Smartbook Recharge Chapter 14 ACCT 405

Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.) - Holds the bond indenture - Represents the rights of the bond holders - Represents the rights of the bond issuer - Appointed by bond issuer

- Holds the bond indenture - Represents the rights of the bond holders - Appointed by bond issuer

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) - Factoring bonds through a licensed factor. - Including a call feature when the bonds are issued. - Purchasing bonds on an open market.

- Including a call feature when the bonds are issued. - Purchasing bonds on an open market.

Which of the following represent the typical characteristics of liabilities? (Select all that apply.) - Future cash payments cannot be measured - Interest accrues as time passes on long-term liabilities - Future cash payments are certain or estimable - The requirement of future cash payments

- Interest accrues as time passes on long-term liabilities - Future cash payments are certain or estimable - The requirement of future cash payments

Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply) - It indicates the company's margin of safety in terms of paying its fixed interest. - It indicates the likelihood the loan will be paid back at maturity. - It indicates the leverage of the company. - It indicates the company's ability to pay its cost of borrowing.

- It indicates the company's margin of safety in terms of paying its fixed interest. - It indicates the company's ability to pay its cost of borrowing

Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.) - Represents the rights of the bond holders - Appointed by bond issuer - Represents the rights of the bond issuer - Holds the bond indenture

- Represents the rights of the bond holders - Appointed by bond issuer - Holds the bond indenture

Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.) - carrying value - face amount - market rate - stated rate

- face amount - stated rate

Bond issue costs - decrease the effective interest rate of borrowing. - reduce the cash proceeds from the issuance of debt. - do not affect the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing. - increase the cash proceeds from the issuance of debt.

- reduce the cash proceeds from the issuance of debt - increase the effective interest rate of borrowing

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is A. 12.5% B. 15% C. 13.75%

A. 12.5% Reason: $50/$400 = 12.5%

Which of the following statements regarding the times interest earned ratio is correct? A. it indicates the margin of safety provided to creditors B. It provides assurance that the loan will be paid back at maturity

A. It indicates the margin of safety provided to creditors

On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for? A. Reduce the cash proceeds and increase the discount and debt issue costs account B. Reduce the cash proceeds and increase the bonds payable account C. Increase the cash proceeds and increase the discount and debt issue costs account

A. Reduce the cash proceeds and increase the discount and debt issue costs account

Callable bonds can be redeemed at the choice of the A. bond issuer B. both the bondholder and the bond issuer C. bondholder

A. bond issuer

Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The company chose the fair value option; however, because of private placement, the fair value is not readily observable. As an alternative, the company A. can report the bonds at the present value of the remaining cash flows using the current effective rate. B. must report the bonds at par value less unamortized discount until market value become available.

A. can report the bonds at the present value of the remaining cash flows using the current effective rate.

Amortization of bond discounts results in the bond being valued on the balance sheet at the A. present value of the associated future cash flows B. maturity value of the bonds plus the remaining interest payments C. maturity value of the bonds

A. present value of the associated future cash flows

Accounting for troubled debt restructuring with modified terms depends on whether under the new agreement, A. total cash payments are more or less than the book value of the debt B. present value of future cash payments is more or less than the fair value of the debt C. total interest is more or less than the amount of interest due on the restructuring date

A. total cash payments are more or less than the book value of the debt

Which of the following is correct regarding the rate of return on shareholders' equity? A. It indicates profitability earned on nonfinancial assets. B. It indicates the effectiveness of employing resources provided by owners. C. It indicates profitability on the company's financial assets. D. It indicates profitability without regard to how resources are financed.

B. It indicates the effectiveness of employing resources provided by owners.

Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? A. Bond issuers are not permitted to enter into separate agreements with bondholders B. It is impractical for the issuer to enter into an agreement with each bondholder C. A bank must guarantee a new bond issue

B. It is impractical for the issuer to enter into an agreement with each bondholder.

This ratio provides information about a company's effectiveness of employing resources provided by owners. A. Debt to equity ratio B. Rate of return on shareholders' equity C. Profit ratio D. Rate of return on assets

B. Rate of return on shareholders' equity

Which of the following is correct regarding the default of a bond issuer? A. A class action suit must be filed by the trustees as well as the individual bondholders. B. The trustee holding the indenture can sue the issuer on behalf of the bondholders. C. Each bondholder must sue the issuing company for payment.

B. The trustee holding the indenture can sue the issuer on behalf of the bondholders.

Assets that are used to satisfy troubled debt are valued at A. amortized cost B. fair value C. historical cost

B. fair value

A common reason for redeeming a bond prior to its maturity date is that A. the market price of bonds decreased B. market interest rates decreased

B. market interest rates decreased

The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic. A. Periodic interest must be paid B. Periodic principal payments must be made C. Periodic interest is incurred

C. Periodic interest is incurred

The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic. A. Periodic principal payments must be made B. Periodic interest must be paid C. Periodic interest is incurred

C. Periodic interest is incurred

This ratio provides information about a company's effectiveness of employing resources provided by owners. A. Debt to equity ratio B. Profit ratio C. Rate of return on shareholders' equity D. Rate of return on assets

C. Rate of return on shareholders' equity

Callable bonds can be redeemed at the choice of the Multiple choice question. both the bondholder and the A. bond issuer. B. bondholder. C. bond issuer.

C. bond issuer

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by crediting A. gain on bond conversion for $1,100,000 B. common stock for $5,150,00 C. common stock for $6,250,000

C. common stock for $6,250,000 Reason: half of bondholders convert their bonds so: 10,000/2 = 5,000 25 x 5,000 x 50 = $6,250,000

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by crediting A. gain on bond conversion for $1,100,000. B. common stock for $5,150,000. C. common stock for $6,250,000.

C. common stock for $6,250,000 Reason: 25 x 5,000 x 50 = $6,250,000

Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the A. maturity value plus accrued interest payable B. present value of the future cash flows using current rates C. present value of the future cash flows using original rates

C. present value of the future cash flows using original rates

Which of the following is correct regarding the rate of return on shareholders' equity? A. it indicates profitability on the company's financial assets B. it indicates profitability earned on nonfinancial assets C. it indicates profitability without regard to how resources are financed D. it indicates the effectiveness of employing resources provided by owners

D. it indicates the effectiveness of employing resources provided by owners

The issue price of bonds is calculated as the ________ value of all the cash flows required of the bonds.

Present