Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value

01/01/2021 $ 8,640,967

06/30/2021 $ 300,000 $ 345,639 $ 45,639 8,686,606

12/31/2021 300,000 347,464 47,464 8,734,070

06/30/2022 300,000 349,363 49,363 8,783,433

12/31/2022 300,000 351,337 51,337 8,834,770

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.)

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Answer: C

When bonds are retired before their maturity date:

A) GAAP has been violated.

B) The issuing company will always report a non-operating gain.

C) The issuing company will always report a non-operating loss.

D) The issuing company may report a non-operating gain or loss.

Answer: D

An amortization schedule for a bond issued at a premium:

A) Has a carrying value that increases over time.

B) Is contained in the balance sheet.

C) Is a schedule that reflects the changes in the carrying value of the bond over its term to maturity.

D) All of the other answer choices are correct.

Answer: C

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

A) Increases.

B) Decreases.

C) Remains the same.

D) Is equal to the change in book value.

Answer: B

How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?

A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium.

B) Decrease for bonds issued at a discount and increase for bonds issued at a premium.

C) Increase for bonds issued at a discount and decrease for bonds issued at a premium.

D) Increase for bonds issued at a discount and increase for bonds issued at a premium.

Answer: C

An amortization schedule for a bond issued at a discount:

A) Has a carrying value that decreases over time.

B) Is contained in the balance sheet.

C) Is a schedule that reflects the changes in carrying value of the bond over its term to maturity.

D) All of the other answer choices are correct.

Answer: C

When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

A) Less than the interest expense.

B) Equal to the interest expense.

C) Greater than the interest expense.

D) More than if the bonds had been sold at a premium.

Answer: A

When bonds are issued at a premium, 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: B

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

A) The final carrying value is not zero in either amortization schedule.

B) The final carrying value is zero in an amortization schedule for bonds.

C) The final carrying value is zero in both amortization schedules.

D) The final carrying value is zero in an amortization schedule for an installment note.

Answer: D

Which of the following describes monthly installment payments of a note payable?

A) The monthly payments equal interest expense plus the reduction of the note's carrying value.

B) The amount of interest expense recorded each month increases over time.

C) The amount of the reduction in the note's carrying value recorded each month decreases over time.

D) All of the other answer choices are correct.

Answer: A

In each succeeding payment on an installment note:

A) The amount that goes to decreasing the carrying value of the note increases.

B) The amount that goes to decreasing the carrying value of the note decreases.

C) The amount that goes to decreasing the carrying value of the note is unchanged.

D) The amounts paid for both interest and principal increase proportionately.

Answer: A