Problem 6-2 Multiple choice

1. What is the effective interest rate of a bond measured at amortized cost?

a. The stated rate of the bond.

b. The interest rate currently charged by the entity or by others for similar bond.
c. The interest rate that exactly discounts estimated future cash payments through
the expected life of the bond or when appropriate, a shorter period to the net
carrying amount of the bond.
d. The basic risk-free interest rate that is derived from observable government
bond prices.

2. For a bond issue which sells for less than face value, the market rate of interest is

a. Dependent on rate stated on the bond

b. Equal to rate stated on the bond
c. Less than rate stated on the bond
d. Higher than rate stated on the bond

3. What is the market rate of interest for a bond issue which sells for more than face
value?

a. Less than rate stated on the bond

b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Independent of rate stated on the bond

4. If bond are issued at a premium, this indicate that

a. The yield rate exceeds the nominal rate

b. The nominal rate exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates

5. Which of the following is true for a bond maturing on a single date when the
effective interest method of amortizing bond discount is used?

a. Interest expense as a percentage of the carrying amount varies from period to

period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate
6. In theory, the proceeds from the sale of a bond will be equal to

a. The face amount of the bond

b. The present value of the principal due at the end of the life of the bond plus the
interest payments made during the life of the bond
c. The face amount of the bond plus the present value of the interest payments
during the life of the bond
d. The sum of the face amount of the bond and the periodic interest payments

7. The market price of a bond issued at a discount is the present value of the principal
amount at the market rate of interest

a. Less the present value of all future interest payments at the market rate of
interest
b. Less the present value of all future interest payments at the rate of interest
stated on the bond
c. Plus the present value of all future interest payments at the market of interest
d. Plus the present value of all the future interest payments at the rate of interest
stated on the bond

8. A five-year term bond was issued by an entity on January 1, 2014 at a premium.

The carrying amount of the bond on December 31, 2015 would be

a. The same as the carrying amount on January 1, 2014

b. Higher than the carrying amount on January 1, 2014
c. Higher than the carrying amount on December 31, 2016
d. Lower than the carrying amount on December 31, 2016

9. A five-year term bond was issued by an entity on January 1, 2014 at a discount. The
carrying amount of the bond on December 31, 2015 would be

a. Higher than the carrying amount on December 31, 2014

b. Lower than the carrying amount on December 31, 20114
c. The same as the carrying as the carrying amount on December 31, 2014
d. Higher than the carrying amount on December 31, 2016

10. Under international accounting, the valuation method used for bond payable
 a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at a yield rate at issuance

ANSWERS:
1. C 6. B
2. C 7. B
3. C 8. C
4. B 9. A
5. A 10. D