$100,000 \times 0.09 \times \frac{6}{12} = $4,500

$\text{Debt ratio} = \frac{\text{Total debt (liabilities)}}{\text{Total assets}}$

Question 1

Which of the following best describes a secured bond?

Accepted Answer

A bond that gives the bondholder the right to assets of the issuer if the company defaults.

Question 2

Southwest Airlines issues $100,000 of 9% bonds at par. What is the semiannual interest payment?

Accepted Answer

$100,000 	imes 0.09 	imes \frac{6}{12} = $4,500

Question 3

If the stated interest rate on a bond is less than the market interest rate, how will the bond be issued?

Accepted Answer

At a discount, below face value.

Question 4

Which formula correctly calculates the debt ratio?

Accepted Answer

$	ext{Debt ratio} = \frac{	ext{Total debt (liabilities)}}{	ext{Total assets}}$

Question 5

A company issues $100,000 of 9% bonds at a market rate of 8%. What is the most likely result?

Accepted Answer

The bonds will be issued at a premium.

Question 6

Which method of bond amortization is considered most theoretically correct and recognizes the time value of money?

Accepted Answer

Effective-interest method

Question 7

When a bond is issued at a discount, what happens to the carrying value of the bond over its life using the effective-interest method?

Accepted Answer

It increases and reaches face value at maturity.

Question 8

Which journal entry correctly records the first semiannual interest payment and amortization for bonds issued at a discount?

Accepted Answer

Debit Interest Expense and Discount on Bonds Payable, Credit Cash

Question 9

What is the impact on interest expense over time for bonds issued at a premium using the effective-interest method?

Accepted Answer

Interest expense decreases over time.

Question 10

A company reports the following: Average total assets = $50,000, Average common stockholders' equity = $10,000. What is the leverage ratio?

Accepted Answer

$\frac{50,000}{10,000} = 5.0$

Question 11

Which of the following is NOT typically disclosed on a bond certificate?

Accepted Answer

Company's net income

Question 12

If a company issues bonds at a premium, how is the premium reported on the balance sheet?

Accepted Answer

As a separate liability added to bonds payable.

Question 13

Which of the following best explains why U.S. GAAP encourages companies to report the fair value of long-term debt?

Accepted Answer

Fair value provides more relevant information to users because market prices fluctuate.

Question 14

A company issues $100,000 of 9% bonds at a discount for $96,149. What is the total discount on the bonds?

Accepted Answer

$100,000 - $96,149 = $3,851$

Question 15

Which of the following is a characteristic of serial bonds?

Accepted Answer

They mature in installments over time.

Question 16

If a company has total liabilities of $24,682 and total assets of $53,869, what is its debt ratio?

Accepted Answer

$\frac{24,682}{53,869} = 0.46$

Question 17

Which of the following statements is true regarding the amortization of bond discount using the effective-interest method?

Accepted Answer

Interest expense increases as the bond approaches maturity.

Question 18

When reporting long-term liabilities on the financial statements, which of the following is typically included?

Accepted Answer

All outstanding bonds, notes, and finance leases.

Question 19

Which entry is made at the maturity of bonds payable?

Accepted Answer

Debit Bonds Payable, Credit Cash

Question 20

A company issues $100,000 of 9% bonds at a premium for $104,100. What is the total premium on the bonds?

Accepted Answer

$104,100 - $100,000 = $4,100$

Long-Term Liabilities: Bonds Payable, Amortization, and Leverage in Financial Accounting

Study Guide - Practice Questions