acct exam 4
Bonds with a face value of $200,000 that are quoted for 103 are selling for?
$206,000
On January 1, 2016, Pullweed Inc. sells bonds for $108,500 with a face value of $100,000 with a annual yield rate of 10% and stated rate of 12%. Interest is paid on July 1 and January. The interest for July 1, 2016 based on the effective interest method will be
$5,425
ABC Company owns 30% of the outstanding shares of Teal Company. At the beginning of the current year, the carrying value of Teal's stock on ABC's balance sheet was $60,000. During the period, Teal paid dividends of $10,000 and reported a net income of $40,000. What is the carrying value of Teal's stock on ABC's balance sheet at the end of the year?
$69,000
Cash paid to retire bonds payable or notes payable is reported as a:
Cash outflow for financing activities.
Which of the following methods of accounting for investments is appropriate when the investor controls the investee?
Consolidation
Which of the following is not a factor of the selling price of a bond?
Contract rate set by buyer
Which of the following does not influence the rate of interest needed to issue debt?
Current earnings per share
The book value of a bond issued at a discount is calculated as follows:
Face Value - Unamortized Discount
Which of the following is the best reason for issuing long-term liabilities?
Debt financing offers an income tax advantage because interest expense reduces taxable income.
Which of the following is not a reason for issuing long-term liabilities?
Debt financing typically has a higher cost of capital than equity.
To determine the bond selling price what rate is applied to both the future principal and periodic interest payments?
Effective rate
To compute interest under the effective interest method, the formula is
Interest Income = Effective Interest Rate X Book Value of the Investment at Beginning of Period
On the statement of cash flows, cash paid for interest is included in the
Operating section.
Companies that issue bonds must take all of the following steps except
Set the effective rate (or yield) that best reflects the current market conditions.
___________ give holders the option to purchase a specified number of common shares at a predetermined price for a period of time.
Stock Warrants
Which of the following disclosures is not required for investments in securities by current GAAP?
The circumstances leading to the decision to sell or transfer a trading security.
Which of the following is not a consideration when determining the rate of interest charged on long-term notes payable?
The credit risk of the lender.
Which of the following statements is false when accounting for held-to-maturity investments?
The effective interest method amortizes the premium or discount in equal amounts each accounting period.
Which type of investment in securities must always be classified as a current asset?
Trading securities
Penguin Company originally issued $100,000 of 8% bonds at 97 on January 1, 2016. The bonds have a 12 year life, pay interest on January 1 and July 1 and are callable at 104 plus accrued interest. Assume for simplicity, that Rodgers amortizes the discount by the straight-line method. On June 30 2021, the company calls the bonds. The entry to record current interest expense, liability and amortization of the discount that has expired since the last interest payment includes
a credit to Discount on Bonds Payable $125
The journal entry to record the issue of bonds between the interest payment dates would include
a credit to Interest Expense.
Orange Corporation originally issued $100,000 of 10% bonds at 98 on January 1, 2008. The bonds have a 10-year life, pay interest on January 1 and July 1, and are callable at 103 plus accrued interest. Orange amortizes the discount by the straight-line method. On June 30, 2013, the company recalls the bonds. The journal entry to record the current interest expense and related liability would include
a credit to Interest Payable for $5,000.
On December 31, 2016, ABC Company's trading securities have a fair value of $84,000. On December 31, 2017, the same trading securities have a fair value of $78,000. The journal entry to report the portfolio at fair market value on December 31, 2017 will include
a debit to Unrealized Holding Loss - Trading Securities for $6,000.
When purchasers of bonds pay an amount less than the face value of the bonds, the bonds sell at
a discount.
Under the equity method, dividends received by the investor should be recorded as
a reduction in the carrying value of the investment.
Bond issue costs such as printing costs, registration fees, and legal fees are reported on the financial statements as
an addition to Deferred Bond Issue Costs.
ABC Company purchased 200 shares of Teal Company's stock for $15,000 and classified them as available-for-sale. ABC later decides to reclassify this investment as a trading security when the 200 shares has a fair value of $18,500. The journal entry to reclassify these securities will include a
credit to Gain on Transfer of Securities for $3,500.
ABC Company holds 100 shares of common stock in Teal Company as an available-for-sale security. Teal Company pays a $0.75 per share dividend for its common shareholders. ABC Company's journal entry to record the declaration includes a
credit to dividend income for $75, which will be included in income for the current period.
Bonds that are not secured by specific property are
debenture bonds.
On October 1, 2016, Stone Co. acquired 8% bonds of Pebble Inc. with a face value of $300,000 for $312,000 plus accrued interest. They plan to hold the bonds to maturity. Interest is payable on June 30 and December 31. Stone would record the initial bond investment with a
debit to Interest Income.
When the conversion of bonds payable to common stock is recorded under the market value method and the market value of the common stock exceeds the book value of the bonds at the date of conversion, the difference is recorded as a
debit to Loss on Conversion.
At the beginning of the year, ABC Company pays an annual insurance premium of $6,000 to cover the lives of its officers. The journal entry to record this transaction will include a
debit to Prepaid Insurance for $6,000.
The Discount on Bonds Payable carries as normal _______ balance and the Premium on Bonds Payable carries a normal _____________ balance.
debit; credit
Under the equity method, receipt of cash dividends by the investor would
decrease the investment account.
When a company offers bondholders a 'sweetener' to induce them to convert their bonds to common stock, the cost of this bond conversion is reflected in the
expense section of income from continuing operations.
Investments in __________________ are debt securities for which the company has the positive intent and ability to hold until maturity, which is not the same as the absence of an intent to sell.
held-to-maturity securities
A loan (note receivable) is _____ if it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.
impaired
An estimated interest rate based on the rate that an independent borrower and an independent lender would negotiate for a similar transaction under comparable conditions and terms is a (n)
imputed interest rate.
Permanent value declines in available-for-sale securities should be
included in income as a realized loss.
Realized gains/losses on trading securities are reported as _________________. Unrealized gains/losses on trading securities are reported as __________________.
income; income
Which of the following is not a reason to call a bond:
offset any unfavorable changes in the market.
Cumulative unrealized gains and losses on investments in available-for-sale securities are reported
on the balance sheet as part of stockholders' equity.
Unrealized gains and losses on investments in trading securities are reported
on the income statement.
The book value (or carrying value) of the bond issue at any time is its face value
plus any unamortized premium or minus any unamortized discount.
When a long-term non-interest bearing note is exchanged solely for cash, the note is assume to have
present value equal to cash proceeds.
Funds set aside to accumulate cash to retire long-term liabilities are called
sinking funds.
If a company has amortized a premium on bonds payable, under the indirect method for the statement of cash flows, the company _____ the premium from net income in the _____ section.
subtracts, operating
The transfer of a security between investment categories is accounted for at
the fair value at the time of the transfer.
A realized gain or loss on the sale of an available-for sale equity security is determined by comparing
the original cost of the security with the proceeds from the sale.
Investments in debt and equity securities that are held for current resale in the near term are
trading securities.
For minority active (or equity method) investments, a company should make all of the following major disclosures except:
whether or not the company plans to sell the investment in the following year.
