About Bonds Payable

When a firm issues bonds in order to raise money, the company records bonds payable. The corporation borrows money because it is a bond issuer. Consequently, by issuing the bond, an obligation is created. As a result, the company's bonds payable are included in its liabilities. Bonds payable are often classified as obligations that are no longer current.

Definition of Bonds Payable

Long-term debt typically issued by companies, hospitals, and governments is known as bonds due. Each six-month period (semiannually) is a legal commitment or agreement made by the issuer of a bond to pay interest and to pay the principal or maturity at a future date. It's called a bond indenture because it contains all of the information about the bonds that will be paid back.

Because of the following factors, US firms choose to issue bonds rather than ordinary stock:

  • In comparison to ordinary stock, debt is less expensive
  • Bond interest can be deducted from taxable income.
  • Bondholders are not owners, hence the existing stockholders' ownership interest will not be eroded.

Example of Bonds Payable

To help finance a new electric power plant, hospitals issue bonds, and governments issue bonds to fund projects, operational deficits, or to repay previous bonds that are due.

For example, a well-capitalized public utility may issue 30-year bonds to fund half of the cost of a new power plant. For example, if the existing market interest rate for the bonds is 4%, then the cost after income tax savings may just be 3%.

Following are some of the multiple choice questions on the Bonds Payable with answers that will help the students in developing their knowledge.

Bonds Payable MCQ

1. What is goodwill considered

  • Asset
  • Liability
  • Both
  • none of the above

2. What is bonds payable considered?

  • Expense
  • Asset
  • Revenue
  • Liability

3. If a 9% bond is selling at 104 plus accrued interest, the bond's effective interest rate will be more than 9%.

  • True
  • False

4. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

  • debit to Interest Payable.
  • credit to Interest Receivable.
  • credit to Interest Expense.
  • credit to Unearned Interest.

5. Note disclosures for long-term debt generally include all of the following except

  • names of specific creditors.
  • call provisions and conversion privileges.
  • restrictions imposed by the creditor.
  • assets pledged as security.

6. 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

  • no gain or loss on the settlement.
  • a gain on the settlement.
  • a loss on the settlement.
  • None of these answer choices are correct.

7. When a note payable is issued for property, goods, or services, the present value of the note may be measured by

  • the fair value of the property, goods, or services.
  • the fair value of the note.
  • using an imputed interest rate to discount all future payments on the note.
  • All of these answer choices are correct.

8. The amortization of a premium on bonds payable

  • decreases the balance of the bonds payable account.
  • increases the amount of interest expense reported.
  • increases the carrying amount of the bond.
  • increases the cash payment to bondholders.

9. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

  • the market rate multiplied by the beginning-of-period carrying amount of the bonds.
  • the market rate of interest multiplied by the face value of the bonds.
  • the stated (nominal) rate of interest multiplied by the face value of the bonds.
  • the stated rate multiplied by the beginning-of-period carrying amount of the bonds.

10. Bonds that pay no interest unless the issuing company is profitable are called

  • collateral trust bonds.
  • debenture bonds.
  • revenue bonds.
  • income bonds.

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

  • junk bonds.
  • debenture bonds.
  • indebenture bonds.
  • callable bonds.

12. If the market rate is greater than the stated rate, bonds will be sold at a premium.

  • TRUE
  • FALSE

13. The replacement of an existing bond issue with a new one is called refunding

  • true
  • false

14. The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

  • FALSE
  • TRUE

15. After interest and principal payments of the bonds on December 31, Year 2, the remainingbonds were reacquired at 99. What amount of gain/(loss) on acquisition of treasury bondswould be recognized?

  • 6,441 loss
  • 21,310 gain
  • 6,441 gain
  • 21,310 loss

16. How would the amortization of premium affect the carrying amount of bonds payable and netincome, respectively

  • Decrease and decrease
  • Decrease and increase
  • Increase and decrease
  • Increase and increase

17. A bond's yield-to-maturity is likely to be similar to the bond's __________ interest rate.

  • Nominal
  • Market
  • Stated
  • None of these

18. Which of the following interest rates is different?

  • Effective
  • Face
  • Nominal
  • Stated

19. Which amortization method will result in each year's bond interest expense increasing as a bond's carrying value is increasing?

  • Straight-line
  • Interest line
  • Effective Interest Rate
  • None of these

20. A bond's maturity value is more likely to be its __________.

  • Issue Price
  • Par Amount
  • Total Amount
  • Both a & b

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