Chapter 12 (Liabilities)

The most common types of bonds are unsecured bonds that also are referred to as: Multiple Choice debentures. indentures. term bonds. bearer bonds.

debentures

When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at: Multiple Choice a discount. a premium. par. a price above par.

par

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: Multiple Choice $14,458. $16,000. $17,542. $20,000.

$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 cash interest paid in 20X2 is: Multiple Choice $16,000. $18,000. $19,080. $20,000.

$16,000

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% ? Multiple Choice $6,000 $10,000 $16,000 $18,000

$16,000 5% + 3% = 8% × $200,000 = $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 bond interest expense for 20X1 is: Multiple Choice $16,000. $17,542. $20,000. $21,542.

$17,542

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: Multiple Choice $16,000. $17,696. $18,458. $19,280.

$17,696

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: Multiple Choice $175,422. $176,964. $200,000. $201,542.

$176,964

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: Multiple Choice $1,696. $2,458. $3,080. $4,000.

$1,696

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 value at the end of 20X2 is: Multiple Choice $175,422. $178,660. $200,000. $203,238.

$178,660

On January 1, 20X1 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-annually and sold for $893,640. The amount of bond discount amortized on July 1, 20X1 is approximately: Multiple Choice $1,000 $2,555 $2,000 $5,110

$2,555

When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be: Multiple Choice 8%. 10%. 4%. 5%.

5%

Which of the following would only be found in current liabilities on the balance sheet? Multiple Choice Bonds payable. Accrued compensation for services already rendered by employees. Income tax liabilities. Deferred revenue.

Accrued compensation for services already

When a bond is sold at a premium the: Multiple Choice effective interest rate is less than the stated rate. effective interest rate is greater than the stated rate. effective interest rate relative to the stated rate is not known. interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.

Effective interest rate is less than the stated rate

When market rates of interest increase, the use of floating-rate debt benefits the issuing company.

False

Consistent with GAAP, bonds are reported on the balance sheet at market value.

False Bonds are reported at amortized costs, which is the present value of future cash flows using the effective rate at time of issuance.

Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of: Multiple Choice increases in the market interest rate. decreases in the market interest rate. increases in the stated interest rate on bonds. decreases in the stated rate on bonds.

Increases in the market interest rate

Noncurrent monetary liabilities are initially recorded at their: Multiple Choice future value. historical value. present value when incurred. undiscounted amount due.

Present Value when incurred

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at: Multiple Choice par. a discount. a premium. stated value.

a discount

When a bond is sold at a discount the effective interest rate is: Multiple Choice equal to the stated rate. above the stated rate. below the stated rate. equal to the stated rate for a period of time and then above the stated rate for a period of time.

above the stated rate

When interest rates have increased and bonds are retired before maturity, market value is: Multiple Choice below book value generating an accounting gain. below book value generating an accounting loss. above book value generating an accounting gain. above book value generating an accounting loss.

below book value generating an accounting gain

Which of the following statements is correct? Multiple Choice Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense. Amortization of premium on bonds payable (bond premium) results in an increase in a bond's carrying value. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.

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

Amortization of discount on bonds payable (bond discount) results in which of the following? Multiple Choice A decrease in bond interest expense. An increase in net income. An increase in the carrying value of the bond. An increase in stockholders' equity due to the decrease in bond interest expense.

An increase in the carrying value of the bond

A liability that is satisfied through the payment of cash is referred to as a denominational liability.

False

A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.

False

A current monetary liability is shown on the financial statements at the undiscounted amount due.

True

A product warranty provided with the sale of an item of merchandise gives rise to a nonmonetary liability.

True

The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.

True

The retirement of a bond that has a $250,000 maturity value and a $10,000 balance in premium on bonds payable (bond premium) creates a $15,000 gain if the bond is retired at a cost of $245,000.

True Carrying (Book) value = $(250,000 + 10,000) = $260,000; gain = Carrying value less proceeds: $260,000 − $245,000 = $35,000

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: Multiple Choice par. a discount. a premium. stated value.

a premium

When the market rate of interest is below the stated rate of interest, a bond sells at: Multiple Choice par. a premium. a discount. stated value.

a premium

Secured bonds are __________ by assets held by the bond issuer. Multiple Choice promised transferred collateralized insured

collateralized

Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the: Multiple Choice cash interest method. effective interest method. bond yield method. cumulative interest method.

effective interest method

A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an: Multiple Choice asset. liability. equity. expense.

liability

The market value of floating-rate debt of $200,000 will: Multiple Choice rise by $2,000 with a 1% rise in interest rates. fall by $2,000 with a 1% fall in interest rates. remain unchanged with a change in interest rates. will rise in the short run and fall in the long run with a change in interest rates.

remain unchanged with a change in interest rates.

Debentures are bonds that: Multiple Choice have no maturity date. do not pay periodic interest. that are unsecured. that can be converted to common stock.

that are unsecured