Multiple Choice: Chapter Thirteen

1. The present value factor at 8% for one period is 0.92593, for two periods is 0.85734, for three periods is 0.79383, for four periods is 0.73503, and for five periods is 0.68058. Given these factors, what amount should be deposited in a bank today to grow to $100 three years from now?

a. $100/0.79383

b. $100/(0.92593/3)

c. ($100/0.92593 + $100/0.85734 + $100/0.79383)

d. $100 X 0.79383

2. You are thinking of borrowing $250,000 to buy a new house. If you are going to finance this purchase at 12% interest per annum, and make 360 level monthly payments to pay off the loan, how much will your payments be?

a. $250,000/360

b. $250,000/present value factor for lump sum at 360 months and 1% per period

c. $250,000/present value factor for annuity of 360 months at 1% per period

d. $250,000 X present value factor for annuity of 360 months at 1% per period

3. Assume that Kamchatny Vladimir borrowed $100,000 on January 1 of Year 1, at 5% interest per annum. On December 31, of Year 1, an $8,000 payment is made. On December 31, of year 2, another $8,000 payment is made. Using normal assumptions about interest and principal reduction, how much is the unpaid balance of Vladimir's loan after the second payment?

a. $100,000

b. $94,000

c. $93,850

d. $84,000

4. Bonds payable should be disclosed on the balance sheet.

a. At their face value minus any unamortized premiums.

b. At their face value plus any unamortized premiums.

c. At their maturity value.

d. At their face value.

5. When the contract interest rate for a bond exceeds the effective interest rate of the bond, then:

a. The price of the bond will be equal to the future cash flow associated with the bond.

b. The bond will be issued at a premium.

c. The bond will be issued at a discount.

d. The face value of the bond will fluctuate over its life.

6. On June 1, Surge Corporation issued $100,000 of 9%, 5-year bonds. The bonds are dated June 1, 20X1. The bonds were issued at 96, and pay interest on December 1 and June 1. The entry to record issuance of the bonds is:

a. Cash 100,000Bonds Payable 100,000b. Cash 96,000Discount on Bonds Payable 4,000Bonds Payable 100,000c. Cash 104,000Bond Interest Payable 4,000Bonds Payable 100,000d. Cash 96,000Bond Interest Expense 4,000Bonds Payable 100,000

7. On April 1, 20X1, German Corporation issued $100,000 of 7%, 5-year bonds dated April 1, 20X1, at 101. Interest is paid on March 31 and September 30. The proper entries to record bond interest expense for the (entire) year ended 20X1 would include a decrease in interest expense for premium amortization in the amount of (round to the nearest dollar and assume straight-line amortization):

a. $0

b. $117

c. $150

d. $200

8. Jeske Company issued $1,000,000 of 8% bonds at a time when the market rate of interest was 10%. If the bonds were issued at a $50,000 discount and interest was paid annually, how much was interest expense for the first full year of the bond issue (utilize the effective-interest amortization technique)?

a. $76,000

b. $80,000

c. $95,000

d. $100,000

9. When interest payment dates on a bond are June 1 and December 1, and the bond is sold on July 1, the amount of cash received at issuance will be:

a. Decreased by accrued interest from July 1 to December 1.

b. Decreased by accrued interest from June 1 to July 1.

c. Increased by accrued interest from July 1 to December 1.

d. Increased by accrued interest from June 1 to July 1.

10. Billings Corporation retired $1,000,000 face of bonds payable. At the time of the retirement, the bonds had unamortized discount of $20,000, and all interest accruals and payments were current. Under the outstanding covenants, Billings was required to pay the bond holders 103.

a. The transaction caused Billings to recognize a loss of $50,000.

b. The transaction caused Billings to recognize a gain of $50,000.

c. The transaction caused Billings to recognize a loss of $30,000.

d. The transaction caused Billings to recognize a gain of $20,000.