Practice Problems: Bonds

True-false

Indicate whether each of the following statements is true or false.

1. An unsecured bond is called a debenture bond.

2. Callable bonds may be called at the option of the holder of the bonds.

3. Favorable financial leverage results when borrowed funds are used to increase earnings per share of common stock.

4. If the market rate of interest exceeds the contract rate, the bonds are issued at a discount.

5. The straight-line method of amortization is the recommended method.

Multiple-choice

Select the best answer for each of the following questions.

1. Harner Company issued USD 100,000 of 12 percent bonds on 2010 March 1. The bonds are dated 2010 January 1, and were issued at 96 plus accrued interest. The entry to record the issuance would be:

a.

Cash	98,000
Discount on bonds payable	4,000
Bonds payable		100,000
Bonds interest payable		2,000

b.

Cash	102,000
Bonds payable		100,000
Bond interest payable		2,000

c.

Cash	96,000
Discount on bonds payable		4,000
Bond interest payable		100,000

d. None of the above

2. If the bonds in the first question had been issued at 104, the entry to record the issuance would have been:

a.

Cash	104,000
Bonds payable		100,000
Premium on bonds payable		4,000

b.

Cash	102,000
Bonds payable		100,000
Bonds interest payable		2,000

c.

Cash	106,000
Bonds payable		100,000
Premium on bonds payable		4,000
Bonds interest payable		2,000

d. None of the above

3. On 2010 January 1, the Alvarez Company issued USD 400,000 face value of 8 percent, 10-year bonds for cash of USD 328,298, a price to yield 11 percent. The bonds pay interest semiannually and mature on 2020 January 1. Using the effective interest rate method, the bond interest expense for the first six months of 2010 would be:

4. If the straight-line amortization method had been used in the previous question, the interest expense for the first six months would have been:

5. Assume a company has net income of USD 100,000, income tax expense of USD 40,000, and interest expense of USD 20,000. The times interest earned ratio is: