,,

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. For a liability to exist,

a. a past transaction or event must have occurred.
b. the exact amount must be known.
c. the identity of the party owed must be known.
d. an obligation to pay cash in the future must exist.
____ 2. The most conceptually appropriate method of valuing a liability under the historical cost basis is to
a. discount the amount of expected cash outlfows that are necessary to liquidate the liability
using the market rate of interest at the date the liability was initially incurred.
b. discount the amount of expected cash outlfows that are necessary to liquidate the liability
using the market rate of interest at the date financial statements are prepared subsequent
to issuance.
c. record as a liability the amount of cash or cash-equivalent value that the company would
be required to pay to eliminate the liability in the ordinary course of business on the date
of the financial statements.
d. record as a liability the amount of cash or cash-equivalent proceeds actually received
when a liability was incurred.
____ 3. Which of the following represents a liability?
a. The obligation to pay for goods that a company expects to order from suppliers next year.
b. The obligation to provide goods that customers have ordered and paid for during the
current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of
the current year.
d. The obligation to distribute share of a company's own common stock next year as a result
of a stock dividend declared near the end of the current year.
____ 4. A short-term note payable with no stated rate of interest should be
a. recorded at maturity value.
b. recorded at the face amount.
c. discounted to its present value.
d. reported separately from other short-term notes payable.
____ 5. At December 31, 2002, Jenkins Sales & Service has a $100,000, 120-day note payable outstanding. The
company has followed the policy of replacing the note rather than repaying it over the last three years. The
company's treasurer says that this policy is expected to continue indefinitely, and the arrangement is
acceptable to the bank to which the note was issued. The proper classification of the note on the December 31,
2002, balance sheet is
a. dependent on the intention of management.
b. dependent on the actual ability to refinance.
c. current liability, unless specific refinancing criteria are met.
d. noncurrent liability.
____ 6. Which of the following does not meet the FASB's definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
____ 7. Bruemmer Co. has a $20,000, two-year note payable to Second City Bank that matures June 30, 2002.
Bruemmer's management intends to refinance the note for an additional three years and is negotiating a
financing agreement with Second City. In order to exclude this note from current liabilities on its December
31, 2001, balance sheet, Bruemmer Co. must
a. pay off the note and complete the refinancing before the 1999 financial statements are
issued.
b. demonstrate an ability to refinance the obligation before the 1999 financial statements are
issued.
c. complete the refinancing before the balance sheet date.
d. complete the refinancing before the note's maturity date.
____ 8. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be equal to
a. the face amount of the bond.
b. the present value of the bond maturity value plus the present value of the interest
payments to be made during the life of the bond.
c. the face amount of the bond plus the present value of the interest payments made during
the life of the bond.
d. the sum of the face amount of the bond and the periodic interest payments.
____ 9. Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the effect of
the failure to record premium amortization on interest expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
d. Overstate; understate
____ 10. Unamortized debt premium should be reported on the balance sheet of the issuer as a
a. direct addition to the face amount of the debt.
b. direct addition to the present value of the debt.
c. deferred credit.
d. deduction from the issue costs.
____ 11. Which one of the following is true when the effective-interest method of amortizing bond discount is used?
a. Interest expense as a percentage of the bonds' book value varies from period to period.
b. Interest expense remains constant for each period.
c. Interest expense increases each period.
d. The interest rate decreases each period.
____ 12. Scott Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the
failure to record discount amortization on interest expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
d. Overstate; understate
____ 13. Bond discount should be presented in the financial statements of the issuer as a(n)
a. contra liability.
b. adjunct liability.
c. deferred charge.
d. contra asset.
____ 14. Any gains or losses from the early extinguishment of debt should be
a. recognized in income of the period of extinguishment.
b. treated as an increase or decrease in Paid-In Capital.
c. allocated between a portion that is an increase (decrease) in Paid-In Capital and a portion
that is recognized in current income.
 d. amortized over the remaining original life of the extinguished debt.
____ 15. When bonds are retired prior to maturity with proceeds from a new bond issue, gain or loss from the early
extinguishment of debt, if material, should be
a. amortized over the remaining original life of the retired bond issue.
b. amortized over the life of the new bond issue.
c. recognized as an extraordinary item in the period of extinguishment.
d. recognized in income from continuing operations in the period of extinguishment.
____ 16. When bonds are redeemed by the issuer prior to their maturity date, any material gain or loss on the
redemption, if material, is
a. amortized over the period remaining to maturity and reported as an extraordinary item in
the income statement.
b. amortized over the period remaining to maturity and reported as part of income from
continuing operations in the income statement.
c. reported in the income statement as an extraordinary item in the period of redemption.
d. reported in the income statement as part of income from continuing operations in the
period of redemption.
____ 17. A troubled debt restructuring, as defined by the FASB, is a situation in which
a. the creditor grants an extension of the maturity date, a reduction in the interest rate, or
both.
b. the creditor, because of the debtor's financial difficulties, grants a concession it would not
otherwise consider.
c. total payments under the terms of the restructuring are less than the total payments under
the original debt agreement.
d. the debtor has clearly demonstrated an inability to comply with the terms of the original
debt agreement.
____ 18. The market price of a bond issued at a discount is the present value of its principal amount at the market
(effective) rate of interest
a. plus the present value of all future interest payments at the market (effective) rate of
interest.
b. plus the present value of all future interest payments at the rate of interest stated on the
bond.
c. minus the present value of all future interest payments at the market (effective) rate of
interest.
d. minus the present value of all future interest payments at the rate of interest stated on the
bond.
____ 19. When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, the
amount of interest expense at December 31 of the year of issuance would be for
a. two months.
b. six months.
c. seven months.
d. eight months.
____ 20. For a bond issue that sells for more than its par value, the market rate of interest is
a. dependent on the rate stated on the bond.
b. equal to the rate stated on the bond.
c. less than the rate stated on the bond.
d. higher than the rate stated on the bond.
____ 21. How would the carrying value of a bond payable be affected by amortization of each of the following?

Discount Premium
 a. No effect No effect
b. Increase No effect
c. Increase Decrease
d. Decrease Increase
____ 22. For the issuer of ten-year bonds, the amount of amortization using the effective-interest method would
increase each year if the bonds were sold at a

Discount Premium

a. No No
b. Yes Yes
c. No Yes
d. Yes No
____ 23. Outstanding bonds payable are converted into common stock. Under either the book value or market value
method, the same amount would be debited to

Bonds Premium on
Payable Bonds Payable

a. No No
b. No Yes
c. Yes No
d. Yes Yes
____ 24. Debentures are
a. unsecured bonds.
b. secured bonds.
c. ordinary bonds.
d. serial bonds.
____ 25. Callable bonds
a. can be redeemed by the issuer at some time at a pre-specified price.
b. can be converted to stock.
c. mature in a series of payments.
d. None of the above.
____ 26. The issuance price of a bond does not depend on the
a. face value of the bond.
b. riskiness of the bond.
c. method used to amortize the bond discount or premium.
d. effective interest rate.
____ 27. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at face value.
b. above face value.
c. below face value.
d. at maturity value.
____ 28. Bonds usually sell at a discount when
a. investors are willing to invest in the bonds at the stated interest rate.
b. investors are willing to invest in the bonds at rates that are lower than the stated interest
rate.
c. investors are willing to invest in the bonds only at rates that are higher than the stated
 interest rate.
d. a capital gain is expected.
____ 29. Bonds usually sell at a premium
a. when the market rate of interest is greater than the stated rate of interest on the bonds.
b. when the stated rate of interest on the bonds is greater than the market rate of interest.
c. when the price of the bonds is greater than their maturity value.
d. in none of the above cases.
____ 30. The effective interest rate on bonds is lower than the stated rate when bonds sell
a. at maturity value.
b. above face value.
c. below face value.
d. at face value.
____ 31. To compute the price to pay for a bond, you use
a. only the present value of $1 concept.
b. only the present value of an annuity of $1 concept.
c. both a and b.
d. neither a nor b.
____ 32. Which of the following is true of a premium on bonds payable?
a. It is a contra-stockholders' equity account.
b. It is an account that appears only on the books of the investor.
c. It increases when amortization entries are made until it reaches its maturity value.
d. It decreases when amortization entries are made until its balance reaches zero at the
maturity date.
____ 33. The net amount of a bond liability that appears on the balance sheet is the
a. call price of the bond plus bond discount or minus bond premium.
b. face value of the bond plus related premium or minus related discount.
c. face value of the bond plus related discount or minus related premium.
d. maturity value of the bond plus related discount or minus related premium.
____ 34. When interest expense is calculated using the effective-interest amortization method, interest expense
(assuming that interest is paid annually) always equals the
a. actual amount of interest paid.
b. book value of the bonds multiplied by the stated interest rate.
c. book value of the bonds multiplied by the effective interest rate.
d. maturity value of the bonds multiplied by the effective interest rate.
____ 35. When a company issues bonds, how are unamortized bond discounts and premiums classified on the balance
sheet?
a. Bond discounts are classified as assets, and bond premiums are classified as contra-asset
accounts.
b. Bond discounts are classified as expenses, and bond premiums are classified as revenues.
c. Bond premiums are classified as additions to, and bond discounts are classified as
deductions from, the face value of bonds.
d. None of the above.
____ 36. The effective-interest method of amortizing bond premiums
a. is too complicated for practical use.
b. recognizes the time value of money.
c. is another name for the straight-line method.
d. is needed to determine the amount of cash to be paid to bondholders at each interest date.
____ 37. The net amount required to retire a bond before maturity (assuming no call premium and constant interest
rates) is the
 a. issuance price of the bond plus any unamortized discount or minus any unamortized
premium.
b. face value of the bond plus any unamortized premium or minus any unamortized
discount.
c. face value of the bond plus any unamortized discount or minus any unamortized
premium.
d. maturity value of the bond plus any unamortized discount or minus any unamortized
premium.
____ 38. RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated
January 1, 2002, with interest payable on January 1 and July 1 of each year. The entry to account for the
discount amortization and accrual of interest on December 31, 2002, would include a
a. debit to Discount on Bonds Payable.
b. credit to Cash.
c. credit to Interest Payable.
d. debit to Bonds Payable.
____ 39. Accrued interest on bonds that are sold between interest dates
a. is ignored by both the seller and the buyer.
b. increases the amount a buyer must pay to acquire the bonds.
c. is recorded as a loss on the sale of the bonds.
d. decreases the amount a buyer must pay to acquire the bonds.
____ 40. When bonds are sold between interest dates, any accrued interest is credited to
a. Interest Payable.
b. Interest Revenue.
c. Interest Receivable.
d. Bonds Payable.
____ 41. Which of the following is true of accrued interest on bonds that are sold between interest dates?
a. It is computed at the effective market rate.
b. It will be paid to the seller when the bonds mature.
c. It is extra income to the buyer.
d. None of the above.
____ 42. On July 1, 2002, Riviera Manufacturing Co. issued a five-year note payable with a face amount of $250,000
and an interest rate of 10 percent. The terms of the note require Riviera to make five annual payments of
$50,000 plus accrued interest, with the first payment due June 30, 2003. With respect to the note, the current
liabilities section of Riviera's December 31, 2002, balance sheet should include
a. $12,500.
b. $50,000.
c. $62,500.
d. $75,000.
____ 43. In an effort to increase sales, Blue Razor Blade Company inaugurated a sales promotion campaign on June
30, 2002, whereby Blue placed a coupon in each package of razor blades sold, the coupons being redeemable
for a premium. Each premium costs Blue $.50, and five coupons must be presented by a customer to receive a
premium. Blue estimated that only 60 percent of the coupons issued will be redeemed. For the six months
ended December 31, 2002, the following information is available:

Packages of razor blades sold ......................... 400,000

Premiums purchased .................................... 30,000
Coupons redeemed ...................................... 100,000

What is the estimated liability for premium claims outstanding at December 31, 2002?
a. $10,000
 b. $14,000
c. $18,000
d. $24,000
____ 44. Included in Kaiser Corporation's liability account balances at December 31, 2002, were the following:

14 percent note payable issued October 1, 2002, $250,000

maturing September 30, 2003 .............
16 percent note payable issued April 1, 2000, payable
in six annual installments of $100,000
beginning April 1, 2001 ................. 400,000

Kaiser's December 31, 2002, financial statements were issued on March 31, 2003. On January 15, 2003, the
entire $400,000 balance of the 16 percent note was refinanced by issuance of a long-term obligation payable
in a lump sum. In addition, on March 10, 2003, Kaiser consummated a noncancelable agreement with the
lender to refinance the 14 percent, $250,000 note on a long-term basis, on readily determinable terms that
have not yet been implemented. Both parties are financially capable of honoring the agreement, and there
have been no violations of the agreement's provisions. On the December 31, 2002, balance sheet, the amount
of the notes payable that Kaiser should classify as noncurrent obligations is
a. $100,000.
b. $250,000.
c. $350,000.
d. $650,000.
____ 45. At December 31, 2002, Reed Corp. owed notes payable of $1,000,000 with a maturity date of April 30, 2003.
These notes did not arise from transactions in the normal course of business. On February 1, 2003, Reed
issued $3,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the
$1,000,000 of notes payable. Reed's December 31, 2002, financial statements were issued on March 29, 2003.
How much of the $1,000,000 notes payable should be classified as current in Reed's balance sheet at
December 31, 2002?
a. $0
b. $100,000
c. $900,000
d. $1,000,000
____ 46. Dean, Inc. has $2,000,000 of notes payable due June 15, 2003. At the financial statement date of December
31, 2002, Dean signed an agreement to borrow up to $2,000,000 to refinance the notes payable on a long-term
basis. The financing agreement called for borrowings not to exceed 80 percent of the value of the collateral
Dean was providing. At the date of issue of the December 31, 2002, financial statements, the value of the
collateral was $2,400,000 and was not expected to fall below this amount during 2003. In its December 31,
2002, balance sheet, Dean should classify notes payable as

Short-Term Long-Term
Obligations Obligations

a. $2,000,000 $0
b. $400,000 $1,600,000
c. $80,000 $1,920,000
d. $0 $2,000,000
____ 47. Swanson Inc. purchased $400,000 of Malone Corp. ten-year bonds with a stated interest rate of 8 percent
payable quarterly. At the time the bonds were purchased, the market interest rate was 12 percent. Determine
the amount of premium or discount on the purchase of the bonds.
a. $92,442 premium
 b. $92,442 discount
c. $81,143 premium
d. $81,143 discount
____ 48. Madison Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible
bond issue in the face amount of $10,000,000. Interest payment dates of the bond issue are June 30 and
December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of
$20 par value common stock in exchange for each $1,000 bond. On June 30, 2002, the holders of $1,800,000
face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100
per bond and the market price of the common stock was $35. The total unamortized bond discount at the date
of conversion was $500,000. What amount should Madison credit to the account "Paid-In Capital in Excess of
Par" as a result of this conversion assuming Madison does not want to recognize any gain (or loss) on the
conversion?
a. $0
b. $270,000
c. $360,000
d. $920,000
____ 49. Selected financial data of Alexander Corporation for the year ended December 31, 2002, is presented below:

Operating income ...................................... $900,000

Interest expense ...................................... (100,000)
Income before income tax .............................. $800,000
Income tax expense .................................... (320,000)
Net income ............................................ $480,000
Preferred stock dividends ............................. (200,000)
Net income available to common stockholders ........... $280,000

Common stock dividends were $120,000. The times-interest-earned ratio is

a. 2.8 to 1.
b. 4.8 to 1.
c. 6.0 to 1.
d. 9.0 to 1.
____ 50. Littleton Corp. had the following long-term debt at December 31:

Collateral trust bonds, having securities of unrelated

corporations as security ............................ $250,000
Bonds unsecured as to principal ....................... 150,000

The debenture bonds amounted to

a. $0.
b. $150,000.
c. $250,000.
d. $400,000.
____ 51. Miller Enterprises had the following long-term debt:

Sinking fund bonds, maturing in installments .......... $1,100,000

Industrial revenue bonds, maturing in installments .... 900,000
Subordinated bonds, maturing on a single date ......... 1,500,000

The total of the serial bonds amounted to

a. $900,000.
b. $1,500,000.
 c. $2,000,000.
d. $2,400,000.
____ 52. On January 1, MAX issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8
percent payable annually each January 1. The bonds were priced to yield 10 percent. The total issue price
(rounded) of the bonds was
a. $1,000,000.
b. $980,000.
c. $920,000.
d. $880,000.
____ 53. During the year, Hancock Corporation incurred the following costs in connection with the issuance of bonds:

Printing and engraving ................................ $ 30,000

Legal fees ............................................ 160,000
Fees paid to independent accountants for registration 20,000
information ...........................................
Commissions paid to underwriter ....................... 300,000

The amount recorded as a deferred charge to be amortized over the term of the bonds is
a. $0.
b. $30,000.
c. $300,000.
d. $510,000.
____ 54. On January 1, 2002, Lisbon Corp. issued 2,000 of its 9 percent, $1,000 bonds at 95. Interest is payable
semiannually on July 1 and January 1. The bonds mature on January 1, 2012. Lisbon paid bond issue costs of
$80,000, which are appropriately recorded as a deferred charge. Lisbon uses the straight-line method of
amortizing bond discount and bond issue costs. On Lisbon's December 31, 2002, balance sheet, how much
would be shown as the carrying amount of the bonds payable?
a. $2,110,000
b. $2,090,000
c. $1,982,000
d. $1,910,000
____ 55. On October 1, 2002, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent, $1,000 bonds.
The bonds are dated July 1, 2002, and mature on July 1, 2012. Interest is payable semiannually on January 1
and July 1. At the time of issuance, Westridge would receive cash of
a. $800,000.
b. $808,000.
c. $820,000.
d. $828,000.
____ 56. On January 1, 2002, Matlock Inc. issued its 10 percent bonds in the face amount of $1,500,000. They mature
on January 1, 2012. The bonds were issued for $1,329,000 to yield 12 percent, resulting in bond discount of
$171,000. Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1
and January 1. For the six months ended June 30, 2002, Matlock should report bond interest expense of
a. $75,000.
b. $79,740.
c. $83,550.
d. $85,260.
____ 57. On July 1, 2002, TJR issued 2,000 of its 8 percent, $1,000 bonds for $1,752,000. The bonds were issued to
yield 10 percent. The bonds are dated July 1, 2002, and mature on July 1, 2012. Interest is payable
semiannually on January 1 and July 1. Using the effective-interest method, how much of the bond discount
should be amortized for the six months ended December 31, 2002?
 a. $15,200
b. $12,400
c. $9,920
d. $7,600
____ 58. On July 1, 2001, Houston Company purchased as a long-term investment Essex Company's ten-year, 9
percent bonds, with a face value of $100,000 for $95,200. Interest is payable semiannually on January 1 and
July 1. The bonds mature on July 1, 2005. Houston uses the straight-line method of amortization. What is the
amount of interest revenue that Houston should report in its income statement for the year ended December
31, 2001?
a. $3,900
b. $4,500
c. $5,100
d. $5,700
____ 59. On February 1, 2000, Lantern Corp. issued 12 percent, $2,000,000 face value, ten-year bonds for $2,234,000
plus accrued interest. The bonds are dated November 1, 1999, and interest is payable on May 1 and November
1. Lantern reacquired all of these bonds at 102 on May 1, 2003, and retired them. Unamortized bond premium
on that date was $156,000. Ignoring the income tax effect, what was Lantern's gain on the bond retirement?
a. $116,000
b. $194,000
c. $234,000
d. $236,000
____ 60. Laker, Inc. had outstanding 10 percent, $1,000,000 face value, convertible bonds maturing on December 31,
2005. Interest is paid December 31 and June 30. After amortization through June 30, 2002, the unamortized
balance in the bond premium account was $30,000. On that date, bonds with a face amount of $500,000 were
converted into 20,000 shares of $20 par common stock. Recording the conversion by using the carrying value
of the bonds, Laker should credit Additional Paid-In Capital for
a. $0.
b. $85,000.
c. $100,000.
d. $115,000.
____ 61. On July 1, 1999, Cooper Corporation issued for $960,000 one thousand of its 9 percent, $1,000 callable
bonds. The bonds are dated July 1, 1999, and mature on July 1, 2009. Interest is payable semiannually on
January 1 and July 1. Cooper uses the straight-line method of amortizing bond discount. The bonds can be
called by the issuer at 101 at any time after June 30, 2004. On July 1, 2005, Cooper called in all of the bonds
and retired them. Ignoring income taxes, how much loss should Cooper report on this early extinguishment of
debt for the year ended December 31, 2005?
a. $50,000
b. $34,000
c. $26,000
d. $10,000
____ 62. On June 30, 2002, Country Inc. had outstanding 10 percent, $1,000,000 face amount, 15-year bonds maturing
on June 30, 2007. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are
amortized on these dates. The unamortized balances on June 30, 2002, of bond discount and bond issue costs
were $55,000 and $20,000, respectively. Country reacquired all of these bonds at 96 on June 30, 2002, and
retired them. Ignoring income taxes, how much gain or loss should Country record on the bond retirement?
a. Loss of $15,000
b. Loss of $35,000
c. Gain of $5,000
d. Gain of $40,000
____ 63. Woods, Inc. holds an overdue note receivable of $1,600,000 plus recorded accrued interest of $128,000. As a
result of a court-imposed settlement on December 31, 2002, Woods agreed to the following restructuring
arrangement:

Reduce the principal obligation to $1,200,000. Forgive the $128,000 accrued interest. Extend the maturity
date to December 31, 2004. Annual interest of $120,000 is to be paid to Woods on December 31, 2002 and
2003.

On December 31, 2002, Woods must recognize a loss from restructuring of

a. $0.
b. $288,000.
c. $408,000.
d. $528,000.
____ 64. During 2002, Daly Company experienced financial difficulties and is likely to default on a $500,000, 15
percent, three-year note dated January 1, 2001, and made payable to Summit Bank. On December 31, 2002,
the bank agreed to settle the note and unpaid interest of $75,000 for 2002. The settlement amount is $410,000
cash payable on January 31, 2003. Ignoring income taxes, what amount should Daly report as a gain from the
debt restructuring in its 2002 income statement?
a. $165,000
b. $90,000
c. $75,000
d. $0
____ 65. Hull Company is indebted to Apex under a $500,000, 12 percent, three-year note dated December 3, 2000.
Because of Hull's financial difficulties developing in 2002, Hull owed accrued interest of $60,000 on the note
at December 31, 2002. Under a troubled debt restructuring, on December 31, 2002, Apex agreed to settle the
note and accrued interest for a tract of land having a fair value of $450,000. Hull's acquisition cost of the land
was $360,000. Ignoring income taxes, on its 2002 income statement Hull should report as a result of the
troubled debt restructuring

Other Income Extraordinary Gain

a. $200,000 $0
b. $140,000 $0
c. $90,000 $110,000
d. $0 $200,000
____ 66. White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1
and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8
percent, what will be the issuance price of the bonds?
a. $175,078
b. $211,283
c. $215,902
d. $227,183
____ 67. White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1
and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is
12 percent, what will be the issuance price of the bonds?
a. $114,699
b. $177,059
c. $190,079
d. $224,926
____ 68. On January 1, 2003, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment
dates on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2003, when
using the straight-line method is
a. $313.76.
b. $156.88.
c. $776.50.
d. $93.11.
____ 69. The total interest expense on a $200,000, 10 percent, 10-year bond issued at 95 would be
a. $190,000.
b. $195,000.
c. $200,000.
d. $210,000.
____ 70. The effective interest rate of a 10-year, 8 percent, $1,000 bond issued at 103 would be approximately
a. 7.5 percent.
b. 7.8 percent.
c. 8.0 percent.
d. 8.2 percent.
____ 71. On January 1, 2003, Deily Corporation issued $500,000 of 10 percent, 10-year bonds at 88.5. Interest is
payable on December 31. If the market rate of interest was 12 percent at the time the bonds were issued, how
much cash was paid for interest in 2003?
a. $44,250
b. $50,000
c. $53,100
d. $60,000
____ 72. Assuming the straight-line method of amortization is used, the average yearly interest expense on a $250,000,
11 percent, 20-year bond issued at 94 would be
a. $26,750.
b. $27,500.
c. $28,250.
d. $29,500.
____ 73. The annual interest expense on a $50,000, 15-year, 10 percent bond issued for $45,650 plus accrued interest 6
months after authorization, assuming straight-line amortization, would be
a. $4,975.
b. $5,000.
c. $5,025.
d. $5,300.
____ 74. On January 1, 2003, Felipe Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is
payable on June 30 and December 31. Felipe uses the effective-interest method to amortize all premiums and
discounts. Assuming an effective interest rate of 12 percent, how much interest expense should be recorded on
June 30, 2003?
a. $11,935.14
b. $12,500.00
c. $13,896.06
d. $14,729.82
____ 75. A $50,000 bond with a carrying value of $52,000 was called at 103 and retired. In recording the retirement,
the issuing company should
a. record no gain or loss.
b. record a $1,500 loss.
c. record a $2,000 gain.
 d. record a $500 gain.
____ 76. On January 1, 2003, Felipe Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is
payable on June 30 and December 31. Felipe uses the effective-interest method to amortize all premiums and
discounts. Assuming an effective interest rate of 12 percent, approximately how much discount will be
amortized on December 31, 2003?
a. $2,230
b. $1,480
c. $1,396
d. $987
____ 77. Kiyabu County issued a $500,000, 10 percent, 10-year bond on January 1, 2003, for 113.6 when the effective
interest rate was 8 percent. Interest is payable on June 30 and December 31. Kiyabu uses the effective-interest
method to amortize all premiums and discounts. How much premium or discount should be amortized on
June 30, 2003?
a. $2,790
b. $2,280
c. $2,000
d. $1,970
____ 78. Kiyabu County issued a $500,000, 10 percent, 10-year bond on January 1, 2003, for 113.6 when the effective
interest rate was 8 percent. Interest is payable on June 30 and December 31. Kiyabu uses the effective-interest
method to amortize all premiums and discounts. How much interest expense should Kiyabu record on
December 31, 2003?
a. $25,000.00
b. $23,810.15
c. $22,628.80
d. $19,920.10
____ 79. Foster Corporation issued a $100,000, 10-year, 10 percent bond on January 1, 2001, for $112,000. Foster uses
the straight-line method of amortization. On April 1, 2004, Foster reacquired the bonds for retirement when
they were selling at 102 on the open market. How much gain or loss should Foster recognize on the retirement
of the bonds?
a. $2,000 loss
b. $3,900 gain
c. $6,100 gain
d. $8,200 loss
____ 80. If a $1,000, 9 percent, 10-year bond was issued at 96 plus accrued interest one month after the authorization
date, how much cash was received by the issuer?
a. $967.50
b. $960.00
c. $1,007.50
d. $992.50
____ 81. Bonds that were authorized on January 1, 2003, and that pay interest on January 1 and July 1 of each year
were issued on October 1, 2003. If the issuer's accounting year ends on December 31, how many months
would any discount or premium be amortized in 2003?
a. 3 months
b. 6 months
c. 9 months
d. 12 months
____ 82. If a $1,000, 9 percent, 10-year bond was issued at 103 plus accrued interest one month after the authorization
date, how much cash did the issuer receive?
a. $1,037.50
 b. $1,030.00
c. $1,007.50
d. $992.50
____ 83. RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated
January 1, 2003, with interest payable on January 1 and July 1 of each year. If the bonds were issued on April
1, 2003, the amount of accrued interest on the date of sale is
a. $20,000.
b. $10,000.
c. $5,000.
d. $2,500.
____ 84. RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated
January 1, 2003, with interest payable on January 1 and July 1 of each year. If the bonds were issued at 97 on
April 1, 2003, plus accrued interest, the amount of cash received by RCM Corporation would be
a. $200,000.
b. $194,000.
c. $199,000.
d. None of the above.
____ 85. RCM Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated
January 1, 2003, with interest payable on January 1 and July 1 of each year. If the bonds were issued at 97 on
April 1, 2003, the amount of the discount amortized on July 1 (using the straight-line method) would be
approximately
a. $25.
b. $76.
c. $67.
d. $152.
____ 86. If a $6,000, 10 percent, 10-year bond was issued at 104 plus accrued interest two months after the
authorization date, how much cash was received by the issuer?
a. $6,000
b. $6,240
c. $6,340
d. $6,600
____ 87. ABC Corporation is authorized to issue $500,000 of 6 percent, 10-year bonds dated July 1, 2003, with interest
payments on December 31 and June 30. When the bonds are issued on November 1, 2003, ABC Corporation
receives cash of $515,000, including accrued interest. The journal entry to record the issuance of the bonds
would include
a. $15,000 bond premium.
b. $5,000 bond premium.
c. $15,000 bond discount.
d. no bond premium or discount.
____ 88. On January 1, 2002, Williams Company lent $17,800 cash to Stone Company. The promissory note made by
Stone for $20,000 did not bear explicit interest and was due on December 31, 2004. No other rights or
privileges were exchanged. The prevailing interest rate for a loan of this type was six percent.
Assume that the present value of $1 for two periods at six percent is .89. Stone should recognize interest
expense in 2002 of
a. $0.
b. $1,068.
c. $1,100.
d. $1,200.
____ 89. Johnson Corporation bought a new machine and agreed to pay for it in equal annual installments of $6,000 at
the end of each of the next five years. Assume the prevailing interest rate for this type of transaction is 12%.
Assume the present value of an ordinary annuity of $1 at 12% for five periods is 3.60. The future amount of
an ordinary annuity of $1 at 12% for five periods is 6.35. The present value of $1 at 12% is 0.567. How much
should Johnson record as the note payable on the balance sheet if financial statements were prepared today?
a. $17,010
b. $21,600
c. $30,000
d. $38,100
____ 90. On December 31, 2002, Carlton Corporation's current liabilities total $50,000 and long-term liabilities total
$150,000. Working capital at December 31, 2002, is equal to $80,000. If Carlton Corporation's debt-to-equity
ratio is .32 to 1, total long-term assets must equal
a. $625,000.
b. $745,000.
c. $825,000.
d. $695,000.
____ 91. On December 31, 2002, Roberts Corporation's current liabilities total $60,000 and long-term liabilities total
$160,000. Working capital at December 31, 2002, is equal to $90,000. If Roberts Corporation's debt-to-equity
ratio is .40 to 1, total long-term assets must equal
a. $620,000.
b. $770,000.
c. $550,000.
d. $680,000.
____ 92. On December 31, 2002, Anderson Company's current liabilities total $55,000 and long-term liabilities total
$155,000. Working capital at December 31, 2002, is equal to $85,000. If Anderson Company's debt-to-equity
ratio is .30 to 1, total long-term assets must equal
a. $910,000.
b. $770,000.
c. $700,000.
d. $825,000.
,,
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1 OBJ: TYPE: LO 1

2. ANS: A PTS: 1 OBJ: TYPE: LO 1
3. ANS: B PTS: 1 OBJ: TYPE: LO 1
4. ANS: C PTS: 1 OBJ: TYPE: LO 2
5. ANS: C PTS: 1 OBJ: TYPE: LO 2
6. ANS: A PTS: 1 OBJ: TYPE: LO 1
7. ANS: B PTS: 1 OBJ: TYPE: LO 2
8. ANS: B PTS: 1 OBJ: TYPE: LO 4
9. ANS: C PTS: 1 OBJ: TYPE: LO 4
10. ANS: A PTS: 1 OBJ: TYPE: LO 4
11. ANS: C PTS: 1 OBJ: TYPE: LO 4
12. ANS: A PTS: 1 OBJ: TYPE: LO 4
13. ANS: A PTS: 1 OBJ: TYPE: LO 4
14. ANS: A PTS: 1 OBJ: TYPE: LO 4
15. ANS: C PTS: 1 OBJ: TYPE: LO 4
16. ANS: C PTS: 1 OBJ: TYPE: LO 4
17. ANS: B PTS: 1 OBJ: TYPE: LO 8
18. ANS: A PTS: 1 OBJ: TYPE: LO 4
19. ANS: C PTS: 1 OBJ: TYPE: LO 4
20. ANS: C PTS: 1 OBJ: TYPE: LO 4
21. ANS: C PTS: 1 OBJ: TYPE: LO 4
22. ANS: B PTS: 1 OBJ: TYPE: LO 4
23. ANS: D PTS: 1 OBJ: TYPE: LO 4
24. ANS: A PTS: 1 OBJ: TYPE: LO 4
25. ANS: A PTS: 1 OBJ: TYPE: LO 4
26. ANS: C PTS: 1 OBJ: TYPE: LO 4
27. ANS: C PTS: 1 OBJ: TYPE: LO 4
28. ANS: C PTS: 1 OBJ: TYPE: LO 4
29. ANS: B PTS: 1 OBJ: TYPE: LO 4
30. ANS: B PTS: 1 OBJ: TYPE: LO 4
31. ANS: C PTS: 1 OBJ: TYPE: LO 4
32. ANS: D PTS: 1 OBJ: TYPE: LO 4
33. ANS: B PTS: 1 OBJ: TYPE: LO 4
34. ANS: C PTS: 1 OBJ: TYPE: LO 4
35. ANS: C PTS: 1 OBJ: TYPE: LO 4
36. ANS: B PTS: 1 OBJ: TYPE: LO 4
37. ANS: B PTS: 1 OBJ: TYPE: LO 4
38. ANS: C PTS: 1 OBJ: TYPE: LO 4
39. ANS: B PTS: 1 OBJ: TYPE: LO 4
40. ANS: A PTS: 1 OBJ: TYPE: LO 4
41. ANS: D PTS: 1 OBJ: TYPE: LO 4
42. ANS: C PTS: 1 OBJ: TYPE: LO 3
43. ANS: B PTS: 1 OBJ: TYPE: LO 1
44. ANS: D PTS: 1 OBJ: TYPE: LO 2
45. ANS: A PTS: 1 OBJ: TYPE: LO 2
46. ANS: C PTS: 1 OBJ: TYPE: LO 2
47. ANS: B PTS: 1 OBJ: TYPE: LO 4
48. ANS: B PTS: 1 OBJ: TYPE: LO 4
49. ANS: D PTS: 1 OBJ: TYPE: LO 6
50. ANS: B PTS: 1 OBJ: TYPE: LO 4
51. ANS: C PTS: 1 OBJ: TYPE: LO 4
52. ANS: D PTS: 1 OBJ: TYPE: LO 4
53. ANS: D PTS: 1 OBJ: TYPE: LO 4
54. ANS: D PTS: 1 OBJ: TYPE: LO 4
55. ANS: D PTS: 1 OBJ: TYPE: LO 4
56. ANS: B PTS: 1 OBJ: TYPE: LO 4
57. ANS: D PTS: 1 OBJ: TYPE: LO 4
58. ANS: C PTS: 1 OBJ: TYPE: LO 4
59. ANS: A PTS: 1 OBJ: TYPE: LO 4
60. ANS: D PTS: 1 OBJ: TYPE: LO 4
61. ANS: C PTS: 1 OBJ: TYPE: LO 4
62. ANS: B PTS: 1 OBJ: TYPE: LO 4
63. ANS: B PTS: 1 OBJ: TYPE: LO 8
64. ANS: A PTS: 1 OBJ: TYPE: LO 8
65. ANS: C PTS: 1 OBJ: TYPE: LO 4
66. ANS: D PTS: 1 OBJ: TYPE: LO 4
67. ANS: B PTS: 1 OBJ: TYPE: LO 4
68. ANS: B PTS: 1 OBJ: TYPE: LO 4
69. ANS: D PTS: 1 OBJ: TYPE: LO 4
70. ANS: B PTS: 1 OBJ: TYPE: LO 4
71. ANS: B PTS: 1 OBJ: TYPE: LO 4
72. ANS: C PTS: 1 OBJ: TYPE: LO 4
73. ANS: D PTS: 1 OBJ: TYPE: LO 4
74. ANS: C PTS: 1 OBJ: TYPE: LO 4
75. ANS: D PTS: 1 OBJ: TYPE: LO 4
76. ANS: B PTS: 1 OBJ: TYPE: LO 4
77. ANS: B PTS: 1 OBJ: TYPE: LO 4
78. ANS: C PTS: 1 OBJ: TYPE: LO 4
79. ANS: C PTS: 1 OBJ: TYPE: LO 4
80. ANS: A PTS: 1 OBJ: TYPE: LO 4
81. ANS: A PTS: 1 OBJ: TYPE: LO 4
82. ANS: A PTS: 1 OBJ: TYPE: LO 4
83. ANS: C PTS: 1 OBJ: TYPE: LO 4
84. ANS: C PTS: 1 OBJ: TYPE: LO 4
85. ANS: B PTS: 1 OBJ: TYPE: LO 4
86. ANS: C PTS: 1 OBJ: TYPE: LO 4
87. ANS: B PTS: 1 OBJ: TYPE: LO 4
88. ANS: B PTS: 1 OBJ: TYPE: LO 3
89. ANS: B PTS: 1 OBJ: TYPE: LO 3
90. ANS: D PTS: 1 OBJ: TYPE: LO 6
91. ANS: A PTS: 1 OBJ: TYPE: LO 6
92. ANS: B PTS: 1 OBJ: TYPE: LO 6