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1.

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

2. Accrued interest on bonds that are purchased between interest dates

a. Is ignored by both the seller and the buyer.


b. Increases the amount a buyer must pay to acquire the bonds.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount the buyer must pay to acquire the bonds.

3. If a 5-year bond matures on October 1, 2020 and interest is payable semiannually, the interest
dates are

a. April 1 and October 1


b. January 1 and July 1
c. May 1 and November 1
d. Not determinable

4. The effective interest method of amortizing bond discount provides for

a. Increasing discount amortization and increasing interest income.


b. Increasing discount amortization and decreasing interest income.
c. Decreasing discount amortization and increasing interest income.
d. Decreasing discount amortization and decreasing interest income.

5. The interest rate written on the face of bond is known as

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. Only the present value of 1 concept


b. Only the present value of an annuity of 1 concept
c. Both the present value of 1 concept and present value of an annuity of 1 concept
d. Neither the present value of 1 concept nor the present value of annuity of 1 concept.
7. Bonds usually sell at a discount when

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.

8. Bonds usually sell at a premium

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

I. Cash paid to seller


II. Face value of bond

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

a. The same as the face amount of the bond


b. The same as the face amount of the bond plus accrued interest
c. More than the face value amount of the bond
d. Less than the face value amount of the bond

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

a. Is too complicated fir practical use.


b. Uses a constant rate of interest.
c. Is another name for the straight line method.
d. Is needed to determine the amount of cash to be paid to bondholders at each interest date.

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. The bond issuer issued a stock dividend.


b. The bond issuer is expected to call the bond at a premium.
c. Interest rate has declined since the investor purchased the bond.
d. Interest rate has increased since the investor purchased the bond.

21. Trading bond investments are reported at

a. Amortized cost
b. Face value
c. Fair value
d. Maturity value

22. Bond investments held for collection are reported at

a. Amortized cost
b. Fair Value
c. The lower of amortized cost and fair value
d. Net realizable value
23. The fair value option

a. Must be applied to all financial instruments.


b. May be selected as a valuation method at any time during the first two years of ownership.
c. Reports all gains and losses in income.
d. All of the choices are correct.

24. The fair value option allows an entity to

a. Record income when the fair value of the investment increases.


b. Value the debt investments at fair value in some years but not in other years.
c. Report financial instruments at fair value by recording gains and losses as a separate
component of other comprehensive income.
d. All of these are true with respect to 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.

b. a varying amount being recorded as interest income from period to period.

c. a variable rate of return on the book value of the investment.

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.

b. 10 periods and 8% from the present value of 1 table.

c. 20 periods and 5% from the present value of 1 table.

d. 20 periods and 4% from the present value of 1 table.


28. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of
the discount includes a
a. debit to Available-for-Sale Securities.

b. debit to the discount account.

c. debit to Interest Revenue.

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.

b. straight-line 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.

d. par value method must be used and therefore no allocation is necessary.

30. Amortized cost is the initial recognition amount of the investment minus

a. repayments and net of any reduction for uncollectibility.


b. cumulative amortization and net of any reduction for uncollectibility.
c. repayments plus or minus cumulative amortization and net of any reduction for uncollectibility.
d. repayments plus or minus cumulative amortization.

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

a. held-to-maturity debt securities.

b. trading debt securities.

c. available-for-sale debt securities.

d. never-sell debt securities.

3. The interest method of amortizing discount provides for

a. Increasing amortization and increasing interest income


b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income

35. . The interest method of amortizing premium provides for

a. Increasing amortization and increasing interest income


b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income

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

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