Chapter 14 Multiple Choice

Which one of the following statements relating to mortgage notes payable is not correct? a. Mortgage notes payable are always reported as a long-term liability. b. Mortgage notes payable are payable in full at maturity or in installments. c. Mortgage notes payable are the most common form of long-term notes payable. d. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan.

a. Mortgage notes payable are always reported as a long-term liability.

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a a. callable bond. b. retirable bond. c. debenture bond. d. convertible bond.

a. convertible bond.

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place a. it should not be recorded on the books of either party until the fair market value of the property becomes evident. 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. 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.

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the a. coupon rate. b. stated rate. c. market rate. d. nominal rate.

c. market rate

Marigold Corp. issued $97000 of ten-year, 8% bonds that pay interest semiannually. The bonds are sold to yield 6%.One step in calculating the issue price of the bonds is to multiply the face value by the table value for a. 20 periods and 4% from the present value of 1 table b. 10 periods and 8% from the present value of 1 table c. 10 periods and 6% from the present value of 1 table d. 20 periods and 3% from the present value of 1 table

d. 20 periods and 3% from the present value of 1 table

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? a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. b. The balance of mortgage payable will remain a constant amount over the 10-year period. c. The amount of interest expense will remain constant over the 10-year period. d. 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.

d. 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.

When a note is exchanged for property in a bargained transaction, the stated interest rate is presumed to be fair unless: a. the stated interest rate is unreasonable. b. the stated face amount of the note is materially different from the current cash sales price for similar items. c. no interest rate is stated. d. all of these answer choices are correct.

d. all of these answer choices are correct.

If a bond sold at 97, the market rate was: a. equal to the coupon rate. b. less than the stated rate. c. equal to the stated rate. d. greater than the stated rate.

d. greater than the stated rate.

Under the effective interest method, interest expense: a. always increases each period the bonds are outstanding. b. always decreases each period the bonds are outstanding. c. is the same annual amount as straight-line interest expense in the earlier years. d. is the same total amount as straight-line interest expense over the term of the bonds.

d. is the same total amount as straight-line interest expense over the term of the bonds.