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exam 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.

A

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.

A

The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

B

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.

A

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.

D

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.

A

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.

D

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.

D

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.

D

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.

B

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.

A

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.

D

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.

D

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.

C

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.

D

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.

D

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.

C

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.

B

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.

D

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.

D

"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.

C

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.

C

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.

A

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 fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

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 fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

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.

D

If a company chooses the fair value option, a decrease in the fair value of the liability is
recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these.

C

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."

D

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.

C

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.

D

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.

D

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.

D

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.

C

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.

C

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.

C

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.

D

In a troubled debt restructuring in which the debt is restructured by a transfer of assets
with a fair value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the restructuring.
b. a gain on the restructuring.
c. a loss on the restructuring.
d. none of these.

B

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