Ch 14

1. The rate of interest actually earned by bondholders is called the

Stated rate.

Yield rate

Effective rate

Effective, yield, or market rate.

2. 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

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

The premium must be amortized up to the purchase date.

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

All of these.

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

Bond indenture

Bond debenture.

Registered bond.

Bond coupon.

4. Theoretically, the costs of issuing bonds could be

Expensed when incurred.

Reported as a reduction of the bond liability.

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

Any of these.

5. Bonds for which the owners' names are not registered with the issuing corporation are called

Bearer bonds.

Term bonds.

Debenture bonds.

Secured bonds.

6. The interest rate written in the terms of the bond indenture is known as the

Coupon rate.

Nominal rate.

Stated rate.

Coupon rate, nominal rate, or stated rate.

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

No interest rate is stated.

The stated interest rate is unreasonable.

Any of these.

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

1

2

3

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

9. Bonds that pay no interest unless the issuing company is profitable are called

Collateral trust bonds.

Debenture bonds.

Revenue bonds.

Income bonds.

10. An example of an item which is not a liability is

Dividends payable in stock

Advances from customers on contracts.

Accrued estimated warranty costs

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

11. "In-substance defeasance" is a term used to refer to an arrangement whereby

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

A governmental unit issues debt instruments to corporations

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

A company legally extinguishes debt before its due date.

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

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

The market value of the note.

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

Any of these.

13. The term used for bonds that are unsecured as to principal is

Junk bonds

Debenture bonds.

Indebenture bonds.

Callable bonds.

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

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

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

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

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

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

16. Note disclosures for long-term debt generally include all of the following except

Assets pledged as security.

Call provisions and conversion privileges.

Restrictions imposed by the creditor.

Names of specific creditors.

17. 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

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

The nominal rate of interest exceeded the market rate.

The market and nominal rates coincided.

No necessary relationship exists between the two rates.

18. The times interest earned ratio is computed by dividing

Net income by interest expense.

Income before taxes by interest expense.

Income before income taxes and interest expense by interest expense.

Net income and interest expense by interest expense.

19. 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

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

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

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

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

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

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

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

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

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

21. 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

Greater than if the straight-line method were used.

Greater than the amount of the interest payments.

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

Less than if the straight-line method were used.

22. Discount on Notes Payable is charged to interest expense

Equally over the life of the note.

Only in the year the note is issued.

Using the effective-interest method.

Only in the year the note matures.

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

Debit to Interest Payable.

Credit to Interest Receivable.

Credit to Interest Expense.

Credit to Unearned Interest.

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

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

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

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

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

25. A troubled debt restructuring will generally result in a

Loss by the debtor and a gain by the creditor.

Loss by both the debtor and the creditor.

Gain by both the debtor and the creditor.

Gain by the debtor and a loss by the creditor.

26. 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

No gain or loss on the settlement

A gain on the settlement.

A loss on the settlement.

None of these.

27. 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?

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

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

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

28. The debt to total assets ratio is computed by dividing

Current liabilities by total assets.

Long-term liabilities by total assets.

Total liabilities by total assets

Total assets by total liabilities.

29. 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

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

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

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

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

30. Treasury bonds should be shown on the balance sheet as

An asset

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

A reduction of stockholders' equity.

Both an asset and a liability.

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

As a current liability.

In a special section between liabilities and stockholders’ equity.

As noncurrent.

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

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

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

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

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

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

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

Increase if the bonds were issued at a discount.

Decrease if the bonds were issued at a premium.

Increase if the bonds were issued at a premium.

Increase if the bonds were issued at either a discount or a premium.

34. The printing costs and legal fees associated with the issuance of bonds should

Be expensed when incurred.

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

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

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

35. 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

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

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

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

None of these.

36. . 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

Decreased by accrued interest from June 1 to November 1.

Decreased by accrued interest from May 1 to June 1.

Increased by accrued interest from June 1 to November 1.

Increased by accrued interest from May 1 to June 1.

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

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

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

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

Is in violation of generally accepted accounting principles.

38. 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 loss should be recognized by the debtor.

A gain should be recognized by the debtor.

A new effective-interest rate must be computed.

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

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

Compute a new effective-interest rate.

Not recognize a loss.

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

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