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Ch 14

39 Questions
Accounting Quizzes & Trivia
Questions and Answers
  • 1. 
    An example of an item which is not a liability is
    • A. 

      Dividends payable in stock

    • B. 

      Advances from customers on contracts.

    • C. 

      Accrued estimated warranty costs

    • D. 

      The portion of long-term debt due within one year.

  • 2. 
    The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
    • A. 

      Bond indenture

    • B. 

      Bond debenture.

    • C. 

      Registered bond.

    • D. 

      Bond coupon.

  • 3. 
    The term used for bonds that are unsecured as to principal is
    • A. 

      Junk bonds

    • B. 

      Debenture bonds.

    • C. 

      Indebenture bonds.

    • D. 

      Callable bonds.

  • 4. 
    Bonds for which the owners' names are not registered with the issuing corporation are called
    • A. 

      Bearer bonds.

    • B. 

      Term bonds.

    • C. 

      Debenture bonds.

    • D. 

      Secured bonds.

  • 5. 
    Bonds that pay no interest unless the issuing company is profitable are called
    • A. 

      Collateral trust bonds.

    • B. 

      Debenture bonds.

    • C. 

      Revenue bonds.

    • D. 

      Income bonds.

  • 6. 
    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
    • A. 

      Greater than if the straight-line method were used.

    • B. 

      Greater than the amount of the interest payments.

    • C. 

      The same as if the straight-line method were used.

    • D. 

      Less than if the straight-line method were used.

  • 7. 
    The interest rate written in the terms of the bond indenture is known as the
    • A. 

      Coupon rate.

    • B. 

      Nominal rate.

    • C. 

      Stated rate.

    • D. 

      Coupon rate, nominal rate, or stated rate.

  • 8. 
    The rate of interest actually earned by bondholders is called the
    • A. 

      Stated rate.

    • B. 

      Yield rate

    • C. 

      Effective rate

    • D. 

      Effective, yield, or market rate.

  • 9. 
    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%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
    • A. 

      10 periods and 10% from the present value of 1 table.

    • B. 

      20 periods and 5% from the present value of 1 table.

    • C. 

      10 periods and 8% from the present value of 1 table.

    • D. 

      20 periods and 4% from the present value of 1 table.

  • 10. 
    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%.Another step in calculating the issue price of the bonds is to
    • A. 

      Multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.

    • B. 

      Multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.

    • C. 

      Multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.

    • D. 

      None of these.

  • 11. 
    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
    • A. 

      The effective yield or market rate of interest exceeded the stated (nominal) rate.

    • B. 

      The nominal rate of interest exceeded the market rate.

    • C. 

      The market and nominal rates coincided.

    • D. 

      No necessary relationship exists between the two rates.

  • 12. 
    If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will
    • A. 

      Exceed what it would have been had the effective-interest method of amortization been used.

    • B. 

      Be less than what it would have been had the effective-interest method of amortization been used.

    • C. 

      Be the same as what it would have been had the effective-interest method of amortization been used.

    • D. 

      Be less than the stated (nominal) rate of interest.

  • 13. 
    Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
    • A. 

      The stated (nominal) rate of interest multiplied by the face value of the bonds.

    • B. 

      The market rate of interest multiplied by the face value of the bonds.

    • C. 

      The stated rate multiplied by the beginning-of-period carrying amount of the bonds.

    • D. 

      The market rate multiplied by the beginning-of-period carrying amount of the bonds.

  • 14. 
    When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will
    • 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.

  • 15. 
    If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
    • A. 

      Debit to Interest Payable.

    • B. 

      Credit to Interest Receivable.

    • C. 

      Credit to Interest Expense.

    • D. 

      Credit to Unearned Interest.

  • 16. 
    . 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
    • A. 

      Decreased by accrued interest from June 1 to November 1.

    • B. 

      decreased by accrued interest from May 1 to June 1.

    • C. 

      Increased by accrued interest from June 1 to November 1.

    • D. 

      Increased by accrued interest from May 1 to June 1.

  • 17. 
    Theoretically, the costs of issuing bonds could be
    • A. 

      Expensed when incurred.

    • B. 

      Reported as a reduction of the bond liability.

    • C. 

      Debited to a deferred charge account and amortized over the life of the bonds.

    • D. 

      Any of these.

  • 18. 
    The printing costs and legal fees associated with the issuance of bonds should
    • A. 

      Be expensed when incurred.

    • B. 

      Be reported as a deduction from the face amount of bonds payable.

    • C. 

      Be accumulated in a deferred charge account and amortized over the life of the bonds.

    • D. 

      Not be reported as an expense until the period the bonds mature or are retired.

  • 19. 
    Treasury bonds should be shown on the balance sheet as
    • A. 

      An asset

    • B. 

      A deduction from bonds payable issued to arrive at net bonds payable and outstanding.

    • C. 

      A reduction of stockholders' equity.

    • D. 

      Both an asset and a liability.

  • 20. 
    An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition
    • A. 

      Any costs of issuing the bonds must be amortized up to the purchase date.

    • B. 

      The premium must be amortized up to the purchase date.

    • C. 

      Interest must be accrued from the last interest date to the purchase date.

    • D. 

      All of these.

  • 21. 
    The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
    • A. 

      An adjustment to the cost basis of the asset obtained by the debt issue

    • B. 

      an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.

    • C. 

      An amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.

    • D. 

      . a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

  • 22. 
    "In-substance defeasance" is a term used to refer to an arrangement whereby
    • A. 

      A company gets another company to cover its payments due on long-term debt.

    • B. 

      a governmental unit issues debt instruments to corporations

    • C. 

      A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.

    • D. 

      A company legally extinguishes debt before its due date.

  • 23. 
     A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
    • A. 

      The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.

    • B. 

      The balance of mortgage payable will remain a constant amount over the 10-year period.

    • C. 

      The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

    • D. 

      The amount of interest expense will remain constant over the 10-year period.

  • 24. 
    A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place
    • A. 

      The present value of the debt instrument must be approximated using an imputed interest rate.

    • B. 

      It should not be recorded on the books of either party until the fair market value of the property becomes evident.

    • C. 

      the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.

    • D. 

      The directors of both entities involved in the transaction should negotiate a value to be assigned to the property.

  • 25. 
    When a note payable is issued for property, goods, or services, the present value of the note is measured by
    • A. 

      The fair value of the property, goods, or services.

    • B. 

      The market value of the note.

    • C. 

      Using an imputed interest rate to discount all future payments on the note.

    • D. 

      Any of these.

  • 26. 
    When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless
    • A. 

      No interest rate is stated.

    • B. 

      The stated interest rate is unreasonable.

    • C. 

      The stated face amount of the note is materially different from the current cash sales price for similar items or from current market value of the note.

    • D. 

      Any of these.

  • 27. 
    Discount on Notes Payable is charged to interest expense
    • A. 

      Equally over the life of the note.

    • B. 

      Only in the year the note is issued.

    • C. 

      Using the effective-interest method.

    • D. 

      Only in the year the note matures.

  • 28. 
    Which of the following is an example of "off-balance-sheet financing"? 1. Non-consolidated subsidiary. 2. Special purpose entity. 3. Operating leases
    • A. 

      1

    • B. 

      2

    • C. 

      3

    • D. 

      All of these are examples of "off-balance-sheet financing."

  • 29. 
    When a business enterprise enters into what is referred to as off-balance-sheet financing, the company
    • A. 

      Is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet.

    • B. 

      Wishes to confine all information related to the debt to the income statement and the statement of cash flow.

    • C. 

      Can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

    • D. 

      Is in violation of generally accepted accounting principles.

  • 30. 
     Long-term debt that matures within one year and is to be converted into stock should be reported
    • A. 

      As a current liability.

    • B. 

      In a special section between liabilities and stockholders’ equity.

    • C. 

      As noncurrent.

    • D. 

      As noncurrent and accompanied with a note explaining the method to be used in its liquidation.

  • 31. 
    Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?
    • A. 

      The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

    • B. 

      The present value of scheduled interest payments on long-term debt during each of the next five years.

    • C. 

      The amount of scheduled interest payments on long-term debt during each of the next five years.

    • D. 

      The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

  • 32. 
    Note disclosures for long-term debt generally include all of the following except
    • A. 

      Assets pledged as security.

    • B. 

      Call provisions and conversion privileges.

    • C. 

      Restrictions imposed by the creditor.

    • D. 

      Names of specific creditors.

  • 33. 
    The times interest earned ratio is computed by dividing
    • A. 

      Net income by interest expense.

    • B. 

      Income before taxes by interest expense.

    • C. 

      Income before income taxes and interest expense by interest expense.

    • D. 

      Net income and interest expense by interest expense.

  • 34. 
    The debt to total assets ratio is computed by dividing
    • A. 

      Current liabilities by total assets.

    • B. 

      Long-term liabilities by total assets.

    • C. 

      Total liabilities by total assets

    • D. 

      Total assets by total liabilities.

  • 35. 
    In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,
    • A. 

      A loss should be recognized by the debtor.

    • B. 

      A gain should be recognized by the debtor.

    • C. 

      A new effective-interest rate must be computed.

    • D. 

      No interest expense or revenue should be recognized in the future.

  • 36. 
    A troubled debt restructuring will generally result in a
    • A. 

      Loss by the debtor and a gain by the creditor.

    • B. 

      Loss by both the debtor and the creditor.

    • C. 

      Gain by both the debtor and the creditor.

    • D. 

      Gain by the debtor and a loss by the creditor.

  • 37. 
    In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less than the carrying amount of the debt, the debtor would recognize
    • A. 

      No gain or loss on the settlement

    • B. 

      A gain on the settlement.

    • C. 

      A loss on the settlement.

    • D. 

      None of these.

  • 38. 
     In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the
    • A. 

      Carrying amount of the pre-restructure debt is less than the total future cash flows.

    • B. 

      Carrying amount of the pre-restructure debt is greater than the total future cash flows.

    • C. 

      Present value of the pre-restructure debt is less than the present value of the future cash flows.

    • D. 

      Present value of the pre-restructure debt is greater than the present value of the future cash flows.

  • 39. 
    In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
    • A. 

      Compute a new effective-interest rate.

    • B. 

      Not recognize a loss.

    • C. 

      Calculate its loss using the historical effective rate of the loan.

    • D. 

      Calculate its loss using the current effective rate of the loan.