Ch 14 - test bank ch 14 PDF

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CHAPTER 14LONG-TERM LIABILITIESIFRS questions are available at the end of this chapter.TRUE-FALSE—ConceptualAnswer No. DescriptionT 1. Bond interest payments. F 2. Debenture bonds. T 3. Definition of serial bonds. F 4. Market rate vs. coupon rate. F 5. Definition of stated interest rate. T 6. Stated...

Description

CHAPTER 14 LONG-TERM LIABILITIES IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual Answer T F T F F T F F F T T F T T T T F F F F

No.

Description

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. *19. *20.

Bond interest payments. Debenture bonds. Definition of serial bonds. Market rate vs. coupon rate. Definition of stated interest rate. Stated rate and coupon rate. Amortization of premium and discount. Issuance of bonds. Interest paid vs. interest expense. Reporting bond discounts. Refunding of bond issue. Long-term notes payable. Variable-rate mortgages. Definition of unrealized holding gain/loss. Off-balance-sheet financing. Debt to assets ratio. Refinancing long-term debt. Times interest earned. Loss recognized on impaired loan. Gain/loss in troubled debt restructuring.

No.

Description

21. 22. 23. P 24. S 25. S 26. S 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38.

Liability identification. Bond terms. Definition of "debenture bonds." Definition of bearer bonds. Definition of income bonds. Effective-interest vs. straight-line method. Interest rate of the bond indenture. Rate of interest earned by the bondholders. Calculating the issue price of bonds. Calculating the issue price of bonds. Premium and interest rates. Interest and discount amortization. Effective-interest amortization method. Impact of effective-interest method. Recording bonds issued between interest dates. Bonds issued at other than an interest date. Classification of premium on bonds payable. Computing bond interest paid.

MULTIPLE CHOICE—Conceptual Answer a a b a d a d d d d b a d d c d d c

14 - 2

Test Bank for Intermediate Accounting, Sixteenth Edition

MULTIPLE CHOICE—Conceptual (cont.) Answer b d d c c a d d c a c d d d c c c d b b c

No.

Description

39. 40. 41. P 42. P 43. S 44. 45. 46. 47. 48. S 49. S 50. 51. 52. 53. 54. *55. *56. *57. *58. *59.

Face value of bonds. Early extinguishment of bonds payable. Gain or loss on extinguishment of debt. In-substance defeasance. Reporting long-term debt. Debt instrument exchanged for property. Stated interest rate of note. Creditworthiness of a company. Accounting for the fair value option. Project financing arrangement. Off-balance-sheet financing. Long-term debt maturing within one year. Required bond disclosures. Long-term debt disclosures. Times interest earned. Debt to assets ratio. Modification of terms in debt restructure. Gain/loss on troubled debt restructuring. Gain/loss on troubled debt restructuring. Interest and troubled debt restructuring. Creditor's calculations for modification of terms.

P

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. * This topic is dealt with in an Appendix to the chapter. S

MULTIPLE CHOICE—Computational Answer a b a c c c c c a d d c a d d b c d a

No. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.

Description Calculate the present value of bond principal. Calculate the present value of bond interest. Determine the issue price of bonds. Proceeds from bond issuance. Bonds issued between interest dates. Proceeds from bond issuance. Bonds issued between interest dates. Effective-interest method interest expense. Effective-interest method carrying value. Straight-line method carrying value. Straight-line amortization/interest expense. Effective-interest method interest expense. Effective-interest method carrying value. Straight-line method carrying value. Straight-line method amortization/interest expense. Interest expense using effective-interest method. Interest expense using effective-interest method. Entry to record issuance of bonds. Calculate bond interest expense.

Long-Term Liabilities 14 - 3

MULTIPLE CHOICE—Computational (cont.) Answer b c b b b c b b b c c b b b b b b a c b d a c d b d a

No. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. *103. *104. *105.

Description Entry to record issuance of bonds. Calculate bond interest expense. Calculate interest expense for two periods. Calculate unamortized bond discount balance. Calculate unamortized bond premium balance. Calculate interest expense for two periods. Entry to record bond redemption. Entry to record bond redemption. Calculate loss on bond redemption. Calculate loss on bond redemption. Calculate gain on retirement of bonds. Calculate gain on retirement of bonds. Calculate loss on retirement of bonds. Bond retirement with call premium. Calculate loss on retirement of bonds. Early extinguishment of debt. Early extinguishment of debt. Interest on noninterest-bearing note. Interest on installment note payable. Determine balance of discount on notes payable. Calculate times interest earned. Calculate times interest earned. Calculate income before taxes with times interest earned. Determine total long-term liabilities. Transfer of equipment in debt settlement. Recognizing gain on debt restructure. Interest and troubled debt restructuring.

MULTIPLE CHOICE—CPA Adapted Answer a b a c a d d c c c d

No. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. *116.

Description Determine proceeds from bond issue. Determine unamortized bond premium. Determine unamortized bond discount. Calculate bond interest expense. Calculate loss on retirement of bonds. Calculate loss on retirement of bonds. Calculate gain on retirement of bonds. Determine carrying value of bonds to be retired. Carrying value of bonds with call provision. Classification of gain from debt refunding. Classification of gain from troubled debt restructuring.

14 - 4

Test Bank for Intermediate Accounting, Sixteenth Edition

BRIEF EXERCISES Item

Description

BE14-117 BE14-118 BE14-119

Terms related to long-term debt. Bond issue price and premium amortization. Amortization of discount or premium.

Item E14-120 E14-121 E14-122 *E14-123 *E14-124 *E14-125

Description Entries for bonds payable. Retirement of bonds. Early extinguishment of debt. Accounting for a troubled debt settlement. Accounting for troubled debt restructuring. Accounting for troubled debt.

EXERCISES

PROBLEMS Item P14-126 P14-127 P14-128 P14-129 P14-130 *P14-131

Description Bond discount amortization. Bond interest and discount amortization. Entries for bonds payable. Entries for bonds payable. Fair value option Accounting for a troubled debt restructuring.

CHAPTER LEARNING OBJECTIVES 1.

Describe the nature of bonds and indicate the accounting for bond issuances.

2.

Describe the accounting for the extinguishment of debt.

3.

Explain the accounting for long-term notes payable.

4.

Describe the accounting for the fair value option.

5.

Indicate how to present and analyze long-term debt.

*6. 7.

Describe the accounting for a debt restructuring. Compare the accounting procedures for long-term liabilities under GAAP and IFRS.

Long-Term Liabilities 14 - 5

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY LO

BT

Item

1. 2. 3. 4.

1 1 1 1

K K K K

5. 6. 7. 8.

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2

C K K K K C K K K K C C K C C C K K K C

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

2 2 3 3 3 4 4 5 5 5 5 5 5 5 6 6 6 6 6 1

K K C C K K C K K K K K K K C K C C C AP

1, 2,

K

118.

1

AP

Item

LO

BT

Item

LO

BT

Item

LO

BT

3 4 5 5

K K K AN AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

Item

LO

BT

17. 18. 19. 20.

5 5 6 6

C K K K

101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.

5 5 6 6 6 1 1 1 1 2 2 2 2 2 2 6

AN AP AP AP AP AP AP AP AP AP AP AP AP C C AP

TRUE-FALSE STATEMENTS 1 1 1 1

K K C K

9. 10. 11. 12.

1 1 2 3

C K K K

13. 14. 15. 16.

MULTIPLE CHOICE QUESTIONS 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.

BRIEF EXERCISES 117.

119.

1

AP

EXERCISES 120. 121.

1, 2 2

AP AP

122. 123.

2 6

AP AP

124. 125.

126. 127.

1 1

AP AP

128. 129.

1, 2 1,2

AP AP

130. 131.

6 6

AP K

PROBLEMS 4 6

AP AP

1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 3 5 5

14 - 6

Test Bank for Intermediate Accounting, Sixteenth Edition

TRUE FALSE—Conceptual 1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

2. A mortgage bond is referred to as a debenture bond. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

3. Bond issues that mature in installments are called serial bonds. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

4. If the market rate is greater than the coupon rate, bonds will be sold at a premium. Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

6. The stated rate is the same as the coupon rate. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense. Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

8. A bond may only be issued on an interest payment date. Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

9. The cash paid for interest will always be greater than interest expense when using effectiveinterest amortization for a bond. Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

10. Companies report bond discounts as a direct deduction from the face amount of the bond. Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

11. The replacement of an existing bond issue with a new one is called refunding. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

Long-Term Liabilities 14 - 7 13. The interest rate of variable-rate mortgages is tied to changes in the fluctuating market rate. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

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. Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

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. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

16. The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet. Ans: T, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, FSA, IFRS: None

17. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current. Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

18. The times interest earned is computed by dividing income before interest expense by interest expense. Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None

*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 undiscounted future cash flows from the loan. Ans: F, LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor. Ans: F, LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

True False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. T F T F F

Item 6. 7. 8. 9. 10.

Ans. T F F F T

Item 11. 12. 13. 14. 15.

Ans. T F T T T

Item 16. 17. 18. 19. 20.

Ans. T F F F F

14 - 8

Test Bank for Intermediate Accounting, Sixteenth Edition

MULTIPLE CHOICE—Conceptual 21.

An example of an item which is not a liability is a. dividends payable in stock. b. advances from customers on contracts. c. accrued estimated warranty costs. d. the portion of long-term debt due within one year.

Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

22.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a. bond indenture. b. bond debenture. c. registered bond. d. bond coupon.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

23.

The term used for bonds that are unsecured as to principal is a. mortgage bonds. b. debenture bonds. c. indenture bonds. d. callable bonds.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None P

24.

Bonds for which the owners' names are not registered with the issuing corporation are called a. bearer bonds. b. term bonds. c. debenture bonds. d. secured bonds.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S

25.

Bonds that pay no interest unless the issuing company is profitable are called a. collateral trust bonds. b. debenture bonds. c. revenue bonds. d. income bonds.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S

26.

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 a. greater than if the straight-line method were used. b. greater than the amount of the interest payments. c the same as if the straight-line method were used. d. less than if the straight-line method were used.

Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

Long-Term Liabilities 14 - 9 27.

The interest rate written in the terms of the bond indenture is known as the a. coupon rate. b. nominal rate. c. stated rate. d. coupon rate, nominal rate, or stated rate.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

28.

The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29.

One step in calculating the issue price of the bonds is to multiply the face value by the table value for a. 10 periods and 10% from the present value of 1 table. b. 20 periods and 5% from the present value of 1 table. c. 10 periods and 8% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 30.

Another step in calculating the issue price of the bonds is to a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. d. None of these answers is correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Moderate,...