ACC 302 Exam 3

Which of the following represents the amount payable at maturity of bonds? You got it correct : A Face value B Extinguishment C Reacquisition price D Issue price

A) Face Value

If a firm uses the fair value option to record the value of a liability, the firm will record a gain when its creditworthiness declines. The FASB says this is acceptable because A) the debtholders' loss is the shareholders' gain. B) the shareholders' loss is the debtholders' gain. C) the company's income will increase as the size of its interest payments decreases. D) the decrease in market rate will increase the value of the firm's equity share

A) The debt holders' loss is the shareholders' gain.

If the balance of a long-term note payable is due within one year or the current operating cycle, whichever is longer, it should be classified as a A : long-term liability. B : current liability. C : note receivable. D : bond.

B) Current Liability

Which of the following scenarios would be most beneficial for a firm's shareholders, assuming overall interest rates remain constant and the firm uses the fair value option to value its bonds? A : The value of the firm's bonds payable increases while the value of its assets remains constant. B : The value of the firm's bonds payable decreases while the value of its assets remains constant. C : The value of the firm's bonds payable decreases while the value of its assets decreases. D : The value of the firm's bonds payable increases while the value of its assets decreases.

B) The value of the firm's bonds payable decreases while the value of its assets remain constant.

A ten-year bond was issued in 2017 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2019, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2019 should have equaled which of the following? A : the call price B : the call price less unamortized discount C : the face amount less unamortized discount D : the face amount plus unamortized discount

C) The face amount less unamortized discount

Which of the following is a representative of refunding? a) The requisition of a bond at a higher interest rate. b) The sale of an issue at a discount c) The replacement of an existing issuance with a new one. d) The return of interest payments after the selling on an issue.

C) The replacement of an existing issuance with a new one.

A debenture bond issued by a corporation A is secured by stocks and bonds of other corporations. B may be converted into other securities of the corporation for a specified time after issuance. C matures in installments. You got it correct : D is unsecured.

D) is unsecured

The value of a note payable is calculated as the A : total principal plus interest that the issuer has to pay back. B : future value of its principal cash flows less interest paid. C : average of the present value and future value of the note. D : present value of its future interest and principal cash flows.

D) present value of its future interest and principal cash flows

Which of the following represents an arrangement where a company plans to pay off a long-term debt in the future by placing purchased securities in an irrevocable trust? A : Net defeasance B : Reacquisition redemption C : In-substance defeasance D : Net redemption

In-substance defeasance

Payment of debt is also called extinguishment of debt.

True

Pinnacle Corporation uses the fair value option to record the value of a long-term note payable. If, in 2017, the company reports an unrealized holding gain, this gain should be reported as part of the firm's net income.

True

What is the term used for bonds that pay no interest unless the issuing company is profitable? You got it correct : A Income bonds B Revenue bonds C Collateral trust bonds D Debenture bonds

a) Income bonds

Grantham Industries' 2017 financial statements contain the following selected data: Income Taxes - 91000 Interest expense - 34000 Net Income - 260000 Grantham's times interest earned for 2017 is A : 10.3 times. B : 11.3 times. C : 7.6 times. D : 8.6 times.

b) 11.3 times

If a company exchanges a debt instrument with no ready market for property with an indeterminable fair value, A : the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. B : the present value of the debt instrument must be approximated using an imputed interest rate. 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 : it should not be recorded on the books of either party until the fair value of the property becomes evident.

b) The present value of the debt instrument must be approximated using an imputed interest rate

On January 1, 2017, Woodall Enterprises sold property to Mattson Company which originally cost Woodall $1,470,000. Mattson gave Woodall a $2,100,000 zero-interest-bearing note payable in three equal annual installments of $700,000, with the first payment due December 31, 2017. The prevailing rate of interest for a note of this type is 10%. The present value of a $2,100,000 note payable in three equal annual installments of $700,000 at a 10% rate of interest is $1,740,900. What is the amount of interest income that should be recognized by Woodall in 2017, using the effective-interest method? a) 210,000 b) 0 c) 70,000 d) 174,090

d) 174,090

The fair Value option is used only with ___________ liabilities.

non-current