Chapter 14 - Intermediate Accounting

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

A. IFRS allows the recognition of liabilities for future losses. Both U.S.GAAP and IFRS prohibit the recognition of liabilities for future losses.

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.

A. a credit to Discount on Notes Payable for $90,160. The adjusting entry made at December 31, 2014 debits Interest Expense and credits Discount on Notes Payable for ($901,560 X .10) = $90,160.

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

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. exceed what it would have been had the effective-interest method of amortization been used. 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.

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.

A. income bonds. Income bonds are bonds which do not pay interest unless the issuing company is profitable.

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.

A. the present value of the debt instrument must be approximated using an imputed interest rate. When such a transaction takes place the present value of the debt instrument must be approximated using an imputed interest rate.

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.

B. $285,500. The discount on bonds payable is recorded at ($5,000,000 - $4,695,000) = $305,000 at issuance. The amortization of discount in 2014 is [$450,000 -($4,695,000 X .10)] =$19,500 leaving a balance of $305,000 - $19,500 = $285,500.

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.

B. $300,000 loss. The bonds' net carrying amount is ($5,000,000 - $200,000 - $50,000) = $4,750,000. The loss on extinguishment is ($5,000,000 X 1.01) - $4,750,000 = $300,000.

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

B. $392,082 Interest expense for the first six months is ($9,802,072X .04) =$392,082.

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.

B. a credit to Premium on Bonds Payable for $2,000,000. The entry will credit Bonds Payable for $100,000,000 and Premium on Bonds Payable for $2,000,000.

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.

B. callable bond. Callable bonds give the issuer the right to call and retire the bonds prior to maturity.

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.

B. income before interest and taxes. The times interest earned ratio is equal to income before interest and taxes divided by interest expense.

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

B. serial bond. Bonds that mature in installments are referred to as serial bonds.

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.

B. the stated rate of interest exceeded the market rate. Bonds will sell at a premium when the market rate is lower than the stated rate.

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

C. $1,568,498 Interest expense for the first 6 month period is ($19,604,145 X.04) =$784,166. The new carrying value for the bonds is [$19,604,145 + ($784,166 - $780,000)] = $19,608,311. Interest expense for the second six months is ($19,608,311 X .04) = $784,332. Total interest expense for 2014 is ($784,166 + $784,332) = $1,568,498.

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.

C. $5,730,000. The bonds' net carrying amount used to calculate the gain or loss on extinguishment is ($6,000,000 - $210,000 - $60,000) = $5,730,000.

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.

C. Non-interest bearing note. All of the options except the non-interest bearing note are examples of off-balance-sheet financing.

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

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

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.

C. greater than the stated rate. If a bond was sold at 97, it sold at a discount (97% of face value), which occurs when the market rate is greater than the stated rate.

When a bond sells at a premium, interest expense will be: A. equal to the bond interest payment. B. greater than the bond interest payment. C. less than the bond interest payment. D. None of these answer choices are correct.

C. less than the bond interest payment. Selling a bond at a premium results in interest expense being less than the interest payment because of the amortized premium.

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.

C. the mid-point of the range. Under IFRS, if no amount within a range is a better estimate than any other amount, a loss contingency is accrued for the mid-point of the range.

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.

D. All of these answer choices are correct. All of the options would challenge the presumption that the stated interest rate is fair.

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.

D. Capital leases. Capital leases are not an example of "off-balance-sheet financing."

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.

D. Mortgage notes payable are always reported as a long-term liability. Mortgage notes payable in installments are reported as part current liabilities and part long-term liabilities.

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.

D. coupon rate, nominal rate, or stated rate. The interest rate written in the terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate.

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.

D. is the same total amount as straight-line interest expense over the term of the bonds. Interest expense is the same total amount over the term of the bonds in both the effective interest and straight-line methods.

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.

D. market rate. The market rate is used to discount the cash flows in determining the selling price (proceeds) of a bond.

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. names of specific creditors. Note disclosures for long-term debt generally do not include the names of specific creditors.

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.

D. recorded as a reduction in the carrying value of bonds payable. Under IFRS, bond issuance costs should be recorded as a reduction in the carrying value of bonds payable.

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

D. registered bond. Registered bonds are issued in the name of the owner.

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.

False. Assets transferred to a creditor in connection with a troubled debt restructuring are recorded on the books of the creditor at fair value. Any gain or loss on the transfer would be recognized by the debtor.