1.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in
the
A. Bond indenture
B. Bond debenture
C. Registered bond
D. Bond coupon

2. The term used for bonds that are unsecured as to principal is

A. Junk bonds
B. Debenture bonds
C. Indebenture bonds
D. Callable bonds

3. Bonds for which the owner’s names are not registered with the issuing corporation are called
A. Bearer bonds
B. Term bonds
C. Debenture bonds
D. Secured bonds

4. The interest rate written in the terms of the bond indenture is known as the
A. Coupon rate
B. Nominal rate
C. Stated rate
D. Coupon rate, nominal rate or stated rate

5. The rate of interest actually earned by bondholders is called the

A. Stated rate
B. Yield rate
C. Effective rate
D. Effective rate or market rate
Use the following information for questions 6 and 7:
Mari Co. Issued P100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
6. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
A. 10 periods and 10% from the present value of 1 table.
B. 20 periods and 5% from the present value of 1 table.
C. 10 periods and 8% from the present value of 1 table.
D. 20 periods and 4% from the present value of 1 table.

7. Another step in calculating the issue price of the bonds is to

A. Multiply P10,000 by the table value for 10 periods and 10% from the present value of an annuity table
B. Multiply P10,000 by the table value for 20 periods and 5% from the present value of an annuity table.
C. Multiply P10,000 by the table value for 20 periods and 4% from the present value of an annuity table.
D. None of these.

8. Pau, Inc. Issued bonds with a maturity amount of P200,000 and a maturity ten years from date of issue. If the
bonds were issued at a premium, this indicates that
A. The effective yield or market rate of interest exceeded the stated (nominal) rate.
B. The nominal rate of interest exceeded the market rate.
C. The market and nominal rates coincided.
D. No necessary relationship exists between the two rates.

9. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is
equal to
A. The stated (nominal) rate of interest multiplied by the face value of the bonds.
B. The market rate of interest multiplied by the face value of the bonds.
C. The stated rate multiplied by the beginning-of-period carrying amount of the bonds.
D. The market rate multiplied by the beginning-of-period carrying amount of the bonds.

10. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization
will
A. Increase if the bonds were issued at a discount.
B. Decrease if the bonds were issued at a premium.
 C. Increase if the bonds were issued at a premium.
D. Increase if the bonds were issued at either a discount or a premium.

11. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
A. Debit to interest payable
B. Credit to interest receivable
C. Credit to interest expense
D. Credit to unearned interest

12. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold in June 1, the
amount of cash received by the issuer will be
A. Decreased by accrued interest from June 1 to November 1.
B. Decreased by accrued interest from May 1 to June 1.
C. Increased by accrued interest from June 1 to November 1.
D. Increased by accrued interest from May 1 to June 1.

13. The printing costs and legal fees associated with the issuance of bonds should
A. Be expense when incurred.
B. Be reported as a deduction from the face amount of bonds payable.
C. Be recorded as a reduction of the bond issue amount and then amortized over the life of the bonds.
D. Not be reported as an expense until the period the bonds mature or are retired.

14. Bond issuance costs, including the printing costs and legal fees associated with the issuance should be
A. Expensed in the period when the debt is issued.
B. Recorded as a reduction in the carrying value of bonds payable.
C. Accumulated in a deferred charge account and amortized over the life oft the bonds.
D. Reported as an expense in the period the bonds mature or are retired.

15. The amortization of a premium on bonds payable

A. Decreases the balance of the bonds payable account.
B. Increases the amount of interest expense reported.
C. Decreases the carrying amount of the bond.
D. Increases the cash payment to bondholders.

16. An extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the
bonds between interest dates. At the time of reacquisition
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.

17. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is
secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the
bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to
apply to the situation?
A. The balance of mortgage payable at a given statement of financial position date will be reported as a
non-current liability.
B. The balance of mortgage payable will remain constant amount over the 10-year period.
C. The amount of interest expense will decrease each period the loan is outstanding, while the portion of
the annual payment applied to the loan principal will increase each period.
D. The amount of interest expense will remain constant over the 10-year period.

18. A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable.
When such a transaction takes place
A. The present value of the debt instrument must be approximated using an imputed interest rate.
B. It should not be recorded on the books of either party until the fair value of the property becomes
evident.
C. The board of directors of the entity receiving the property should estimate a value for the property that
will serve as a basis for the transaction.
D. The directors of both entities involved in the transaction should negotiate a value to be assigned to the
property.

19. When a note payable is issued for property, goods, or services, the present value of the note is measured by
A. The fair value of the property, goods, or services.
 B. The fair value of the note.
C. Using an imputed interest rate to discount all future payments on the note.
D. Any of these.

20. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be
fair unless
A. No interest rate is stated.
B. The stated interest rate is unreasonable.
C. The stated face amount of the note is materially different from the current cash sales price for similar
items or from current fair value of the note.
D. Any of these.

21. A discount on notes payable is charged to interest expense

A. Equally over the life of the note.
B. Only in the year the note is issued.
C. Using the effective-interest method.
D. Only in the year the note matures.

22. In a debt extinguishment in which the debt is continued with modified terms and the carrying value of the debt
is more than the fair value of the debt,
A. A loss should be recognized by the debtor.
B. A new effective-interest rate must be computed.
C. A gain should be recognized by the debtor
D. No interest expense should be recognized in the future.

23. In a debt extinguishment in which the debt is settled by a transfer of assets with a fair value less than the
carrying amount of the debt, the debtor would recognize
A. No gain or loss on the settlement.
B. A gain on the settlement.
C. A loss on the settlement.
D. None of these.

24. In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the date
of settlement whenever the
A. Carrying amount of the debt is less than the total future cash flows.
B. Carrying amount of the debt is greater than the present value of the future cash flows.
C. Present value of the debt is less than the present value of the future cash flows.
D. Present value of the debt is greater than the present value of the future cash flows.

25. Long-term debt that matures within one year and is to be converted into shares should be reported
A. As a current liability.
B. In a special section between liabilities and equity.
C. As part current and part non-current.
D. As non-current.

26. Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?
A. The present value of future payments for sinking fund requirements and long-term debt maturities
during each of the next five years.
B. The present value of scheduled interest payments on long-term debt during each of the next five years.
C. The amount of scheduled interest payments on long-term debt during each of the next five years.
D. The amount of future payments for sinking fund requirements and long-term debt maturities during
each of the next five years.

27. Note disclosures for long-term debt generally include all of the following except
A. Assets pledged as security.
B. Call provisions and conversion privileges.
C. Restrictions imposed by the creditor.
D. Names of specific creditors.
Use the following information for questions 28 through 30:
On January 1, 2010, Ellison Co. issued eight-year bonds with a face value of P1,000,000 and a stated interest rate of 6%,
payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6%.............................................................................. .627
Present value of 1 for 8 periods at 8%................................................................................ .540
Present value of 1 for 16 periods at 3%.............................................................................. .623
Present value of 1 for 16 periods at 4%.............................................................................. .534
Present value of annuity for 8 periods at 6%...................................................................... 6.210
Present value of annuity for 8 periods at 8%...................................................................... 5.747
Present value of annuity for 16 periods at 3%................................................................... 12.561
Present value of annuity for 16 periods at 4%................................................................... 11.652
28. The present value of the principal is __________________

29. The present value of the interest is ___________________

30. The issue price of the bonds is _______________________

31. Downing Company issues P5,000,000, 6% 5-year bonds dated January 1, 2010 on January 1,2010. The bonds pay
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from
the bond issue?
A. P5,000,000
B. P5,216,494
C. P5,218,809
D. P5,217,308

32. Feller Company issues P20,000,000, of 10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest. The bonds
are dated January 1, 2010 and pay interest on June 30 and December 31. What is the total cash received on the
issue date?

33. Everhart Company issues P10,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The bonds
pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds
from the bond issue?

34. Farmer Company issues P10,000,000 for 10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest. The
bonds are dated January 1, 2010, and pay interest on June 30 and December 31. What is the total cash received
on the issued date?

35. A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30
and December 31. The proceeds from the bonds are P19,604,145. Using effective-interest amortization, how
much interest expense will be recognized in 2010?
A. P780,000
B. P1,560,000
C. P1,568,498
D. P1,568,332

36. A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30
and December 31. The proceeds from the bonds are P19,604,145. Using effective-interest amortization, what will
the carrying value of the bonds be on the December 31, 2010 statement of financial position?
A. P19,612,643
B. P20,000,000
C. P19,625,125
D. P19,608,310
 37. A company issues P5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and
December 31. The proceeds from the bonds are P4,901,036. Using effective-interest amortization, how much
interest expense will be recognized in 2010?

38. A company issues P5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and
December 31. The proceeds from the bonds are P4,901,036. Using effective-interest amortization, what will the
carrying value of the bonds be on the December 31, 2010 statement of financial position?

39. On January 1, 2010, Huber Co. sold 12% bonds with face value of P600,000. The bonds mature in five years, and
interest is paid semiannually on June 30 and December 31. The bonds were sold for P646,200 to yield 10%. Using
effective-interest amortization, interest expense for 2010 is _______.
A. P60,000
B. P64,436
C. P64,620
D. P72,000

40. On January 2, 2010, a calendar-year corporation sold 8% bonds with face value of P600,000. The bonds mature in
five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for P553,600 to
yield 10%. Using effective-interest amortization of computing interest, how much should be charged to interest
expense in 2010?
A. P48,000
B. P55,360
C. P55,544
D. P60,000

The following information applies to both questions 41 and 42.

On October 1, 2010 Macklin Corporation issued 5%, 10-year bonds with face value of P1,000,000 at 108 (a 4% yield).
Interest is paid on October 1 and April 1, with any premiums of discounts amortized on an effective-interest basis.
41. The entry to record the issuance of the binds would include a credit of
A. P25,000 to interest payable
B. P80,000 to bonds payable
C. P1,000,000 to bonds payable
D. P1,080,000 to bonds payable

42. Bond interest expense reported on the December 31, 2010 income statement of Macklin Corporation would
be__________________.

The following information applies to both questions 43 and 44.

On October 1, 2010 Bartley Corporation issued 5%, 10-year bonds with face value of P500,000 at 108 (a 4% yield). Interest
is paid on October 1 and April 1, with any premiums of discounts amortized on an effective-interest basis.
43. The entry to record the issuance of the binds would include a
A. Credit of P12,500 to interest payable
B. Credit of P540,000 to premium on bonds payable
C. Credit of P500,000 to bonds payable
D. Debit of P40,000 to bonds payable

44. Bond interest expense reported on the December 31, 2010 income statement of Bartley Corporation would
be__________________.

45. At the beginning of 2010, Wallace Corporation issued 10% bonds with face value of P900,000. These bonds mature
in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for P833,760 to
yield 12%. Wallace uses a calendar year reporting period. Using effective-interest of amortization, what amount
of interest expense should be reported in 2010? (round your answer to the nearest dollar.)
46. On January 1, Patterson Inc. issued P5,000,000, 9% bonds for P4,695,000. The market rate of interest for these
bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest of amortizing
bond discount. At the end of the first year, Patterson should report bonds payable of __________________.

47. On January 1, Martinez Inc. issued P3,000,000, 11% bonds for P3,195,000. The market rate of interest for these
bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest of amortizing
bond discount. At the end of the first year, Martinez should report bonds payable of __________________.

48. At the beginning of 2010, Winston Corporation issued 10% bonds with face value of P600,000. These bonds
mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for
P555,840 to yield 12%. Winston uses a calendar-year reporting period. Using effective-interest of amortization,
what amount of interest expense should be reported in 2010? (round your answer to the nearest dollar.)
A. P66,500
B. P66,700
C. P66,901
D. P68,832

49. Franzia Company issues P10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2011. Interest is paid on July 1
and January 1. The proceeds from the bonds are P9,802,073. What amount of interest expense will be reported
on the 2012 income statement?

50. Franzia Company issues P10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2011. Interest is paid on July 1
and January 1. The proceeds from the bonds are P9,604,145. The balance reported in the bonds payable account
on the December 31, 2011 statement of financial position?

51. Bangalor Company issues P10,000,000, 8% 10-year bonds at 96.5 on July 1, 2011. Interest is paid on July 1 and
January 1. The journal entry to record the issuance will include
A. A debit to cash for P10,000,000
B. A credit to cash for P9,650,000
C. A debit to discount on bonds payable for P350,000
D. A credit to bond payable for P9,650,000

52. On January 1, 2011, Chang Company sold P10,000,000 of its 10%, bonds for P8,852,960, a yield of 12%. Interest is
payable semiannually on January 1 and July 1. The June 30, 2011 entry to record the first interest payment will
include
A. A debit to bonds payable for P531,178
B. A credit to bonds payable for P1,062,355
C. A debit to cash for P600,000
D. A credit to interest expense for P442,648

53. On January 1, 2011, Chang Company sold bonds with a face amount of P50,000,000 at 97, a yield of 11%. Interest
is payable semiannually at 10% on July 1 and December 31. The entry to record the July 1, 2011 interest payment
will include
A. A debit to bonds payable for P2,500,000
B. A credit to bonds payable for P2,667,500
C. A credit to cash for P5,500,000
D. A debit to interest expense for P2,425,000

54. On January 1, 2011, Lorry Manufacturing Company purchased equipment from Wales Inc. There was no
established market price for the equipment which has an 8year life and no salvage value. Lorry gave Wales a
P105,000 zero-interest-bearing note payable in 3 equal annual installments of P35,000, with the first payment
due December 31, 2011. The prevailing rate of interest for a note of this type is 8%. The present value of the note
at 8% was P90,199. Assuming that Lorry uses the straight-line method of depreciation, what amounts will be
reported in the company’s 2011 income statement for interest expense and depreciation expense for the note
and equipment?
A. P7,216; P11,275
 B. P7,216; P30,066
C. P8,400; P13,125
D. P1,750; P8,750

55. On January 1, 2011, Jantzen Company sold land to Dansko Company. There was no established market price for
the land. Dansko gave Jantzen a P2,400,000 zero-interest-bearing note payable in 3 equal annual installments of
P800,000 with the first payment due December 31, 2011. The note has no ready market. The prevailing rate of
interest for a note of this type is 10%. The present value of a P2,400,000 note payable in three equal annual
installments of P800,000 at 10% rate of interest is P1,989,600. The note will be reported on Dansko’s 2011
statement of financial position at a carrying value of _____________.

56. On January 1, 2011, Li Company purchased equipment from Keiko Distributors. There was no established market
price for the equipment which has 10year life and no salvage value Li gave Keiko a P200,000 zero-interest-bearing
note payable in 5 equal annual installments of P40,000, with the first payment due December 31, 2011. The
prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was P144,200. Assuming
that Li uses the straight-line method of depreciation, what amounts will be reported on the company’s 2011
income statement for interest expense and depreciation expense for the note and equipment?
A. P0; P20,000
B. P18,000; P20,000
C. P12,978; P14,420
D. P14,420; P28,840

57. On January 1, 2010, Ann Price loaned P45,078 to Joe Kiger. A zero-interest-bearing note (face mount P60,000) was
exchanged solely for cash; no other rights or privileges were exchanged. The note is to repaid on December 31,
2012. The prevailing rate of interest for a loan of this type is 10%. The present value of P60,000 at 10% for three
years is P45,078. What amount of interest income should Ms. Price recognize in 2010?

58. On January 1 , 2010, Jacobs Company sold property to Dains Company which originally cost Jacob P760,000. There
was no established exchange price for this property. Dains gave Jacobs a P1,200,000 zero-interest-bearing note
payable in three equal annual installments of P400,000 with the first payment due December 31, 2010. The note
has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a P1,200,000
note payable in three equal annual installments of P400,000 at a 10% rate of interest is P994,800. What is the
amount of interest income that should be recognized by Jacobs in 2010, using the effective-interest method?

59. On January 1, 2010, Crown Company sold property to Leary Company. There was no established exchange price
for the property and Leary gave Crown a P2,000,000 zero-interest- bearing note payable in 5 equal annual
installments of P400,000, with the first payment due December 31, 2010. The prevailing rate of interest for a note
of this type is 9%. The present value of the note at 9% was P1,442,000 at January 1, 2010. What should be the
balance of the notes payable account on the books of Leary at December 31, 2010 after adjusting entries are
made, assuming that the effective-interest method is used?
A. P2,000,000
B. P1,571,780
C. P1,553,600
D. P1,442,000

60. Kant Corporation retires its P100,000 face value bonds at 102 on January 1, following the payment of interest. The
carrying value of the bonds at the redemption date is P96, 250. The entry to record the redemption will include a
A. Credit of P3,750 to loss on bond redemption
B. Debit of P96,250 to bonds payable
C. Debit of P5,750 to gain on bond redemption
D. Credit of P3,750 to bond discount

61. Carr Corporation retires its P100,000 face value bonds at 105 on January 1, following the payment of interest. The
carrying value of the bonds at the redemption date is P103,745.
The entry to record the redemption will include a
A. Credit of P3,745 to loss on bond redemption
B. Debit of P103,745 to bonds payable
 C. Credit of P1,255 to gain on bond redemption
D. Debit of P3, 745 to bonds payable

62. At December 31, 2010 the following balances existed on the books of Foxworth Corporation:
Bonds Payable P1,840,000
Interest Payable 50,000
If the bonds are retired on January 1, 2011 for P2,040,000 what will Foxworth report as a loss on redemption?
A. P250,000
B. P200,000
C. P150,000
D. P100,000

63. At December 31, 2010 the following balances existed on the books of Rentro Corporation:
Bond Payable P1,380,000
Interest Payable 37,000
If the bonds are retired on January 1, 2011, for P1, 530,000 what will Rentro report as a loss on redemption?
A. P37,000
B. P113,000
C. P150,000
D. P187,000

64. The 10% bonds payable of Nixon Company had a net carrying amount of P570,000 on December 31, 2010. The
bonds, which had a face value of P600,000, were issued at a discount to yield 12%. The amortization of the bond
discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each
year. On July 2, 2011, several years before their maturity, Nixon retired the bonds at 102. The interest payment
on July 1, 2011 was made as scheduled. What is the loss that Nixon should record on the early retirement of the
bonds on July 2, 2011? Ignore taxes.

65. The 12% bonds payable of Nyman Co. had a carrying amount of P832,000 on December 31, 2010. The bonds,
which had a face value of P800,000, were issued at a premium to yield 10%. Nyman uses the effective-interest
method of amortization. Interest is paid on June 30 and December 31. On June 30, 2011, several years before
their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
_______________.

66. Cadbury Company’s 10 year, 8% P10,000,000 face value of bonds have a carrying value of P9,672,300 on
December 31, 2011. The bonds pay interest semiannually at 8% on June 30 and December 31. On January 1, 2012,
the bonds are called at 102. What loss would be reported for the called bonds on the company’s 2012 income
statement?
A. P102,000 loss
B. P200,000 loss
C. P327,700 loss
D. P527,700 loss

67. The December 31, 2011, statement of financial position of Bordeaux Corporation includes the following items
9% bonds payable due December 31, 2018 P3,081,000
The bonds were issued on December 31, 2008, and have a face amount of P3,000,000 with interest payable semi-annually
on July 1 and December 31 of each year. On January 1, 2012, Bordeaux retired P1,000,000 of these bonds at 98. What
amount should Bordeaux report on the company’s 2012 income statement as gain or loss on the retirement of the bonds?
A. P47,000 loss
B. P141,000 loss
C. P7,000 loss
D. P21,000 loss
 68. At December 31, 2011 the following balances were reported on the statement of financial position of Yang
Corporation.
Bonds payable P1,472,000,000
Interest payable 33,750,000
The bonds have a face amount of P1,500,000,000. If the bonds are retired on January 1, 2012 at 101, what amount of gain
or loss will Yang report on the redemption?

Use the following information for questions 68 and 69

On December 31, 2008, Nolte Co. Is in financial difficulty and cannot pay a note due that day. It is a P600,000 note with
P60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte a building that has a fair value of
P590,000, an original cost of P530,000, and accumulated depreciation of P130,000.
69. Nolte should recognize a gain or loss on the disposal of the building of ___________.
A. P0
B. P190,000 gain
C. P60,000 gain
D. P70,000 loss

70. Nolte should recognize a gain on the settlement of the debt of

A. P0
B. P10,000
C. P60,000
D. P70,000

71. The adjusted trial balance for Lifesaver Corp. At the end of the current year, 2010, contained the following
accounts.
5-year bonds payable 8% P1,600,000
Bond interest payable 50,000
Notes payable (3 months) 40,000
Notes payable (5 years) 165,000
Mortgage payable ($15,000 due currently) 200,000
Salaries payable 18,000
Taxes payable (due 3/15 of 2011) 25,000

The total non-current liabilities reported on the statement of financial position are
A. P1,865,000
B. P1,850,000
C. P1,965,000
D. P1,950 000