Problem 6-3 Multiple choice (IAA)

1. What is the interest rate written on the face of the bond?

a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate or stated rate

2. What is the rate of interest actually incurred?

a. Market rate
b. Yield rate
c. Effective rate
d. Market, yield or effective rate

3. When the effective interest method is used, the periodic amortization would

a. Increase if the bonds were issued at a discount.

b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either a discount or a premium.

4. A discount on bond payable is charged to interest expense

a. Equally over the life of the bond

b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures

5. An entity issued a bond with a stated rate of interest that is less than the
effective interest rate. The bond was issued on one of the interest payment dates.
What should the entity report on the first interest payment date?

a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. a debit to discount on bond payable.
d. A debit to premium on bond payable.

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