Chapter 14 Textbook Quiz – Flashcards

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.

The interest rate written in the terms of the bond indenture is known as the A. effective rate. B. market rate. C. yield rate. D. coupon rate, nominal rate, or stated rate.

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a A. convertible bond. B. callable bond. C. retirable bond. D. debenture bond.

A bond issued in the name of the owner is a: A. bearer bond. B. convertible bond. C. income bond. D. registered bond.

When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. A. True B. False

If a bond sold at 97, the market rate was: A. equal to the stated rate. B. less than the stated rate. C. greater than the stated rate. D. equal to the coupon rate.

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include A. a credit to Bonds Payable for $102,000,000. B. a credit to Premium on Bonds Payable for $2,000,000. C. a debit to Cash for $100,000,000. D. a credit to Interest Expense for $2,000,000.

Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8% for $922,780,000, to yield 10%. If the company uses the effective interest method of amortization, interest expense for the first six months would be $4,000,000. A. True B. False

The effective interest method calculates interest expense by multiplying the carrying value of the bonds by the stated rate of interest. A. True B. False

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.

Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30 payment? A. $390,000 B. $392,082 C. $400,000 D. $784,164

Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement A. True B. False

On June 30, 2014, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2024. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $210,000 and $60,000, respectively. On June 30, 2014, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? A. $5,940,000. B. $5,790,000. C. $5,730,000. D. $5,640,000.

All of the following statements are true regarding IFRS treatment of reporting and recognition of liabilities except: A. IFRS allows the recognition of liabilities for future losses. B. IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity. C. For contingencies, IFRS requires insurance recoveries be "virtually certain" before recognition of an asset is permitted. D. The recognition criteria for asset retirement obligations is less stringent under IFRS than it is under U.S. GAAP.

On January 1, 2014, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2014 with regard to the note will include A. a credit to Discount on Notes Payable for $90,160. B. a debit to Interest Expense for $120,000. C. a credit to Interest Payable for $60,000. D. a debit to Interest Expense for $29,850.

If a company elects the fair value option for its long-term liabilities, a decrease in the fair value of a bond payable will result in an unrealized holding loss. A. True B. False

Which of the following is not an example of "off-balance-sheet financing"? A. Non-consolidated subsidiary. B. Special purpose entity. C. Operating leases. D. Capital leases.

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.

The loss recorded by the creditor in a troubled debt restructuring is based on the expected future cash flows discounted at the current effective interest rate. A. True B. False

Franzia Co. prepares its financial statements using IFRS. The company has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be A. zero. B. the minimum of the range. C. the mid-point of the range. D. the maximum of the range.

Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. A. True B. False

Bonds that are not recorded in the name of the bondholder are called unsecured bonds. A. True B. False

A bond that matures in installments is called a: A. term bond. B. serial bond. C. callable bond. D. bearer bond.

Bonds which do not pay interest unless the issuing company is profitable are called A. income bonds. B. term bonds. C. debenture bonds. D. secured bonds.

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the A. stated rate. B. nominal rate. C. coupon rate. D. market rate.

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.

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that A. the market rate of interest exceeded the stated rate. B. the stated rate of interest exceeded the market rate. C. the market and stated rates coincided. D. no necessary relationship exists between the two rates.

Eckert Company issues $10,000,000, 6%, 5-year bonds dated July 1, 2014 on July 1, 2014. The bonds pay interest semiannually on December 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 A. $10,000,000 B. $10,432,988 C. $10,437,618 D. $10,434,616

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2014 income statement will total A. $1,529,115 B. $1,560,000 C. $1,568,498 D. $1,600,000

Under the effective interest method, interest expense: A. always increases each period the bonds are outstanding. B. always decreases each period the bonds are outstanding. C. is the same annual amount as straight-line interest expense. D. is the same total amount as straight-line interest expense over the term of the bonds.

On January 1, 2014, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2014, Kimbrough should report unamortized bond discount of A. $274,500. B. $285,500. C. $258,050. D. $255,000.

On June 30, 2014, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $200,000 and $50,000, respectively. On June 30, 2014, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? A. $505,000 gain. B. $300,000 loss. C. $200,000 gain. D. $250,000 loss.

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.

When a note is exchanged for property in a bargained transaction, 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. D. All of these answer choices are correct.

Which one of the following statements relating to mortgage notes payable is not correct? A. Mortgage notes payable are the most common form of long-term notes payable. B. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan. C. Mortgage notes payable are payable in full at maturity or in installments. D. Mortgage notes payable are always reported as a long-term liability.

Boomchickapop Company elects the fair value option for a long-term note payable. In 2014, the company reported an unrealized holding gains which was reported as a component of Other Comprehensive Income. A. True B. False

Which of the following is not an example of off-balance-sheet financing? A. Non-consolidated subsidiary. B. Special purpose entity. C. Non-interest bearing note. D. Operating lease.

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.

The numerator in the times interest earned ratio is: A. net income. B. income before interest and taxes. C. income before interest. D. income before taxes.

When assets such as buildings and equipment are transferred in a troubled debt restructuring, the creditor should record a gain or loss for the difference between the fair value and the debtor's book value. A. True B. False

Under IFRS, bond issuance costs, including the printing costs and legal fees associated with the issuance, should be: A. accumulated in a deferred charge account and amortized over the life of the bonds. B. reported as an expense in the period the bonds mature or are redeemed. C. expensed in the period when the debt is issued. D. recorded as a reduction in the carrying value of bonds payable.