Intermediate Accounting I: Long-term Liabilities (Chapter 14)

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An example of an item which is not a liability is:

dividends payable in stock.

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

bond indenture.

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

debenture bonds.

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

bearer bonds.

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

income bonds.

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.

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

coupon rate, nominal rate, or stated rate.

The rate of interest actually earned by bondholders is called the:

effective, yield, or market rate.

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:

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

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:

none of these -- multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table.

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 nominal rate of interest exceeded the market rate.

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 amortization been used.

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

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

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

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

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

credit to Interest Expense.

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:

increased by accrued interest from May 1 to June 1.

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.

any of these.

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

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

Treasury bonds should be shown on the balance sheet as:

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

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.

all of these.

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

a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

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

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

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 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.

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

the present value of the debt instrument must be approximated using an imputed interest rate.

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.

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.

any of these.

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting:

Unrealized Holding Gain/Loss-Income.

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

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

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

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

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

as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

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

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

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

names of specific creditors.

The times interest earned ratio is computed by dividing:

income before income taxes and interest expense by interest expense.

The debt to total assets ratio is computed by dividing:

total liabilities by total assets.

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 new effective-interest rate must be computed.

A troubled debt restructuring will generally result in a:

gain by the debtor and a loss by the creditor.

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 gain on the restructuring.

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 greater than the total future cash flows.

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

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

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a:

credit of $18,750 to Discount on Bonds Payable.

Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a:

debit of $18,725 to Premium on Bonds Payable.

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $600,000. To extinguish this debt, the company had to pay a call premium of $200,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?

Charge $800,000 to a loss in the year of extinguishment.

Putnam Company's 2012 financial statements contain the following selected data:

Income taxes $40,000
Interest expense 25,000
Net income 60,000

Putnam's times interest earned for 2012 is:

5.0 times

In the recent year Hill Corporation had net income of $280,000, interest expense of $60,000, and tax expense of $80,000. What was Hill Corporation's times interest earned ratio for the year?

7.0

A ten-year bond was issued in 2011 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2013, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2013 should have equaled the:

face amount less unamortized discount.

Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a:

part of continuing operations.

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