Problem 6-1 Multiple choice (IAA)

1. Under the effective interest method of amortization, the interest expense is equal to

a. The stated rate of interest multiplied by the face amount of the bonds.
b. The market rate of interest multiplied by the face amount of the bonds.
c. The stated rate of interest multiplied by the beginning carrying amount of the
bonds.
d. The market rate of interest multiplied by the beginning carrying amount of the
bonds.

2. When interest expense for the current year is more than interest paid, the bonds
were issued at

a. A discount
b. A premium
c. Face amount
d. Cannot be determined

3. When interest expense for the current year is more than interest paid, the bonds
were issued at

a. A discount
b. A premium
c. Face amount
d. Cannot be determined

4. When an entity failed to recognized amortization of discount on bond payable for

the current year, what is the effect of the error on liabilities and equity,
respectively?

a. Overstated and overstated

b. Understated and understated
c. Overstated and understated
d. Understated and overstated

5. Cost of issuing bonds payable

I. Is included in the measurement of the bonds payable measured at amortized cost

II. Is amortized using the interest method over the life of the bonds.
III. Will effectively increase the market rate of interest

a. I, II and III
 b. II and III only
c. I and III only
d. I and II only

ANSWERS:
1. B
2. A
3. B
4. C
5. D