Ch 14
Settings
-
+
- 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.
- 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.
- 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.
Back to top