Chapter 10

The party who has the right to exercise a call option on bonds is the
issuer.
bearer.
investment banker.
bondholder.
On January 1, 2017, Istanbul Inc. sold bonds with a face amount of $7,000,000 and a contract rate of
10% for $6,197,065. The effective-interest rate is 12%. Interest is payable annually on January 1
Istanbul uses effective interest amortization of premiums and discounts.
What amount should Istanbul report as interest expense for year ended December 31, 2017?
$619,707.
$840,000.
$700,000.
$743,648.
When authorizing bonds to be issued, the board of directors does not specify the
selling price.
total number of bonds authorized to be sold.
contractual interest rate.
total face value of the bonds.
Either the straight-line method or the effective-interest method of amortization will always result in
more interest expense being recognized than if premium or discounts were not amortized.
the same carrying value each year during the term of the bonds.
the same amount of interest expense being recognized each year.
the same amount of interest expense being recognized over the term of the bonds.
The adjusted trial balance for Beneteau Corporation at the end of the 2017 included the following
accounts:
5-year Bonds Payable 8% €4,620,000

Interest Payable 240,000
Notes Payable (3 mo.) 50,000
Notes Payable (5 yr.) 1,650,000
Mortgage Payable (€150,000 due currently) 2,000,000 - 150000
Salaries and Wages Payable 68,000
Taxes Payable (due 3/15 of next yr) 85,000
The total non-current liabilities reported on the statement of financial position at December 31, 2017
are
€8,360,000.
€7,880,000.
€8,030,000.
€8,120,000.
Julie's Boutique has total receipts for the month of $41,580 including sales taxes. If the sales tax rate
is 5%, what are Julie's sales for the month?
$39,501.
$39,600.
$41,580.
It cannot be determined
Bonds issued against the general credit of the borrower are called
a sinking fund bond.
mortgage bonds.
callable bonds.
debenture bonds.
On January 1, Cleopatra Corporation issued $7,000,000, 14%, 5-year bonds with interest payable on
December 31. The bonds sold for $7,504,670. The market rate of interest for these bonds was 12%.
On the first interest date, using the effective-interest method, the debit entry to Interest Expense is
for
$900,561.
$878,437.
$840,000.
$980,000.
The interest charged on a ¥250,000,000 note payable, at the rate of 6%, on a 60-day note would be
¥15,000,000.
¥3,750,000.
¥2,500,000.
¥8,333,333.
When the effective-interest method of bond discount amortization is used,
the applicable interest rate used to compute interest expense is the prevailing market interest
rate on the date of each interest payment date.
interest expense will not be a constant dollar amount over the life of the bond.
interest paid to bondholders will be a function of the effective-interest rate on the date the
bonds are issued.
the carrying value of the bonds will decrease each period.
In most companies, current liabilities are paid within
one year out of current assets.
one year through the creation of other current liabilities.
the operating cycle out of current assets.
the operating cycle through the creation of other current liabilities.
In the statement of financial position, the account Interest Payable is
deducted from bonds payable.
classified as a current liability.
classified as a revenue account.
added to bonds payable.
Silcon Company issued $2,000,000 of 6%, 10-year bonds on one of its interest dates for $1,727,400
to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used.
Interest is paid annually.
The journal entry on the first interest payment date, to record the payment of interest and
amortization of discount will include a
credit to Cash for $138,192.
credit to Bonds Payable for $18,192.
debit to Interest Expense for $160,000.

Gomez Corporation issues 7,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 98. The
journal entry to record the issuance will show a
980*7000
credit to Bonds Payable for $7,000,000.
debit to Cash for $6,860,000.
debit to Cash of $7,000,000.
credit to Discount on Bonds Payable for $140,000.
If a corporation issued ¥8,000,000,000 in bonds which pay 10% annual interest, what is the annual
net cash cost of this borrowing if the income tax rate is 30%?
(ISSUES BONDS x ANNUAL INTEREST) x (1 - ANNUAL INTEREST ) = X

($8,000,000,000 × .1) × (1 - .30) = 560000000
¥800,000,000
¥240,000,000
¥560,000,000
¥8,000,000,000
On October 1, Steve's Carpet Service borrows €900,000 from First National Bank on a 3-month,
€900,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial
statements are prepared?

Interest Expense 18,000


Notes Payable 18,000

Any balance in an unearned revenue account is reported as a(n)
unearned liability.
current liability.
long-term debt.
revenue.
Delmar Company purchased a building on January 2 by signing a long-term $840,000 mortgage with
monthly payments of $7,700. The mortgage carries an interest rate of 10 percent. The amount owed
on the mortgage after the first payment will be
$833,000.
$840,000.
$839,300.
$832,300.
Presented here is a partial amortization schedule for Courtney Company who sold €750,000, five year
10% bonds on January 1, 2016 for €780,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE

Interest Period Interest Paid Interest Premium Bond Carrying
Expense Amortization Value
January 1, 2016 €780,000
January 1, 2017 (i) (ii) (iii) (iv)
Which of the following amounts should be shown in cell (i)?
€81,000
€78,000
€75,000
€15,000
Aragon Corporation issues CHF4,000,000, 6%, 5-year bonds on January 1, 2017, for CHF4,050,000.
Interest is paid annually on January 1. If Aragon uses the straight-line method to amortize bond
discount and premium, the amount of bond interest to be accrued at December 31, 2017 is
4000000 * .06 – 50000/5
CHF0.
CHF248,000.
CHF240,000.
CHF230,000.
On January 1, 2017, Michelin Company, a calendar-year company, issued €9,000,000 of mortgage

notes payable, of which €3,000,000 is due on January 1 for each of the next three years. The proper
statement of financial position presentation on December 31, 2017, is:
Current liabilities, €3,000,000; Non-current Liabilities, €6,000,000.
Non-current Liabilities, €4,500,000.
Current liabilities, €9,000,000.
Current liabilities, €4,500,000; Non-current Liabilities, €4,500,000
Each payment on a mortgage note payable consists of
reduction of loan principal only.
interest on the unpaid balance of the loan and reduction of loan principal.
interest on the original balance of the loan.
interest on the original balance of the loan and reduction of loan principa
Which of the following statements regarding the effective-interest method of accounting for bonds
characteristics is false?
Over the life of the bonds, the carrying value increases for discounted bonds when using the
effective-interest method.
The effective-interest method applies a constant percentage to the bond carrying value to
compute interest expense.
IFRS prefers the use of the effective-interest method.
The amount of periodic interest expense decreases over the life of a discounted bond
issue when the effective-interest method is used
Which of the following statements concerning bonds is not a true statement?
The bond indenture and bond certificate are separate documents.
The trustee keeps records of each bondholder.
Bonds are generally sold through an investment company.
The bond indenture is prepared after the bonds are printed.
The interest charged on a ¥250,000,000 note payable, at the rate of 6%, on a 60-day note would be
¥8,333,333.
¥2,500,000.
¥3,750,000.
¥15,000,000.
A corporation issues ¥2,000,000,000, 10%, 5-year bonds on January 1, 2017 for ¥1,916,000,000.
Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization
of bond discount, the amount of bond interest expense to be recognized in December 31, 2017's
adjusting entry is
2000000000 * 10/1000 + (2000000000-1916000000)/5
¥200,000,000.
¥208,400,000.
¥216,800,000.
¥91,600,000.
Hardy Company has current assets of $180,000, current liabilities of $150,000, non-current assets of
$270,000 and non-current liabilities of $135,000. Hardy Company's working capital and its current
ratio are
$30,000 and 1.58:1.
($30,000) and 1.20:1.
$30,000 and 1.20:1.
$165,000 and 1.20:1.
Unearned Rent Revenue is
debited when rent is received in advance.
a revenue account.
a contra-account to Rent Revenue.
reported as a current liability
On October 1, Steve's Carpet Service borrows €900,000 from First National Bank on a 3-month,
€900,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial




January 1, 2016 €780,000
Which of the following amounts should be shown in cell (i)?
€78,000
€75,000
€81,000
€15,000
The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2017, contained the
following accounts.
5-year Bonds Payable 8% $2,500,000

Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of 2018) 25,000
The total non-current liabilities reported on the statement of financial position are
$2,765,000.
$2,850,000.
$2,750,000.
$2,865,000.
On January 1, 2017, Bentley Company issued £30,000,000, 5-year, 7% bonds, were issued for
£29,550,000. Interest is paid annually on December 31. Bentley uses the straight-line method to
amortize discount on bonds payable.
The annual amortization of bond discount is

£420,000.
£45,000.
£90,000.
£120,000.
A mortgage note payable with a fixed interest rate requires the borrower to make installment
payments over the term of the loan. Each installment payment includes interest on the unpaid balance
of the loan and a payment on the principal. With each installment payment, indicate the effect on the
portion allocated to interest expense and the portion allocated to principal.
Portion Allocated Portion Allocated

to Interest Expense to Payment of
Principal
Decreases Decreases
Decreases Increases
Increases Increases
Increases Decreases
Franco Company credits its Sales Revenue account for the sales price and the sales tax collected on
sales. If the sales tax rate is 9% and the balance in the Sales Revenue account amounted to
€545,000, what is the amount of the sales taxes owed to the taxing authority?
€49,050.
€53,465.
€53,901.
€45,000.
A $1,200,000 bond was retired at 103 when the carrying value of the bond was $1,244,000. The entry
to record the retirement would include a
gain on bond redemption of $36,000.
loss on bond redemption of $24,000.
A corporation issues ¥2,000,000,000, 10%, 5-year bonds on January 1, 2017, for $1,916,000,000.
of bond discount, the amount of bond interest expense to be recognized in December 31, 2017’s
adjusting entry is
¥183,200,000.
¥16,800,000.
¥216,800,000.
¥200,000,000.
he current ratio is
current assets plus current liabilities.
current assets multiplied by current liabilities.
current assets minus current liabilities.
current assets divided by current liabilities.
The market price of a bond is the
present value of its principal amount only.

principal amount plus all future interest payments.
present value of its principal amount at maturity plus the present value of all future
interest payments.
principal amount plus the present value of all future interest payments.
Admire County Bank agrees to lend Givens Brick Company $800,000 on January 1. Givens Brick
Company signs a $800,000, 8%, 9-month note. What entry will Givens Brick Company make to pay
off the note and interest at maturity assuming that interest has been accrued to September 30?

Cash 848,000

Cash 848,000

Cash 848,000

Cash 848,000
The market price of a bond is the
present value of its principal amount only.
principal amount plus all future interest payments.
present value of its principal amount at maturity plus the present value of all future
interest payments.
principal amount plus the present value of all future interest payments
Bryce Company has $3,000,000 of bonds outstanding. The unamortized premium is $43,200. If the
company redeemed the bonds at 101, what would be the gain or loss on the redemption?
3000000 X 1.01 = 3,030,000

So you got at a premium of 43200 and giving it at 30,000 so a gain of 13200
$13,200 loss
$30,000 loss
$13,200 gain
$30,000 gain
A ¥1,200,000,000 bond was retired at 98 when the carrying value of the bond was ¥1,184,000,000.
The entry to record the retirement would include a
gain on bond redemption of ¥8,000,000.
gain on bond redemption of ¥16,000,000.
loss on bond redemption of ¥16,000,000.
loss on bond redemption of ¥8,000,000.
In most companies, current liabilities are paid within
the operating cycle out of current assets.
the operating cycle through the creation of other current liabilities.
one year out of current assets.
one year through the creation of other current liabilities.
The total cost of borrowing is increased only if the
bonds were issued at a premium.
market interest rate is less than the contractual interest rate on that date.
bonds were issued at a discount.
bonds were sold at face value.
Silcon Company issued $2,000,000 of 6%, 10-year bonds on one of its interest dates for $1,727,400
to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used.
Interest is paid annually.
The journal entry on the first interest payment date, to record the payment of interest and
amortization of discount will include a
1727400X.08 – 2000000X.06
credit to Cash for $138,192.
credit to Bonds Payable for

$18,192.


A mortgage note payable with a fixed interest rate requires the borrower to make installment
payments over the term of the loan. Each installment payment includes interest on the unpaid balance
of the loan and a payment on the principal. With each installment payment, indicate the effect on the
portion allocated to interest expense and the portion allocated to principal.
Portion Allocated Portion Allocated

to Interest Expense to Payment of
Principal
Increases Decreases
Decreases Decreases
Decreases Increases
Increases Increases
On January 1, Cleopatra Corporation issued $7,000,000, 14%, 5-year bonds with interest payable on
December 31. The bonds sold for $7,504,670. The market rate of interest for these bonds was 12%.
On the first interest date, using the effective-interest method, the debit entry to Interest Expense is
for
$840,000.
$980,000.
$900,561.
$878,437.
A corporation issues ¥2,000,000,000, 10%, 5-year bonds on January 1, 2017 for ¥1,916,000,000.
of bond discount, the amount of bond interest expense to be recognized in December 31, 2017's
adjusting entry is
¥200,000,000.
¥208,400,000.
¥216,800,000.
¥91,600,000.
___
Terrance Company issued $1,500,000 of 8%, 5-year bonds at 106. Assuming straight-line
amortization and annual interest payments, how much bond interest expense is recorded on the next
interest date?
$138,000
$102,000
$18,000
$120,000
The current ratio is
current assets minus current liabilities.
current assets divided by current liabilities.
current assets plus current liabilities.
current assets multiplied by current liabilities
A note payable is in the form of
an oral agreement.
a standing agreement.
a contingency that is reasonably likely to occur.
a written promissory note.

Unearned Rent Revenue is
a contra-account to Rent Revenue.
debited when rent is received in advance.
a revenue account.
reported as a current liability.
The times interest earned is computed by dividing
income before interest expense by interest expense.
income before income taxes by interest expense.
net income by interest expense.
income before income taxes and interest expense by interest expense
loss on bond redemption of $36,000


London Bank and Trust agrees to lend the Beckham Company £5,000,000 on January 1, 2017.
Beckham Company signs a £5,000,000, 6%, 9-month note.
Assuming that monthly accruals are not made, what adjusting entry is required if Beckham Company
prepares financial statements on June 30?


Cash 200,000

Cash 150,000
Bond interest paid is
higher when bonds sell at a discount.
higher when bonds sell at a discount and lower when bonds sell at a premium.
lower when bonds sell at a premium.
the same whether bonds sell at a discount or a premium.
Terrance Company issued $1,500,000 of 8%, 5-year bonds at 106. Assuming straight-line
amortization and annual interest payments, how much bond interest expense is recorded on the next
interest date?
$18,000
$120,000
$138,000
$102,000

January 1, 2016 €780,000
Which of the following amounts should be shown in cell (iv)?
€786,000
€777,000
€774,000
€780,000
On September 1, Joe's Painting Service borrows $350,000 from National Bank on a 4-month,
$350,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial


Notes Payable 7,000

Each payment on a mortgage note payable consists of
interest on the original balance of the loan.
reduction of loan principal only.
interest on the original balance of the loan and reduction of loan principal.
interest on the unpaid balance of the loan and reduction of loan principal.
Gomez Corporation issues 7,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 98. The
journal entry to record the issuance will show a
credit to Discount on Bonds Payable for $140,000.
credit to Bonds Payable for $7,000,000.
debit to Cash of $7,000,000.
debit to Cash for $6,860,000.

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The party who has the right to exercise a call option on bonds is the

total number of bonds authorized to be sold.

contractual interest rate.

total face value of the bonds.

the same amount of interest expense being recognized each year.

5-year Bonds Payable 8% €4,620,000

a sinking fund bond.

When the effective-interest method of bond discount amortization is used,

the carrying value of the bonds will decrease each period.

In most companies, current liabilities are paid within

one year out of current assets.

one year through the creation of other current liabilities.

the operating cycle out of current assets.

the operating cycle through the creation of other current liabilities.

In the statement of financial position, the account Interest Payable is

deducted from bonds payable.

classified as a current liability.

classified as a revenue account.

added to bonds payable.

credit to Cash for $138,192.

credit to Bonds Payable for $18,192.

debit to Interest Expense for $160,000.

credit to Bonds Payable for $7,000,000.

debit to Cash for $6,860,000.

debit to Cash of $7,000,000.

credit to Discount on Bonds Payable for $140,000.

(ISSUES BONDS x ANNUAL INTEREST) x (1 - ANNUAL INTEREST ) = X

Interest Payable 18,000

Interest Expense 72,000

Interest Expense 18,000

Interest Expense 18,000

Interest Payable 18,000

BOND AMORTIZATION SCHEDULE

Which of the following amounts should be shown in cell (i)?

4000000 * .06 – 50000/5

On January 1, 2017, Michelin Company, a calendar-year company, issued €9,000,000 of mortgage

Current liabilities, €3,000,000; Non-current Liabilities, €6,000,000.

Non-current Liabilities, €4,500,000.

Current liabilities, €9,000,000.

Current liabilities, €4,500,000; Non-current Liabilities, €4,500,000

Each payment on a mortgage note payable consists of

reduction of loan principal only.

interest on the original balance of the loan.

Which of the following statements concerning bonds is not a true statement?

The bond indenture and bond certificate are separate documents.

The trustee keeps records of each bondholder.

Bonds are generally sold through an investment company.

The bond indenture is prepared after the bonds are printed.

2000000000 * 10/1000 + (2000000000-1916000000)/5

$30,000 and 1.58:1.

($30,000) and 1.20:1.

$30,000 and 1.20:1.

$165,000 and 1.20:1.

Unearned Rent Revenue is

debited when rent is received in advance.

a contra-account to Rent Revenue.

reported as a current liability

Interest Expense 18,000

Interest Payable 18,000