ACC 304 WEEK 9 QUIZ 6
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ACC 304 WEEK 9 QUIZ 6
ACC 304 Week 9 Quiz 6 – STR NEW
ACC 304 Week 9 Quiz 6
All Questions Included.
TRUE FALSE—Conceptual
1. Companies usually make bond interest
payments semiannually, although the interest rate is generally expressed as an
annual rate.
2. A mortgage bond is referred to as a
debenture bond.
3. Bond issues that mature in installments are
called serial bonds.
4. If the market rate is greater than the
coupon rate, bonds will be sold at a premium.
5. The interest rate written in the terms of
the bond indenture is called the effective yield or market rate.
6. The stated rate is the same as the coupon
rate.
7. Amortization of a premium increases bond
interest expense, while amortization of a discount decreases bond interest
expense.
8. A bond may only be issued on an interest
payment date.
9. The cash paid for interest will always be
greater than interest expense when using effective-interest amortization for a
bond.
10. Bond issue costs are capitalized as a
deferred charge and amortized to expense over the life of the bond issue.
11. The replacement of an existing bond issue
with a new one is called refunding.
12. If a long-term note payable has a stated
interest rate, that rate should be considered to be the effective rate.
13. The implicit interest rate is the rate
that equates the cash received with the amounts received in the future.
14. An unrealized holding gain or loss is the
net change in the fair value of the liability from one period to another,
exclusive of interest expense recognized but not recorded.
15. Off-balance-sheet financing is an attempt
to borrow monies in such a way to minimize the reporting of debt on the balance
sheet.
16. The debt to total assets ratio will go up
if an equal amount of assets and liabilities are added to the balance sheet.
17. If a company plans to retire long-term
debt from a bond retirement fund, it should report the debt as current.
18. The times interest earned ratio is
computed by dividing income before interest expense by interest expense.
*19. The loss to be recognized by a creditor
on an impaired loan is the difference between the investment in the loan and
the expected undiscounted future cash flows from the loan.
*20. In a troubled debt restructuring, the
loss recognized by the creditor will equal the gain recognized by the debtor.
MULTIPLE CHOICE—Conceptual
21. 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.
22. 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.
23. The term used for bonds that are
unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P24. Bonds for which the owners’ names
are notregistered
with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
S25. 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.
S26. 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.
27. 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.
28. 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.
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%.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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.
34. 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.
35. 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.
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
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.
37. 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.
38. 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.
39. 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.
40. 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.
41. 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.
P42. “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.
P43. 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.
S44. 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.
45. 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.
46. 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.
47. 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.
48. 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.”
S49. 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.
S50. 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.
51. 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.
52. 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.
53. 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.
54. 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.
*55. 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.
*56. 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.
*57. 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.
*58. 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
a. carrying amount of the pre-restructure debt is
less than the total future cash flows.
b. carrying amount of the pre-restructure debt is
greater than the total future cash flows.
c. present value of the pre-restructure debt is less
than the present value of the future cash flows.
d. present value of the pre-restructure debt is
greater than the present value of the future cash flows.
*59. 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
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective
rate of the loan.
d. calculate its loss using the current effective
rate of the loan.
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