OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
Multiple Choice
1. LO 13.1 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
Solution
A
2. LO 13.1 A debenture is ________.
A. the interest paid on a bond
B. a type of bond that can be sold back to the issuing company whenever the bondholder
wishes
C. a bond with only the company's word that they will pay it back
D. a bond with assets such as land to back their word that they will pay it back
Solution
C
3. LO 13.1 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
Solution
D
4. LO 13.1 A convertible bond can be converted into ________.
A. preferred stock
B. common stock and then converted into preferred stock
C. common stock of a different company
D. common stock of the company
Solution
D
5. LO 13.1 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
Solution
B
6. LO 13.1 On July 1, a company sells 8-year $250,000 bonds with a stated interest rate of 6%. If
interest payments are paid annually, each interest payment will be ________.
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
A. $120,000
B. $60,000
C. $7,500
D. $15,000
Solution
D. $15,000 = $250,000 × 6%, and this is payable annually not semi-annually
7. LO 13.1 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%
Solution
A. Calculated: $1,875 × 2 (because they are paid semiannually) = $3,750, $3,750/75,000=.05 or
5%
8. LO 13.1 On October 1 a company sells a 3-year, $2,500,000 bond with an 8% stated interest
rate. Interest is paid quarterly and the bond is sold at 89.35. On October 1 the company would
collect ________.
A. $200,000
B. $558,438
C. $2,233,750
D. $6,701,250
Solution
C. Calculated $2,500,000 × .8935 = $2,233,750
9. LO 13.1 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
Solution
A. Calculated: 60,000 × .07 = $4,200, $4,200/4 (because they are paid quarterly) = $1,050
10. LO 13.2 The effective-interest method of bond amortization finds the difference between the
________ times the ________ and the ________ times the ________.
A. stated interest rate, principal, stated interest rate, carrying value
B. stated interest rate, principal, market interest rate, carrying value
C. stated interest rate, carrying value, market interest rate, principal
D. market interest rate, carrying value, market interest rate, principal
Solution
B
11. LO 13.2 When a bond sells at a discount, the carrying value ________ after each
amortization entry.
A. increases
B. decreases
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
C. stays the same
D. cannot be determined
Solution
A
12. LO 13.2 The International Financial Reporting Standards require the use of ________.
A. any method of amortization of bond premiums
B. the straight-line method of amortization of bond discounts
C. the effective-interest method of amortization of bond premiums and discounts
D. any method approved by US GAAP
Solution
C
13. LO 13.2 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
Solution
B
14. LO 13.2 Whirlie Inc. issued $300,000 face value, 10% paid annually, 10-year bonds for
$319,251 when the market of interest was 9%. The company uses the effective-interest method
of amortization. At the end of the year, the company will record ________.
A. a credit to cash for $28,733
B. a debit to interest expense for $31,267
C. a debit to Discount on Bonds Payable for $1,267
D. a debit to Premium on Bonds Payable for $1.267
Solution
D
15. LO 13.3 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
Solution
C
16. LO 13.3 Keys Inc. issued 100 bonds with a face value of $1,000 and a rate of 8% at $1,025
each. The journal entry to record this transaction includes ________.
A. a credit to Bonds Payable for $102,500
B. a credit to cash for $102,500
C. a debit to cash for $100,000
D. a credit to Premium on Bonds Payable for $2,500
Solution
D
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Chapter 13: Long-Term Liabilities
Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
Multiple Choice
1. LO 13.1 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
Solution
A
2. LO 13.1 A debenture is ________.
A. the interest paid on a bond
B. a type of bond that can be sold back to the issuing company whenever the bondholder
wishes
C. a bond with only the company's word that they will pay it back
D. a bond with assets such as land to back their word that they will pay it back
Solution
C
3. LO 13.1 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
Solution
D
4. LO 13.1 A convertible bond can be converted into ________.
A. preferred stock
B. common stock and then converted into preferred stock
C. common stock of a different company
D. common stock of the company
Solution
D
5. LO 13.1 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
Solution
B
6. LO 13.1 On July 1, a company sells 8-year $250,000 bonds with a stated interest rate of 6%. If
interest payments are paid annually, each interest payment will be ________.
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
A. $120,000
B. $60,000
C. $7,500
D. $15,000
Solution
D. $15,000 = $250,000 × 6%, and this is payable annually not semi-annually
7. LO 13.1 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%
Solution
A. Calculated: $1,875 × 2 (because they are paid semiannually) = $3,750, $3,750/75,000=.05 or
5%
8. LO 13.1 On October 1 a company sells a 3-year, $2,500,000 bond with an 8% stated interest
rate. Interest is paid quarterly and the bond is sold at 89.35. On October 1 the company would
collect ________.
A. $200,000
B. $558,438
C. $2,233,750
D. $6,701,250
Solution
C. Calculated $2,500,000 × .8935 = $2,233,750
9. LO 13.1 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
Solution
A. Calculated: 60,000 × .07 = $4,200, $4,200/4 (because they are paid quarterly) = $1,050
10. LO 13.2 The effective-interest method of bond amortization finds the difference between the
________ times the ________ and the ________ times the ________.
A. stated interest rate, principal, stated interest rate, carrying value
B. stated interest rate, principal, market interest rate, carrying value
C. stated interest rate, carrying value, market interest rate, principal
D. market interest rate, carrying value, market interest rate, principal
Solution
B
11. LO 13.2 When a bond sells at a discount, the carrying value ________ after each
amortization entry.
A. increases
B. decreases
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 13: Long-Term Liabilities
C. stays the same
D. cannot be determined
Solution
A
12. LO 13.2 The International Financial Reporting Standards require the use of ________.
A. any method of amortization of bond premiums
B. the straight-line method of amortization of bond discounts
C. the effective-interest method of amortization of bond premiums and discounts
D. any method approved by US GAAP
Solution
C
13. LO 13.2 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
Solution
B
14. LO 13.2 Whirlie Inc. issued $300,000 face value, 10% paid annually, 10-year bonds for
$319,251 when the market of interest was 9%. The company uses the effective-interest method
of amortization. At the end of the year, the company will record ________.
A. a credit to cash for $28,733
B. a debit to interest expense for $31,267
C. a debit to Discount on Bonds Payable for $1,267
D. a debit to Premium on Bonds Payable for $1.267
Solution
D
15. LO 13.3 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
Solution
C
16. LO 13.3 Keys Inc. issued 100 bonds with a face value of $1,000 and a rate of 8% at $1,025
each. The journal entry to record this transaction includes ________.
A. a credit to Bonds Payable for $102,500
B. a credit to cash for $102,500
C. a debit to cash for $100,000
D. a credit to Premium on Bonds Payable for $2,500
Solution
D
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