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The contractual agreement between an investor and the bond issuer is contained in a formal
document known as
a. Contract of debt
b. Bond indenture
c. Bond certificate
d. Bond Agreement
3. If a 5-year bond matures on October 1, 2020 and interest is payable semiannually, the interest
dates are
a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
6. To compute the price to pay for a bond, what present value concept is used?
a. Investors are willing to invest in the bonds at the stated interest rate.
b. Investors are willing to invest in the bonds at rates that are lower than the stated interest
rate.
c. Investors are willing to invest in the bonds only at rates that are higher than the stated
interest rate.
d. An unrealized gain is expected.
a. When the market rate of interest is greater than the stated rate of interest on the bonds.
b. When the stated rate of the interest of interest on the bonds is greater than the market
rate of interest.
c. When the price of the bonds is greater than their maturity value.
d. In none of the above cases.
9. The effective interest rate on bonds is lower than the stated rate when bonds sell
a. At maturity value
b. Above face value
c. Below face value
d. At face value
10. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. At face value
b. Above face value
c. Below face value
d. At maturity value
11. How is the premium or discount on bonds purchased as a “trading” investment reported in
financial statements?
a. As an integral part of the cost of the asset acquired and amortized over the remaining life of
the bond issue.
b. As an integral part of the cost of the asset acquired until such time as the investment is sold.
c. As expense or revenue in the period the bonds are purchased.
d. As an integral part of the cost of the asset acquired and amortized over the period the
bonds are expected to be held.
12. An entity did not amortized discount on its “trading” bond investment. What effect would this
have on the carrying amount of the investment and on net income, respectively?
a. Overstated and Overstated
b. Understated and Overstated
c. Understated and Understated
d. No effect and No effect
13. An investor purchased a bond classified as a long-term investment between interest dates at a
premium. At the purchase date, the carrying amount of the bond is more than the
a. Both I and II
b. I only
c. II only
d. Neither I nor II
14. An investor purchased a bond as a long-term investment between interest dates at a premium.
At the purchased date, the cash paid to the seller is
15. An investor purchased a bond as a long-term investment on January 1. Annual interest was
received on December 31. The investor’s interest income for the year would be lower if the
bond was purchased at
a. A discount
b. A premium
c. Par
d. Face value
16. An investor purchased a bond as a long-term investment on January 1. Annual interest was
received on December 31. The investor’s interest income for the year would be higher if the
bond was purchased at
a. Par
b. Face value
c. A discount
d. A premium
17. When the interest payment dates of a bond are May 1 and November 1, and a bond is
purchased on June 1, the amount of cash paid by the investor would be
a. Decreased by accrued interest from June 1 to November 1
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May 1 to June 1
18. A bond purchased on June 1 of the current year has interest payment dates of April 1 and
October 1. Bond interest payment dates of April 1 and October 1. Bond interest income for the
current year ended December 31 is for
a. 3 months
b. 4 months
c. 6 months
d. 7 months
19. The effective interest method of amortizing bond premium or bond discount
20. In the prior year, an entity acquired at a premium 10-year bond as a long-term investment. At
the end of the current year, the bond is quoted at a small discount. Which of the following
situations is the most likely cause of the decline in the bond’s market value?
a. Amortized cost
b. Face value
c. Fair value
d. Maturity value
a. Amortized cost
b. Fair Value
c. The lower of amortized cost and fair value
d. Net realizable value
23. The fair value option
25. Which of the following statements is correct about the effective interest method of
amortization?
a. The effective interest method applied to bond investments is different from that applied to
bonds payable.
b. Amortization of discount decreases from period to period.
c. Amortization of premium decreases from period to period.
d. The effective interest method applies the effective interest rate to the beginning carrying
amount for each interest pperiod
26. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result from use of the
straight-line method.
d. a smaller amount of interest income over the life of the bond issue than would result from use
of the straight-line method.
27. Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield
8%. One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
d. none of these.
29. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt
security, the
a. effective-interest method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be applied if
there is no material difference in the results obtained.
30. Amortized cost is the initial recognition amount of the investment minus
31. Which of the following statements is true regarding the differences between amortized cost and fair
value for debt investments?
a. When bonds sold at a discount and are accounted for using amortized cost, interest revenue will
be greater than the interest revenue recorded under fair value.
b. When bonds sold at a premium and are accounted for using amortized cost, interest revenue will
be less than the interest revenue recorded under fair value.
c. Under the fair value approach, an unrealized gain or loss is recorded in each year whereas no
unrealized gains or losses are recorded under the amortized cost method.
d. All of these answer choices are correct.
32.Debt investments that meet the business model and contractual cash flow tests are reported at
a. net realizable value.
b. fair value.
c. amortized cost.
d. the lower of amortized cost or fair value.
33. Debt securities that are accounted for at amortized cost, not fair value, are
Answer Key:
1. B 20. D
2. B 6. C
3. A 7. C 11. B
4. A 8. B 12. D 16. C
5. D 9. B 13. C 17. D 21. C
10. C 14. C 18. D 22. A
15. B 19. B 23. C
24. A
25. D
26. B
27. D
28. A
29. C
30. C
31. B
32. C
33. A
34. A
35. B