Multiple-Choice Questions

1. Which of the following statements regarding bonds payable is true?

a. Generally, bonds are issued in denominations of $100.

b. When an issuing company’s bonds are traded in the ‘‘secondary’’ market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser.

c. A debenture bond is backed by specific assets of the issuing company.

d. The entire principal amount of most bonds mature on a single date.

2. Bonds are sold at a premium if the

a. Issuing company has a better reputation than other companies in the same business.

b. Market rate of interest was less than the stated rate at the time of issue.

c. Market rate of interest was more than the stated rate at the time of issue.

d. Company will have to pay a premium to retire the bonds.

3. If bonds are issued at 101.25, this means that

a. A $1,000 bond sold for $101.25.

b. The bonds sold at a discount.

c. A $1,000 bond sold for $1,012.50.

d. The bond rate of interest is 10.13 percent of the market rate of interest.

4. What best describes the discount on bonds payable account?

a. An asset

b. An expense

c. A liability

d. A contra liability

5. The premium on bonds payable account is shown on the balance sheet as

a. A contra asset.

b. A reduction of an expense.

c. An addition to a long-term liability.

d. A subtraction from a long-term liability.

6. When bonds are issued by a company, the accounting entry typically shows an

a. Increase in liabilities and a decrease in stockholders’ equity.

b. Increase in liabilities and an increase in stockholders’ equity.

c. Increase in assets and an increase in liabilities.

d. Increase in assets and an increase in stockholders’ equity.

7. The Bower Company sold $100,000 of 20-year bonds for $95,000. The stated rate on the bonds was 7 percent, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.)

a. Interest Expense

Cash

b. Interest Expense

Discount on Bonds Payable

Cash

c. Interest Expense

Discount on Bonds Payable

Cash

d. Interest Expense

Bonds Payable

Cash

8. Bonds in the amount of $100,000 with a life of 10 years were issued by the Roundy Company. If the stated rate is 6 percent and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

a. $60,000

b. $120,000

c. $30,000

d. $6,000

9. Sean Corp. issued a $40,000, 10-year bond, with a stated rate of 8 percent, paid semiannually. How much cash will the bond investors receive at the end of the first interest period?

a. $800

b. $1,600

c. $3,200

d. $4,000