LIABILITIES

1. The use of the effective interest method in amortizing a premium on bonds payable would result in
a. An increasing amount of interest expense and a decreasing carrying amount for the bonds payable.
b. A decreasing amount of interest expense and an increasing carrying amount for the bonds payable.
c. A decreasing amount of interest expense and a decreasing carrying amount for the bonds payable.
d. An increasing amount of interest expense and an increasing carrying amount for the bonds payable
2. A two-year note was issued in an arms length transaction at face value for cash at the beginning of this
year. There were no other rights or privileges exchanged. The interest rate is specified at 12% per annum.
Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this kind is 15%
per year. What amount of interest rate should be used to record interest expense for this year and next
year respectively?
a. 12 percent and 15 percent
c. 12 percent and 12 percent
b. 15 percent and 15 percent
d. 15 percent and 12 percent
3. A investor purchased a bond as a long term investment on January 1. The investors carrying value at
the end of the first year would be highest if the bond was purchased at
a. Discount and amortized by the straight line method
b. Discount and amortized by the effective interest method
c. Premium and amortized by the straight-line method
d. Premium and amortized by the effective interest method
4. When convertible bonds are exchanged for other securities of the issuer, the securities received are
measured at
a. Book value of bonds converted
c. Fair value of the securities received
b. Fair value of the bonds converted
d. Book value of the securities received
5. In December 2004, catalogs were printed for use in a special promotion in January 2005. The
Catalogs were delivered by the printer on December 13, 2004, with an invoice for P70,000 attached.
Payment was made in January 2005. The P70,000 should be reported as a deferred cost at the December
31, 2004 balance sheet date because of the
a. Matching principle.b. Revenue recognition principle. c. Reliability principle.
d.
Cost
principle.
6. 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
7. Fox 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 yield (effective or market) rate of interest exceeded the nominal (stated) rate.
b. The nominal rate interest exceeded the yield rate
c. The yield and nominal rate coincided
d. No necessary relationship exist between the two rates
8. Under the effective interest method of bond discount or premium amortization, the periodic interest
expenses is equal to
a. The stated (nominal) rate of interest multiplied by the face value of the bonds
b. The effective (yield) 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 effective rate multiplied by the beginning-of-period carrying amount of the bonds
9. If bonds are sold at a discount and the effective interest method of amortization is used, interest
expense will
a. Increase from one period to another
b. Remain constant from one period to another
c. Equal the cash interest payment each period
d. Be less than the cash interest payment each period
10. An entity neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect
of the failure to record discount amortization on interest expense and bond carrying value, respectively?
a. Understate and understate
b. Understate and overstate
c. Overstate and overstate
d. Overstate and overstate
11. When interest expense is calculated using the effective-interest amortization method, interest expense
(assuming that interest is paid annually) always equals the
a. Actual amount of interest paid
b. Book value of the bonds multiplied by the stated interest rate
c. Book value of the bonds multiplied by the effective interest rate
d. Maturity value of the bonds multiplied by the effective interest rate
ANSWER KEY:

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

C
B
C
A
B
A
B
D
A
A
C