(Multiple Choice)1. Annual interest expense for a single bond issue co

QUESTION

(Multiple Choice)1. Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this?a. The market rate of interest has increased since the bonds were sold.b. The coupon rate of interest has increased since the bonds were sold.c. The bonds were sold at a discount.d. The bonds were sold at a premium.2. Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital?a. Stockholders maintain proportionate ownership percentages.b. Interest expense reduces taxable income.c. Timing flexibility associated with the payment of interest.d. All of the above are advantages associated with bonds.3. A bond with a maturity value of $100,000 has a stated interest rate of 8 percent. The bond matures in 10 years. When the bond is issued, the market rate of interest is 10 percent. What amount should be reported when the bond is issued?a. $100,000 b. $87,707 c. $49,157d. $113,4214. Which account would not be included in the debt-to-equity ratio calculation?a. Unearned Revenue. c. Income Taxes Payable.b. Retained Earnings. d. All of the above are included5. Which of the following is false when a bond is issued at a premium?a. The bond will issue for an amount above its par value.b. Bonds payable will be credited for the par value of the bond.c. Interest expense will exceed the cash interest payments.d. All of the above are false.6. A bond with a face value of $100,000 was issued for $93,500 on January 1, 2011. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2011?a. $10,000 b. $8,000 c. $7,480d. $9,3507. To determine whether a bond will be sold at a premium, discount, or at face value, one must know which of the following pairs of information?a. Par value and the coupon rate on the date the bond was issued.b. Par value and the market rate on the date the bond was issued.c. Coupon rate and the market rate on the date the bond was issued.d. Coupon rate and the stated rate on the date the bond was issued.8. When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by thea. Par value of the bonds.b. Coupon rate of interest stated in the bond certificate.c. Market rate of interest on the date the bonds were issued.d. Both (a) and (b).9. A bond with a face value of $100,000 is sold on January 1. The bond has a stated interest rate of 10 percent and matures in 10 years. When the bond was issued the market rate of interest was 10 percent. On December 31, the market rate of interest increased to 11 percent. What amount should be reported on December 31 as the bond liability?a. $100,000 b. $94,112 c. $94,460d. $87,56210. When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date?a. Interest expense b. Cash interest payment c. Amortizationd. None of the above
Solution: 1. Option C is correct. Annual interest expense for a single bond issue continues to increase over the life of the bonds. In this case, the bonds were sold at a discount. 2. Option C is correct. Timing flexibility associated with the payment of interest is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital. 3. Option B is correct. Par Value = $100000 Stated Interest Rate (Coupon Rate) = 8% Time Period = 10 Years Market Rate of Interest = 10% Coupon Payment = 8%*$100000 = $8000 Bond Price = Annual Coupon*((1-1/(1+r)^n)/r) + Par Value/(1+r)^n = $8000*((1-1/(1+10%)^10)/10%) + $100000/(1+10%)^10 = $87807 4. Option D is correct. Debt to Equity Ratio includes unearned revenue, income taxes payable (Liabilities) and retained earnings (Equity). 5. Option C is correct. Interest expense will exceed the cash interest payments is false when a bond is issued at a premium. 6. Option B is correct. Par Value = $100000 Stated Interest Rate = 8% Interest Amount (Paid on December 31, 2011) = $100000*8% = $8000 7. Option C is correct. To determine whether a bond will be sold at a premium,¦

nt, or at face value, one must know Coupon rate and the market rate on the date the bond was issued. 8. Option C is correct. When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the market rate of interest on the date the bonds were issued. 9. Option C is correct. Par Value = $100000 Coupon Rate = 10% Coupon Payment = Par Value*Coupon Rate = $10000 Remaining Time = 10 -1 = 9 Years Interest Rate (New) = 11% Bond Price = Annual Coupon*((1-1/(1+r)^n)/r) + Par Value/(1+r)^n = $10000*((1-1/(1+11%)^9)/11%) + $100000/(1+11%)^9 Bond Liability = $94460 10. Option C is correct. When using the effective-interest method of amortization, the book value of the bonds changes by amortization on each interest payment date

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