CHAPTER 13
LONG-TERM LIABILITIES
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. Companies usually make bond interest payments semiannually, although the interest rate is
generally expressed as an annual rate.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
2. A mortgage bond is referred to as a debenture bond.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
3. Bond issues that mature in installments are called serial bonds.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
4. If the market interest rate is greater than the coupon rate, the bonds will be sold at a
premium.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
5. The interest rate written in the terms of the bond indenture is called the effective, yield, or
market rate.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
6. The stated interest rate is the same as the coupon rate.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance. IFRS: None
7. Amortization of premium on bonds payable increases bond interest expense while
amortization of bond discount decreases interest expense.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
8. A bond may only be issued on an interest payment date.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
9. The cash paid for interest will always be greater than interest expense when using effective-
interest amortization for a bond.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
10. Companies report bond discount as a direct deduction from the face amount of the bond.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,13 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. The replacement of an existing bond issue with a new one is called refunding.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
12. If a long-term note payable has a stated interest rate, that rate is considered to be the effective
rate.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
13. The interest rate on a variable-rate mortgage is tied to the fluctuating market rate.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
14. An unrealized holding gain or loss is the net change in the fair value of the liability from one
period to another, exclusive of interest expense recognized but not recorded.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
15. Off-balance-sheet financing is an attempt to borrow capital in a way that minimizes the
reporting of debt on the balance sheet.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
16. The debt to assets ratio will increase if equal amounts of assets and liabilities are added to
the balance sheet.
Ans: T, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
17. If a company plans to retire long-term debt from a bond retirement fund, it should report the
debt as current.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. The times interest earned is computed by dividing income before interest expense by
interest expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
*19. The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
, Long-Term Liabilities 13- 3
MULTIPLE CHOICE—Conceptual
21. Which of the following is not classified as a liability?
a. dividends payable in stock
b. advances from customers on contracts
c. accrued estimated warranty costs
d. the portion of long-term debt due within one year
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. The covenants and other terms of the agreement between the issuer of bonds and the
lender are outlined in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
23. The term used for bonds for which the principal is unsecured is
a. mortgage bonds.
b. debenture bonds.
c. indenture bonds.
d. callable bonds.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
P
24. Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
S
25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
S
26. If bonds are issued at a premium and the effective-interest method of amortization is used,
interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
, 13 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
28. The rate of return earned by bondholders is called the
a. stated rate.
b. coupon rate.
c. nominal rate.
d. effective rate.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
29. Foxtrot Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
multiply the face value by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
30. Foxtrot Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an
annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. multiply $5,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
Solution: Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table.
31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from
the date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
32. If bonds are sold at a discount and the straight-line method of amortization is used, interest
expense in the earlier years will
LONG-TERM LIABILITIES
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. Companies usually make bond interest payments semiannually, although the interest rate is
generally expressed as an annual rate.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
2. A mortgage bond is referred to as a debenture bond.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
3. Bond issues that mature in installments are called serial bonds.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
4. If the market interest rate is greater than the coupon rate, the bonds will be sold at a
premium.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
5. The interest rate written in the terms of the bond indenture is called the effective, yield, or
market rate.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
6. The stated interest rate is the same as the coupon rate.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance. IFRS: None
7. Amortization of premium on bonds payable increases bond interest expense while
amortization of bond discount decreases interest expense.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
8. A bond may only be issued on an interest payment date.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
9. The cash paid for interest will always be greater than interest expense when using effective-
interest amortization for a bond.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
10. Companies report bond discount as a direct deduction from the face amount of the bond.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,13 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. The replacement of an existing bond issue with a new one is called refunding.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
12. If a long-term note payable has a stated interest rate, that rate is considered to be the effective
rate.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
13. The interest rate on a variable-rate mortgage is tied to the fluctuating market rate.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
14. An unrealized holding gain or loss is the net change in the fair value of the liability from one
period to another, exclusive of interest expense recognized but not recorded.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
15. Off-balance-sheet financing is an attempt to borrow capital in a way that minimizes the
reporting of debt on the balance sheet.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
16. The debt to assets ratio will increase if equal amounts of assets and liabilities are added to
the balance sheet.
Ans: T, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
17. If a company plans to retire long-term debt from a bond retirement fund, it should report the
debt as current.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. The times interest earned is computed by dividing income before interest expense by
interest expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC:
None, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
*19. The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
, Long-Term Liabilities 13- 3
MULTIPLE CHOICE—Conceptual
21. Which of the following is not classified as a liability?
a. dividends payable in stock
b. advances from customers on contracts
c. accrued estimated warranty costs
d. the portion of long-term debt due within one year
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. The covenants and other terms of the agreement between the issuer of bonds and the
lender are outlined in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
23. The term used for bonds for which the principal is unsecured is
a. mortgage bonds.
b. debenture bonds.
c. indenture bonds.
d. callable bonds.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
P
24. Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
S
25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
S
26. If bonds are issued at a premium and the effective-interest method of amortization is used,
interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Recordkeeping, IFRS: None
, 13 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
28. The rate of return earned by bondholders is called the
a. stated rate.
b. coupon rate.
c. nominal rate.
d. effective rate.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning &
Performance: Corporate Finance, IFRS: None
29. Foxtrot Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
multiply the face value by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
30. Foxtrot Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an
annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. multiply $5,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
Solution: Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table.
31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from
the date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Corporate Finance, IFRS: None
32. If bonds are sold at a discount and the straight-line method of amortization is used, interest
expense in the earlier years will
