Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

Financial Accounting

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

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Multiple Choice

Selling the bonds at a premium has the effect of:

Decreasing the interest expense recognized over the life of the bonds

Increasing the total amount of cash received above the face value of the bonds

Increasing the stated interest rate above the market rate

Reducing the total cash received below the face value of the bonds

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Verified step by step guidance

Understand the concept of selling bonds at a premium: Bonds are sold at a premium when their stated interest rate (coupon rate) is higher than the market interest rate. This makes the bond more attractive to investors, allowing the issuer to sell the bond for more than its face value.

Analyze the effect on cash received: Selling bonds at a premium increases the total cash received by the issuer above the face value of the bonds. This is because investors are willing to pay more for a bond that offers a higher return than the prevailing market rate.

Examine the impact on interest expense: The premium received is amortized over the life of the bond, which reduces the interest expense recognized in each accounting period. This is because the effective interest rate method allocates the premium to offset the interest expense.

Clarify the relationship between stated interest rate and market rate: Selling bonds at a premium does not increase the stated interest rate above the market rate. Instead, the stated interest rate is fixed, and the premium reflects the difference between the stated rate and the lower market rate.

Evaluate the incorrect option: Selling bonds at a premium does not reduce the total cash received below the face value of the bonds. In fact, the opposite is true—the issuer receives more cash than the bond's face value.