Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?

A) Increase assets and liabilities.

B) Increase and decrease assets.

C) Increase assets and stockholders' equity.

D) Increase and decrease stockholders' equity.

Answer: A

Bonds payable should be reported as a long-term liability in the balance sheet at the:

A) Face value.

B) Current bond market price.

C) Carrying value.

D) Face value less accrued interest since the last interest payment date.

Answer: C

The cash interest payment each period is calculated as the:

A) Face amount times the stated interest rate.

B) Face amount times the market interest rate.

C) Carrying value times the market interest rate.

D) Carrying value times the stated interest rate.

Answer: A

When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?

A) Carrying value and interest expense increase.

B) Carrying value and interest expense decrease.

C) Carrying value decreases and interest expense increases.

D) Carrying value increases and interest expense decreases.

Answer: A

Which of the following is true for bonds issued at a premium?

A) The stated interest rate is less than the market interest rate.

B) The market interest rate is less than the stated interest rate.

C) The stated interest rate and the market interest rate are equal.

D) The stated interest rate and the market interest rate are unrelated.

Answer: B

Interest expense on bonds payable is calculated as the:

A) Face amount times the stated interest rate.

B) Face amount times the market interest rate.

C) Carrying value times the market interest rate.

D) Carrying value times the stated interest rate.

Answer: C