Problem 5-3 Multiple Choice (IAA)

1. Debentures are

a. Unsecured bonds
b. Secured bonds
c. Ordinary bonds
d. Serial bonds

2. If bonds are issued between interest dates, the entry of the issuer could include a

a. Debit to interest payable

b. Credit to interest receivable
c. Credit to interest expense
d. Credit to unearned interest

3. Which of the following statements is true regarding accrued interest on bonds that
are sold between interest dates?

a. The accrued interest is computed at the effective rate

b. The accrued interest will be paid to the seller when the bonds mature
c. The accrued interest is extra income to the buyer
d. All of the statements are not true

4. Which of the following statements is true regarding premium on bonds payable?

a. The premium on bonds payable is a contra shareholders equity account

b. The premium on bonds payable appears on the books of the investors
c. The premium on bonds payable increases when amortization entries are made
until maturity date
d. The premium on bonds payable decreases when amortization entries are made
until the balance reaches zero at the maturity date

5. The carrying amount of a bond liability is the

 a. Call price of the bond plus bond discount or minus bond premium
b. Face amount of the bond plus related premium or minus related discount
c. Face amount of the bond plus related discount or minus related premium
d. Maturity value of the bond plus related discount or minus related premium

6. The proceeds from the sale of bonds

a. Will always be equal to the face amount

b. Will always be less than the face amount
c. Will always be more than the face amount
d. May be equal to or more or less than the face amount depending on market interest
rate

7. An extinguishment of bonds payable originally issued at a premium is made by

purchase of the bonds between interest dates. Which of the following statements is
true at the time of extinguishment?

a. Any costs of issuing the bonds must be amortized up to the purchase date
b. The premium must be amortized up to the purchase date
c. Interest must be accrued from the last interest date to the purchase date
d. All of these statements are true

8. When bonds are retired prior to maturity with proceeds from a new bond issue, any
gain or loss from the early extinguishment of debt 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 in retained earnings
d. Recognized in income from continuing operations

9. An entity neglected to amortize to discount on outstanding bonds payable. What is

the effect of the failure to record discount amortization on interest expense and bond
carrying amount, respectively?

a. Understated and understated

b. Understated and overstated
c. Overstated and overstated
 d. Overstated and understated

10. An entity neglected to amortize the premium on outstanding bonds payable. What
is the effect of the failure to record premium amortization on interest expense and
bond carrying amount, respectively?

a. Understated and understated

b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated

ANSWERS:
1. A 6. D
2. C 7. B
3. D 8. D
4. D 9. A
5. B 10. C