CH 14

A project financing arrangement refers to:

an arrangement where a company creates a special-purpose entity to perform a special project.

Long-term debt that matures within one year and is to be converted into stock should be reported

as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

"In-substance defeasance" is a term used to refer to an arrangement whereby

a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,

a new effective-interest rate must be computed.

In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize

a gain on the restructuring.

The term used for bonds that are unsecured as to principal is

debenture bonds.

An example of an item which is not a liability is

dividends payable in stock.

Note disclosures for long-term debt generally include all of the following except

names of specific creditors.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

the market rate multiplied by the beginning-of-period carrying amount of the bonds.

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

the nominal rate of interest exceeded the market rate.

A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place

the present value of the debt instrument must be approximated using an imputed interest rate.

The debt to assets ratio is computed by dividing

total liabilities by total assets.

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

increase if the bonds were issued at either a discount or a premium.

The interest rate written in the terms of the bond indenture is known as the

coupon rate, nominal rate, or stated rate.

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

20 periods and 4% from the present value of 1 table.

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?

The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?

The debtholders' loss is the shareholders' gain.

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting

Unrealized Holding Gain/Loss-Income

Treasury bonds should be shown on the balance sheet as

a deduction from bonds payable issued to arrive at net bonds payable and outstanding.

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

a difference between the reacquisition price and the net carrying amount of the debt

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

increased by accrued interest from May 1 to June 1.

The printing costs and legal fees associated with the issuance of bonds should

be accumulated in a deferred charge account and amortized over the life of the bonds

Bonds for which the owners' names are not registered with the issuing corporation are called

bearer bonds

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

bond indenture.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should

calculate its loss using the historical effective rate of the loan.

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the

carrying amount of the pre-restructure debt is greater than the total future cash flows

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

credit to Interest Expense

Bonds that pay no interest unless the issuing company is profitable are called

d. income bonds.

The rate of interest actually earned by bondholders is called the

effective rate.

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

exceed what it would have been had the effective-interest method of amortization been used.

A troubled debt restructuring will generally result in a

gain by the debtor and a loss by the creditor.

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

greater than if the straight-line method were used

The times interest earned ratio is computed by dividing

income before income taxes and interest expense by interest expense