Bonds and Long Term Liabilities PDF

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Discussions and notes of bonds and long-term liabilities....

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Chapter 14 Bonds and Long-Term Notes True/False Questions 1. The specific provisions of a bond issue are described in a document called a bond indenture. Answer: True Learning Objective: 1

Level of Learning: 1

2. Bonds will sell for a premium when the market rate of interest exceeds their stated rate. Answer: False Learning Objective: 2

Level of Learning: 1

3. Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period. Answer: False Learning Objective: 1

Level of Learning: 1

4. The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation. Answer: False Learning Objective: 2

Level of Learning: 1

5. Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow. Answer: False Learning Objective: 2

Level of Learning: 1

6. Premium on bonds payable is a contra liability account. Answer: False Learning Objective: 2

Level of Learning: 1

7. The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized. Answer: True Learning Objective: 1

Level of Learning: 1

8. Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants. Answer: True Learning Objective: 1

Level of Learning: 2

9. An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest. Answer: True Learning Objective: 3

Level of Learning: 2

10. The interest on an installment note decreases with each periodic payment. Answer: True Learning Objective: 3

Level of Learning: 2

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

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Chapter 14 Bonds and Long-Term Notes Matching Pair Questions Use the following to answer questions 11-15: 11-15. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Bond indenture B. Call feature C. Gain on extinguishment D. Implicit rate of interest E. Interest expense F. Interest fund G. Loss on extinguishment H. Mortgage bond I. Sinking fund J. Subordinated debenture Phrases: 11. ____ Used when the rate is not stated or is materially different from the market rate. 12. ____ Used by a trustee to repurchase bonds in the open market. 13. ____ Conceptually equal to effective rate times balance. 14. ____ Secured by real property. 15. ____ Promises made to bondholders. Answer: 11-D; 12-I; 13-E; 14-H; 15-A Use the following to answer questions 16-20: 16-20. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Bond indenture B. Call feature C. Default risk D. Gain on extinguishment E. Implicit rate of interest F. Interest expense G. Loss on extinguishment H. Mortgage bond I. Stock warrant J. Subordinated debt Phrases: 16. ____ Protects debt issuer if rates fall. 17. ____ The amount by which the reacquisition price of debt exceeds carrying value 18. ____ Possibility of debt dishonor. 19. ____ Other debts have superior claims. 20. ____ Right of an investor to purchase a specific number shares at a fixed price. Answer: 16-B; 17-G; 18-C; 19-J; 20-I 50

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 14 Bonds and Long-Term Notes Use the following to answer questions 21-25: 21-25. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Convertible bonds B. Coupon bonds C. Debenture bond D. Debt service ratio E. Debt to equity ratio F. Default to interest ratio G. Installment notes H. Nameless notes I. Serial bonds J. Times interest earned ratio Phrases: 21. ____ No specific assets pledged. 22. ____ Name of owner not registered. 23. ____ Measures default risk. 24. ____ Measures ability to service debt. 25. ____ May become stock. Answer: 21-C; 22-B; 23-E; 24-J: 25-A Use the following to answer questions 26-30: 26-30. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Convertible bonds B. Coupon bonds C. Debenture bond D. Debt issue costs E. Discount on bonds F. Installment notes G. Maturity bonds H. Premium on bonds I. Profession notes J. Serial bonds Phrases: 26. ____ Market rate less than stated rate. 27. ____ Market rate higher than stated rate. 28. ____ No maturity payment. 29. ____ Legal, accounting, printing. 30. ____ Many separate maturity dates. Answer: 26-H; 27-E; 28-F; 29-D; 30-J Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

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Chapter 14 Bonds and Long-Term Notes Use the following to answer questions 31-35: 31-35. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Bond price B. Book value method C. Convertible stocks D. Effective interest method E. Induced conversion F. Market value method G. Straight-line method H. Troubled debt restructuring I. Warrants J. Zero-coupon bonds Phrases: 31. ____ Requires(s) no cash outflow before maturity. 32. ____ Often traded separately from associated bonds. 33. ____ A practical expediency when not misleading. 34. ____ Additional consideration is recorded as an expense. 35. ____ No gain or loss recorded when convertible bond option is exercised. Answer: 31-J; 32-I; 33-G; 34-E; 35-B Multiple Choice Questions 36. In each succeeding payment on an installment note: A) The amount of interest paid increases. B) The amount of principal reduction increases. C) The amount of interest paid is unchanged. D) The amounts paid for both interest and principal increase proportionately. Answer: B Learning Objective: 3

Level of Learning: 1

37. Interest expense is: A) The effective interest rate times the amount of the debt outstanding during the interest period. B) The stated interest rate times the amount of the debt outstanding during the interest period. C) The effective interest rate times the face amount of the debt. D) The stated interest rate times the face amount of the debt. Answer: A Learning Objective: 1

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Level of Learning: 1

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 14 Bonds and Long-Term Notes 38. Ordinarily, the proceeds from the sale of a bond issue will be equal to: A) The face amount of the bond. B) The total of the face amount plus all interest payments. C) The present value of the face amount plus the present value of the stream of interest payments. D) The face amount of the bond plus the present value of the stream of interest payments. Answer: C Learning Objective: 2

Level of Learning: 2

39. The interest rate that is printed on the bond certificate always is the same as each of the following except one, which is: A) Stated rate. B) Contract rate. C) Nominal rate. D) Effective rate. Answer: D Learning Objective: 1

Level of Learning: 1

40. In theory (disregarding other marketplace variables), bonds should sell for their: A) Maturity value. B) Face value. C) Present value. D) Statistical expected value Answer: C Learning Objective: 2

Level of Learning: 1

41. Most corporate bonds are: A) Mortgage bonds. B) Debenture bonds. C) Secured bonds. D) Collateral bonds. Answer: B Learning Objective: 1

Level of Learning: 1

42. The method used to pay interest depends on whether the bonds are: A) Registered or coupon. B) Mortgaged or unmortgaged. C) Indentured or debentured. D) Callable or redeemable. Answer: A Learning Objective: 1

Level of Learning: 2

43. To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on: A) Bond ratings provided by financial investment services such as Moody's. B) Newspaper articles. C) Bond interest payments. D) The company's audit report. Answer: A Learning Objective: 4

Level of Learning: 2

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

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Chapter 14 Bonds and Long-Term Notes 44. Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond carrying value, respectively? A) Understated, understated. B) Understated, overstated. C) Overstated, understated. D) Overstated, overstated. Answer: D Learning Objective: 2

Level of Learning: 2

45. The rate of interest expense that is actually incurred on a bond payable is called the: A) Face rate. B) Contract rate. C) Effective rate. D) Stated rate. Answer: C Learning Objective: 1

Level of Learning: 1

46. Which of the following indicates the margin of safety provided to creditors? A) Rate of return on shareholders' equity. B) Times interest earned ratio. C) Gross margin. D) Debt to equity ratio. Answer: B Learning Objective: 4

Level of Learning: 1

47. A $500,000 bond issue sold for 98.Therefore, the bonds: A) Sold at a discount because the stated rate of interest was lower than the effective rate. B) Sold for the $500,000 face amount less $10,000 of accrued interest. C) Sold at a premium because the stated rate of interest was higher than the yield rate. D) Sold at a discount because the effective interest rate was lower than the face rate. Answer: A Learning Objective: 2

Level of Learning: 2

48. Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and they each pay interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct? A) Both bonds will sell for the same amount. B) Both bonds will sell for more than $100,000. C) Bond X will sell for more than bond Y. D) Bond Y will sell for more than bond X. Answer: A Learning Objective: 2

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Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 14 Bonds and Long-Term Notes 49. Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and each pay mature in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct? A) Both bonds will sell for the same amount. B) Both X will sell for more than bond Y. C) Both Y will sell for more than bond X. D) Both bonds will sell at a discount. Answer: C Learning Objective: 2

Level of Learning: 3

50. Straight-line amortization of bond discount or premium: A) Can be used for amortization of discount or premium in all cases and circumstances. B) Provides the same amount of interest expense each period as does the effective interest method. C) Is appropriate for deep discount bonds. D) Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method. Answer: D Learning Objective: 3

Level of Learning: 1

51. Bonds payable should be reported as a long-term liability on the balance sheet of the issuing corporation at: A) Face value price less any unamortized discount or plus any unamortized premium. B) Current bond market price. C) Face value less any unamortized premium or plus any unamortized discount. D) Face value less accrued interest since the last interest payment date. Answer: A Learning Objective: 4

Level of Learning: 1

52. The unamortized balance of discount on bonds payable is reported on the balance sheet as: A) A prepaid expense. B) An expense account. C) A current liability. D) A contra-liability. Answer: D Learning Objective: 4

Level of Learning: 1

53. When the interest payment dates are March 1 and September 1, and the notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would: A) Not be required. B) Be for six months. C) Be for four months. D) Be for ten months. Answer: C Learning Objective: 3

Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

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Chapter 14 Bonds and Long-Term Notes 54. When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported on the December 31 income statement for the year of issue would be for: A) Six months. B) Four months. C) Ten months. D) Twelve months. Answer: A Learning Objective: 2

Level of Learning: 3

55. How would the carrying value of bonds payable be affected by the amortization of each of the following? Premium Discount A) No effect No effect B) No effect Increase C) Increase Decrease Decrease Increase D) Answer: D Learning Objective: 2

Level of Learning: 3

56. For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds were sold at a: Discount Premium A) No No B) No Yes C) Yes Yes D) Yes No Answer: A Learning Objective: 2

Level of Learning: 2

57. For a bond issue that sells for more than the bond face amount, the effective interest rate is: A) The rate printed on the face of the bond. B) The Wall Street Journal prime rate. C) More than the rate stated on the face of the bond. D) Less than the rate stated on the face of the bond. Answer: D Learning Objective: 2

Level of Learning: 2

58. When outstanding bonds are converted into common stock, under either the book value method or the market method, the same amount would be debited to: Bonds Payable Bond Premium A) Yes Yes B) No Yes C) No No D) Yes No Answer: A Learning Objective: 2

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Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 14 Bonds and Long-Term Notes 59. Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financial statements, the discount should be: A) Deducted from bonds payable. B) Added to bonds payable. C) Included as an expense in the year of issue. D) Reported as a deferred charge. Answer: A Learning Objective: 2

Level of Learning: 3

60. Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financial statements, the premium should be: A) Reported as an intangible asset. B) Included in revenue for the year of sale. C) Deducted from bonds payable. D) Added to bonds payable. Answer: D Learning Objective: 2

Level of Learning: 3

61. When bonds are sold at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) Less than the effective interest. B) Equal to the effective interest. C) Greater than the effective interest. D) More than if the bonds had been sold at a discount. Answer: C Learning Objective: 2

Level of Learning: 2

62. When bonds are sold at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) More than the effective interest. B) Less than the effective interest. C) Equal to the effective interest. D) More than if the bonds had been sold at a premium. Answer: B Learning Objective: 2

Level of Learning: 2

63. When bonds are sold at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense: A) Increases. B) Decreases. C) Remains the same. D) Is equal to the change in book value. Answer: A Learning Objective: 2

Level of Learning: 2

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

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Chapter 14 Bonds and Long-Term Notes 64. When bonds are sold at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense: A) Remains constant. B) Is equal to the change in book value. C) Increases. D) Decreases. Answer: D Learning Objective: 2

Level of Learning: 2

65. When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, one would find that the annual amount of the straight-line amortization of discount is: A) Higher than the effective interest amount every year. B) Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. C) Less than the effective interest amount in the early years and more than the effective interest amount in the later years. D) Less than the effective interest amount every year. Answer: B Learning Objective: 2

Level of Learning: 2

66. When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, one would find that the annual amount of the straight-line amortization of premium is: A) Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. B) Less than the effective interest amount in the early years and more than the effective interest amount in the later years. C) Higher than the effective interest amount every year. D) Less than the effective interest amount every year. Answer: A Learning Objective: 2

Level of Learning: 2

67. When bonds are retired prior to their maturity date: A) GAAP has been violated. B) The issuing company probably will report an ordinary gain or loss. C) The issuing company probably will report an extraordinary gain or loss. D) The issuing company will report a non-operating gain or loss. Answer: B Learning Objective: 5

Level of Learning: 2

68. When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue? A) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values. B) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values. C) A nominal amount is allocated to the warrants. D) All of the proceeds are allocated to the bonds. Answer: A Learning Objective: 1 58

Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition

Chapter 14 Bonds and Long-Term Notes 69. When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is: A) The invoice price. B) The wholesale price. C) The present value of cash outflows discounted at the stated rate. D) The present value of the note payments discounted at the market rate. Answer: D Learning Objective: 3

Level of Learning: 3

70. When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes: A) Is treated as a...