bond is issued at a premium?

• a. The bond will issue for an amount above its par value.

• b. Bonds payable will be credited for an amount greater than the bond’s face value.

• c. Interest expense will exceed the cash interest payments.

• d. All of the above are false.

A bond with a face value of $100,000 was issued for $93,500 on January 1 of this year. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31 of this year?

• a. $10,000

• b. $8,000

• c. $7,480

• d. $9,350

To determine whether a bond will be sold at a premium, at a discount, or at face value, one must know which of the following pairs of information?

• a. Face value and the coupon rate on the date the bond is issued.

• b. Face value and the market rate of interest on the date the bond is issued.

• c. The coupon rate and the market rate of interest on the date the bond is issued.

• d. The coupon rate and the stated rate on the date the bond is issued.