Managerial Accounting Ch. 15

The accounting for bonds payable is: (a) essentially the same under IFRS and GAAP. (b) differs in that GAAP requires use of the straight-line method for amortization of bond premium and discount. (c) the same except that market prices may be different because the present value calcula- tions are different between IFRS and GAAP. (d) not covered by IFRS.

(a) essentially the same under IFRS and GAAP.

At the end of each year, a mortgage is reported under how many sections of the balance sheet? a. 1 b. 2 c. 3 d. 4

B. 2

The debt to total assets ratio is computed by dividing A. long-term liabilities by total assets. B. total debt by total assets. C. total assets by total debt. D. total assets by long-term liabilities.

B. total debt by total assets.

Premium on Bonds Payable A. is considered to be an increase in the cost of borrowing B. is a contra account. C. is considered to be a reduction in the cost of borrowing. D. is deducted from bonds payable on the balance sheet.

C. is considered to be a reduction in the cost of borrowing.

The lessee must record a lease as an asset if the lease A. transfers ownership of the property to the lessor. B. does not contain a purchase option. C. term is 75% or more of the economic life of the leased property. D. payments equal or exceed 90% of the fair market value of the leased property.

C. term is 75% or more of the economic life of the leased property.

The market price of a bond is dependent on A. the payments amounts. B. the length of time until the amounts are paid. C. Both the market and face interest rates. D. All of the above.

D. All of the above.

A $500,000 bond was retired at 98 when the carrying value of the bond was $494,000. The entry to record the retirement would include a A. gain on bond redemption of $6,000. B. loss on bond redemption of $4,000. C. loss on redemption of $6,000. D. gain on bond redemption of $4,000.

D. gain on bond redemption of $4,000 The difference between the cash paid ($500,000 x .98) = $490,000, and the carrying value of the bonds ($494,000) is the gain or loss ($4,000). Since the cash paid was less than the carrying value, the difference represents a gain on the bond redemption ("Redeeming Bonds before Maturity").

Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 9 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed

a. $200,000

Callable bonds a. Can be redeemed by the issuer at any time at a specified price b. Can be redeemed by the investor at any time at a specified price c. Mature in a series of payments d. Mature in one single sum on a specified future date

a. Can be redeemed by the issuer (borrower) at any time at a specified price

Consider the following: Term Is this a Synonym? A. Market rate Stated rate B. Contractual rate Stated rate C. Contractual rate Face rate D. Effective rate Yield rate E. Market rate Effective rate F. Market rate Yield rate Which line of the schedule do not show synonyms? a. Line A b. Line B c. Line C d. Line D e. Line E

a. Line A - A. Market rate Stated rate

Why do companies issue bonds: a. To obtain larger amounts of long-term debt financing that can usually be obtained from the bank b. To obtain smaller amounts of long-term debt financing that can usually be obtained from the bank c. To utilize equity financing and increase the number of shares of stock outstanding d. To obtain short-term financing.

a. To obtain larger amounts of long-term debt financing that can usually be obtained from the bank

A lease which is in effect close to a purchase of the leased asset is: a. a capital lease for which an asset and liability must be recorded. b. an operating lease for which periodic expense is recorded, but no asset or liability.

a. a capital lease for which an asset and liability must be recorded.

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that: a. the contractual interest rate exceeds the market interest rate. b. the market interest rate exceeds the contractual interest rate. c. the contractual interest rate and the market interest rate are the same. d. no relationship exists between the two rates.

a. the contractual interest rate exceeds the market interest rate.

The market interest rate on bonds is lower than the contractual rate when bonds sell a. At maturity value b Above face value c. Below face value d. At face value

b Above face value

Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 7 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed

b. More than $200,000

A $100,000 bond with a carrying value of $104,000 was called at 107 and retired. In recording the retirement, the issuing company should a. Record no gain or loss b. Record a $3,000 loss c. Record a $4,000 gain d. Record a $1,000 gain

b. Record a $3,000 loss Loss on bond: $104,000 - $107,000 [$100,000 x 1.07] = (3,000) Now in this one we have a loss because it cost the company more to pay off the bond than the liability shown on the books.

When do bonds usually sell at a premium? a. When the market rate of interest is greater than the contractual rate of interest on the bonds b. When the contractual rate of interest on the bonds is greater than the market rate of interest c. When the price of the bonds is less than their maturity value d. In none of these cases

b. When the contractual rate of interest on the bonds is greater than the market rate of interest

A lease which is basically just an agreement for temporary use of property like a rental of an apartment or car rental is called: a. a capital lease for which an asset and liability must be recorded. b. an operating lease for which periodic expense is recorded, but no asset or liability.

b. an operating lease for which periodic expense is recorded, but no asset or liability.

The market rate on bonds is higher than the contractual rate when bonds sell a. At face value b. Above face value c. Below face value d. At maturity value

c. Below face value

If the effective interest rate equals the stated interest rate, a bond will sell at a. A premium b. A discount c. Face value d. Unable to determine from the data given

c. Face value

Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 12 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed

c. Less than $200,000

The term used for bonds that are unsecured is: a. callable bonds. b. indenture bonds. c. debenture bonds. d. bearer bonds

c. debenture bonds.

The market interest rate: a. is the contractual interest rate used to determine the amount of cash interest paid by the borrower. b. is listed in the bond indenture. c. is the rate investors demand for loaning funds.

c. is the rate investors demand for loaning funds.

Howard Corporation issued a 20-year mortgage note payable on January 1, 2012. At December 31, 2012, the unpaid principal balance will be reported as: a. a current liability. b. a long-term liability. c. part current and part long-term liability. d. interest payable.

c. part current and part long-term liability.

Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? Lease A Lease B a. Operating lease Capital lease b. Operating lease Operating lease c. Capital lease Operating lease d. Capital lease Capital lease

d. Capital lease Capital lease

A $100,000 bond with a carrying value of $104,000 was called at 103 and retired. In recording the retirement, the issuing company should a. Record no gain or loss b. Record a $3,000 loss c. Record a $4,000 gain d. Record a $1,000 gain

d. Record a $1,000 gain Gain on bond: $104,000 carrying value - $103,000 [$100,000 x 1.03 ]cost to pay off = $1,000 There is a gain because it cost the company less than the book value to pay off the bond.

Which of the following is not true about issuing bonds when compared to issuing additions shares of stock in order to obtain additional capital? a. Stockholders maintain proportionate ownership percentages. b. Interest expense reduces taxable income. c. Positive leverage increases return on equity. d. The company may defer payment of interest and principal if funds are not available.

d. The company may defer payment of interest and principal if funds are not available.

Four-Nine Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31 includes a: a. debit to Interest Payable. b. credit to Cash. c. credit to Interest Expense. d. credit to Interest Payable.

d. credit to Interest Payable.