Ch. 14-16 Test Bank

111 Questions | Total Attempts: 72

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Banking Exam 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. 

      Mortgage bonds

    • B. 

      Debenture bonds

    • C. 

      Indebenture bonds

    • D. 

      Registered bond

  • 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. 

      Callable 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. 
    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.

  • 9. 
    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 answers is correct.

  • 10. 
    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.

  • 11. 
    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 amortiza-tion been used.

    • D. 

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

  • 12. 
    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.

  • 13. 
    When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will
    • A. 

      Increase only if the bonds were issued at a discount.

    • B. 

      Decrease only if the bonds were issued at a premium.

    • C. 

      Increase only if the bonds were issued at a premium.

    • D. 

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

  • 14. 
    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.

  • 15. 
    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.

  • 16. 
    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 answers are correct.

  • 17. 
    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.

  • 18. 
    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.

  • 19. 
    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 answers are correct.

  • 20. 
    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.

  • 21. 
    "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.

  • 22. 
    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

  • 23. 
    A debt instrument with no ready market is exchanged for property whose fair 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 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

  • 24. 
    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 fair value of the note.

    • D. 

      Any of these answers are correct

  • 25. 
    Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?
    • A. 

      The shareholders' loss is the debtholders' gain.

    • B. 

      The income of the company will increase as the amount of interest payment will reduce

    • C. 

      The decrease in market rate will increase the value of equity shares.

    • D. 

      The debtholders' loss is the shareholders' gain.