Chapter 12

The use of the fair value option tends to:

decrease income volatility.

Investors need to review transactions involving debt-for-debt swaps carefully to ensure that there is an underlying:

economic benefit.

When market rates of interest decrease, the use of floating-rate debt benefits:

issuing companies

Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value:

makes it easier to manipulate accounting numbers.

Hocker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 20X1. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.The amount of cash interest paid in 20X1 on the bonds is:

$16,000.

Hocker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 20X1. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.The amount of bond interest expense for 20X2 is:

$17,696.

Dot Company issued $200,000 of bonds on January 1, 20X1 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.Which of the following will be the interest expense for year 1 if LIBOR is 5% ?

$16,000

On January 1, 20X1 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date.

$198,000

A bond with a maturity value of $700,000 was initially issued for $715,000. The bond has a stated rate of 10% and matures in ten years. The total interest expense over the life of the bond is:

$685,000

On January 2, 20X1, Ziegler Company issues a four-year note in exchange for a license agreement requiring four annual payments of $27,956. The market value of the four-year agreement is $100,000. The first payment is due on the day the agreement is signed. The effective interest rate is 8%. The first payment includes interest expense of:

0

Hocker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 20X1. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.The bond carrying amount at the end of 20X1 is:

176,964.

Klein Company issues a four-year note in exchange for a license agreement with fair value of $100,000. The contract requires payment of $27,956 at the beginning of each of the four years. The approximate effective interest rate associated with the notes payable is:

8%

Which of the following is not an accurate description of the controversies surrounding the fair value accounting option?

Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress

Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?

Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.

Which of the following statements is correct?

Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value.

Which of the following represent(s) a bond valuation account?

Both bond premium and discount

Hocker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 20X1. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.The amount of bond discount amortization for 20X2 is:

$1,696.

When a company retires debt, which of the following is not an accurate statement?

If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.

Which of the following statements with respect to floating-rate debt is incorrect?

If the market rate of interest decreases, both the issuing company and the investors benefit.

Roberts owns 100 shares of $1,000 face amount convertible bonds issued by Bearny Inc. Choose the statement that correctly describes this transaction.

Roberts may choose to exchange the bonds for Bearny Inc. common stock, or retain the bonds until maturity.

Which of the following is nota valid statement regarding floating-rate debt?

The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt.

Which of the following is not a true statement regarding the fair value accounting option?

The fair value option increases earning volatility.

Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS?

The fair value option is permitted under IFRS only under two specific sets of circumstances.

When interest rates have increased and bonds are retired before maturity, market value is:

below book value generating an accounting gain.

Amortization of discount on bonds payable (bond discount) results in which of the following?

An increase in the carrying value of the bond.

On January 1, 20X1, Ross Corporation issued bonds with a maturity value of $200,000; the bond's stated rate of interest equaled the market interest rate on the issue date. On December 31, 20X1, the market value of the bonds was $188,926; on December 31, 20X2, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporation's financial reporting if Ross elects to measure the bond liability using the fair value accounting option?

For the year ending December 31, 20X1, Ross will report an unrealized holding loss of $11,074 in its income statement.

Which of the following is a correct statement about preparing a balance sheet?

Some financial instruments possess the characteristics of both debt and equity.

A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?

The loss on the debt extinguishment is $20,500.

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:

a premium.

When the market rate of interest is below the stated rate of interest, a bond sells at:

a premium.

Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of:

increases in the market interest rate.

Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%. The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a:

reduction of the bond premium.

The market value of floating-rate debt of $200,000 will:

remain unchanged with a change in interest rates.

On January 1, 20X1 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date.If Philips Co. uses IFRS, the effective interest rate will be:

slightly higher than 12%.