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Bond amortization

1) Classifying liabilities as either current or long-term helps creditors assess:
A) The extent of a firm's liabilities.
B) The relative risk of a firm's liabilities.
C) The degree of a firm's liabilities.
D) The amount of a firm's liabilities.

2) Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and they each pay interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?
A) Both bonds will sell for almost the same amount.
B) Both bonds will sell for more than $100,000.
C) Bond X will sell for more than bond Y.
D) Bond Y will sell for more than bond X.

3) Straight-line amortization of bond discount or premium:
A) Can be used for amortization of discount or premium in all cases and circumstances.
B) Provides the same amount of interest expense each period as does the effective interest method.
C) Is appropriate for deep discount bonds.
D) Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

4) When the interest payment dates are March 1 and September 1, and the notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:
A) Not be required.
B) Be for six months.
C) Be for four months.
D) Be for ten months.

5) How would the carrying value of bonds payable be affected by the amortization of each of the following?
Premium Discount
A) No effect No effect
B) No effect Increase
C) Increase Decrease
D) Decrease Increase

6) When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:
A) The invoice price.
B) The wholesale price.
C) The present value of cash outflows discounted at the stated rate.
D) The present value of the note payments discounted at the market rate.

Solution Preview

1) Classifying liabilities as either current or long-term helps creditors assess:
A) The extent of a firm's liabilities.
B) The relative risk of a firm's liabilities.
C) The degree of a firm's liabilities.
D) The amount of a firm's liabilities.

Answer: C) The degree of a firm's liabilities.

Short term liabilities fall due within one year or one operating cycle from the balance sheet date.
Long term liabilities fall due beyond one year from the balance sheet date
Thereore, classification helps assess the degree of a firm' liabilities

2) Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and they each pay interest at 8%. The current market rate of interest is 8%.  Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?
A) Both bonds will sell for almost the same amount.
B) Both bonds will sell for more than $100,000.
C) Bond X will sell for more than bond Y.
D) Bond Y will sell for more than bond X.

Answer: A) Both bonds will sell for almost the same amount.

Since the market interest rate is the same as the coupon rate =8% both bonds will sell for par i.e. $100,000
(see calculations below for confirmation)

To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, ...

Solution Summary

Answers multiple choice questions on bond amortization etc.

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