Bond Financing and Accounting Worksheet

A bond is issued at par value when:

• The bond pays no interest.

• Straight line amortization is used by the company.

• The bond is not between interest payment dates.

• The market rate of interest is the same as the contract rate of interest.

• The bond is callable.

A disadvantage of bond financing is:

• Bonds can increase return on equity.

• All of the choices listed are disadvantages.

• Bonds do not affect owners' control.

• Interest on bonds is tax deductible.

• Bonds pay periodic interest and require the repayment of par value at maturity.

Which of the following statements is true? Multiple Choice

• A. Bonds do not have to be repaid.

• B. Distributions to owners are tax deductible.

• C. Bonds always increase return on equity.

• D. Interest on bonds is tax deductible.

• E. Interest on bonds is not tax deductible.

If an issuer sells bonds at a premium:

• The carrying value of the bond stays constant over time.

• The carrying value decreases from the issue price to the par value over the bond’s term.

• The carrying value decreases from the par value to the issue price over the bond’s term.

• The carrying value increases from the issue price to the par value over the bond’s term.

• The carrying value increases from the par value to the issue price over the bond’s term.

The Premium on Bonds Payable account is a(n):

• Revenue account.

• Equity account.

• Adjunct liability account.

• Contra asset account.

• Contra revenue account.

The carrying value of bonds at maturity always equals:

• The amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.

• The amount of discount or premium.

• The amount of cash originally received in exchange for the bonds.

• The amount in excess of par value.

• The par value of the bond.

The Discount on Bonds Payable account is:

• Contra liability.

• Contra expense.

• An expense.

• A liability.

• A contra equity.

The legal contract between the bond issuer and the bondholders is called a(n):

• Bond indenture.

• Term bond.

• Installment note.

• Mortgage.

• Debenture.

An advantage of bonds is:

• Bond payments can be burdensome when income and cash flow are low.

• Bonds can decrease return on equity.

• Bonds do not affect owner control.

• Bonds require payment of periodic interest.

• Bonds require payment of par value at maturity.

When a bond sells at a premium: Which of the following is correct?

• The contract rate is below the market rate.

• The contract rate is equal to the market rate.

• The contract rate is above the market rate.

• It means that the bond is a zero-coupon bond.

• The bond pays no interest.