Chapter 14 - True/False Test Bank Questions

6. The stated rate is the same as the coupon rate.

TRUE

12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

FALSE

17. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

FALSE

18. The times interest earned is computed by dividing income before interest expense by interest expense.

FALSE

19. The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected un-discounted future cash flows from the loan.

FALSE

2. A mortgage bond is referred to as a debenture bond.

FALSE

20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor.

FALSE

4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.

FALSE

5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

FALSE

7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

FALSE

8. A bond may only be issued on an interest payment date.

FALSE

9. The cash paid for interest will always be greater than interest expense when using effective interest amortization for a bond.

FALSE

16. The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

TRUE

3. Bond issues that mature in installments are called serial bonds.

TRUE

1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

TRUE

10. Companies report bond discounts as a direct deduction from the face amount of the bond.

TRUE

11. The replacement of an existing bond issue with a new one is called refunding.

TRUE

13. The interest rate of variable-rate mortgages is tied to changes in the fluctuating market rate.

TRUE

14. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded.

TRUE

15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

TRUE