Chapter 14 MC

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- Bons indenture

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

In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less than the carrying amount of the debt, the debtor would recognize A- no gain or loss on the settlement B- a gain of the settlement C- a loss on the settlement D- none of these

B- a gain on the settlement

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

B- carrying amount of the pre-restructured debt is greater than the total the total future cash flows

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- Credit to Interest Expense

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 flows 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

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- income before income taxes and interest expense by interest expense

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- total liabilities by total assets

Discount on Notes Payable is charged to interest expense A- equally over the life of the note B- only in the year the note is issued C- using the effective-interest method D- only in the year the note matures

C- using the effective-interest method

Fox Co. issued $1000 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 principle 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- 20 periods and 4% from the present value of 1 table

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- effective, yield, or market rate

When the interest payment dates of a bond are May 1 and Nov 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- increased by accrued interest May 1 to June 1

Note disclosures for long-term debt generally include all of the following except A- assets pledged as security B- call provisions and conversions privileges C- restrictions imposed by the creditor D- names of specific creditors

D- names of specific creditors

T/F A bond may only be issued on an interest payment date

False

T/F A mortgage bond is referred to as a debenture bond

False

T/F Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense

False

T/F Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue

True

T/F Bond issues that mature in installments are called serial bonds

True

T/F Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate

True

T/F Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet

True

T/F The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet

True

T/F The implicit interest rate is the rate that equates the cash received with the amounts received in the future

True

T/F The process of interest-rate approximation is called imputation, and the resulting interest rate is called an imputed interest rate

True

T/F The replacement of an existing bond issue with a new one is called refunding

True

T/F The stated rate is the same as the coupon rate

True

Bonds to which the owner's names are not registered with the issuing corporation are called A- bearer bonds B- term bonds C- debenture bonds D- secured bonds

A- bearer bonds

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- dividends payable in stock

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 what have been has 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 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- greater than if the straight-line method were used

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

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- debenture bonds

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 relationships exist between the two rates

B- the nominal rate of interest exceeded the market rate

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 fo 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 will remain a constant amount over the 10-year period. 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- 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

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

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 new effective-interest rate must be computed

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

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 recognise 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

C- calculate its loss using the historical effective rate of the loan

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

The generally accepted method of accounting for gains and 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 issued 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- a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

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 cost 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- all of these

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- all of these are examples of "off-balance-sheet financing"

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- 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 states 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 market value of the note D- any of these

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 market value of the note C- using an imputed interest rate to discount all future payments on the note. D- any of these

D- any of these

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

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- coupon rate, nominal rate, or stated rate

A trouble 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- gain by the debtor and a loss by the creditor

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- income bonds

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 issues at a premium D- increase if the bonds were issued at either a discount or a premium

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

Fox Co. issued $1000 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 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 from 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

D- none of these

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to interest expense is equal to A- the stated (nominal) rate of interest multiplies by the face value of the bonds B- the market rate of interest multiplies by the face value of the bonds C- the stated rate multiplied by the beginning-of-the period carrying amount of the bonds D- the market rate multiplied by the beginning-of-period carrying amount of the bonds

D- the market rate multiplies by the beginning-of-period carrying amount of the bonds

T/F If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current

False

T/F If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

False

T/F If the market rate is greater than the coupon rate, bonds will be sold at a premium

False

T/F The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

False

T/F The interest rate written in the terms of the bonds indenture is called the effective yield or market rate.

False

T/F The times interest earned ratio is computed by dividing income before interest expense by interest expense

False

T/F In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor

False - (Gain/loss in trouble debt reconstructuring)

T/F 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

False- (loss recognized on an impaired loan)