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Unformatted text preview: 21.An example of an item which is not a liability is dividends payable in stock. 22. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture. 23. The term used for bonds that are unsecured as to principal is debenture bonds. P 24. Bonds for which the owners' names are not registered with the issuing corporation are called bearer bonds. S 25. Bonds that pay no interest unless the issuing company is profitable are called income bonds. S 26. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be greater than if the straight-line method were used. 27. The interest rate written in the terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate. 28. The rate of interest actually earned by bondholders is called the effective, yield, or market rate. Use the following information for questions 29 and 30: Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29. One step in calculating the issue price of the bonds is to multiply the principal by the table value for 20 periods and 4% from the present value of 1 table. 31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that the nominal rate of interest exceeded the market rate. 32. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used. 33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to the market rate multiplied by the beginning-of-period carrying amount of the bonds. 34. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will increase if the bonds were issued at either a discount or a premium. 35. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a credit to Interest Expense. 36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be increased by accrued interest from May 1 to June 1. 37. Theoretically, the costs of issuing bonds could be expensed when incurred. reported as a reduction of the bond liability. debited to a deferred charge account and amortized over the life of the bonds. 38. The printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amortized over the life of the bonds....
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- Fall '10