Question 1

Debt issue costs on long-term debt are expensed upon issue.

Accepted Answer

A) True 
 B)False

Question 2

In-substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt.In such situations,the debt is always recorded as paid when the trust fund is set up (i.e.removed from the books).

Accepted Answer

A) True 
 B)False

Question 3

Interest may be recognized on a note even though the note does not explicitly state an interest rate.

Accepted Answer

A) True 
 B)False

Question 4

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 5

Gains or losses from the early extinguishment of debt,if material,should be:

Accepted Answer

A)  recognized in income as ordinary gains and losses or as unusual items. 
B)  recognized as an extraordinary item in the period of extinguishment. 
C)  amortized over the remaining original life of the extinguished issue. 
D)  amortized over the life of the new issue. 
A)  recognized in income as ordinary gains and losses or as unusual items. 
B)  recognized as an extraordinary item in the period of extinguishment. 
C)  amortized over the remaining original life of the extinguished issue. 
D)  amortized over the life of the new issue.

Question 6

When the interest payment dates of a bond are May 31 and November 30,and a bond issue is sold on July 1,the amount of cash received by the issuer will be:

Accepted Answer

A)  Decreased by accrued interest from July 1 to November 30. 
B)  Decreased by accrued interest from May 31 to July 1. 
C)  Increased by accrued interest from May 31 to July 1. 
D)  Increased by accrued interest from July 1 to November 30. 
E)  Unaffected by accrued interest. 
A)  Decreased by accrued interest from July 1 to November 30. 
B)  Decreased by accrued interest from May 31 to July 1. 
C)  Increased by accrued interest from May 31 to July 1. 
D)  Increased by accrued interest from July 1 to November 30. 
E)  Unaffected by accrued interest.

Question 7

Assume that a company issues bonds at a discount.Under the effective interest method,the company will record progressively less interest expense with the passage of time.

Accepted Answer

A) True 
 B)False

Question 8

On January 1,2014,ER signed a $120,000,10%,three-year,note payable.The proceeds are to be used to purchase a computer and related software for the company.The lending institution advanced proceeds of $115,800 and took a mortgage on the computer.The note is payable in three equal annual instalments starting on December 31,2014.The effective interest rate to use for this debt is (rounded to the nearest percent; do not interpolate):

Accepted Answer

A)  10%. 
B)  11%. 
C)  12%. 
D)  13%. 
A)  10%. 
B)  11%. 
C)  12%. 
D)  13%.

Question 9

On January 1,1999,a company incurred a debt of $11,663,which is payable in four equal annual instalments of $3,600,starting on December 31,1999.
(a)The implicit interest rate is _________% (rounded to the nearest percent).
(b)Give the journal entry to record the second annual payment (on December 31,2000).

Accepted Answer

(a)Implicit interest rate: 9%

Question 10

A firm retired a long-term note by in-substance defeasance.This means that:

Accepted Answer

A)  the creditors have been paid. 
B)  the debtor has been released of its legal responsibility for all remaining debt payments. 
C)  there is only a remote chance that the debtor will be required to make further payments on the liability. 
D)  the debt is shown as an offset against the assets used to retire the debt, in the debtor's balance sheet. 
E)  the debtor will continue to recognize interest expense on the debt but will make no more payments. 
A)  the creditors have been paid. 
B)  the debtor has been released of its legal responsibility for all remaining debt payments. 
C)  there is only a remote chance that the debtor will be required to make further payments on the liability. 
D)  the debt is shown as an offset against the assets used to retire the debt, in the debtor's balance sheet. 
E)  the debtor will continue to recognize interest expense on the debt but will make no more payments.

Question 11

If a bond was sold at $108,the stated rate of interest was:

Accepted Answer

A)  Equal to market rate. 
B)  Not related to market rate. 
C)  Higher than market rate. 
D)  Lower than market rate. 
A)  Equal to market rate. 
B)  Not related to market rate. 
C)  Higher than market rate. 
D)  Lower than market rate.

Question 12

$5,000 (face value)of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest)paid to retire the bonds was $4,700.The entry to record the retirement would include:

Accepted Answer

A)  dr. bonds payable $5,000 
B)  cr. cash $4,300 
C)  dr. bonds payable $4,700 
D)  cr. unusual gain $400 
A)  dr. bonds payable $5,000 
B)  cr. cash $4,300 
C)  dr. bonds payable $4,700 
D)  cr. unusual gain $400

Question 13

VB owes a $200,000,8%,five-year note payable dated January 1,2020.It is the end of year 2020,and instead of making the interest payment now due,VB has made arrangements to pay the debt and the 2020 interest payment in four equal instalments based on the same interest rate.The first payment is to be made on January 1,2021.The amount of the equal annual payments is (rounded to the nearest dollar):

Accepted Answer

A)  $54,000 
B)  $60,384 
C)  $55,912 
D)  $65,214 
A)  $54,000 
B)  $60,384 
C)  $55,912 
D)  $65,214

Question 14

A firm issued a 16%,$1,000 bond issued and dated Jan.1/2000 maturing Jan.1,2011 paying interest each June 30 and December 31,and yielding 14%.One bond is used for simplicity.
Required:
(a)Determine the price of the bond
(b)All Year 2000 entries and balance sheet presentations for the bond after each interest date in Year
A. Show the interest method and straight-line methods in parallel fashion.     Balance sheet disclosure Jan. 1/00 (both methods)     77.42 = $1,105.94(.07) 5.30 = $105.94/20
Balance sheet disclosure June 30/00     77.24 = $1,103.36(.07) 5.30 = $105.94/20
Balance sheet disclosure Dec. 31/00

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Balance sheet disclosure Jan.1/00 (bot

Question 15

On March 1,2002,the Shrivastava Company issued bonds dated January 2,2002 with the following characteristics:
Face value $20,000,000
Coupon rate 7.6%
Yield to maturity 8%
Coupon payment dates June 30,Dec.31
Maturity 15 years
The Shrivastava Company's year-end is December 31.
Required:
a.Assuming the Shrivastava Company uses the effective interest method,
i.Prepare all journal entries relating to this bond issue for the year 2002.
ii.Assume that on July 2,2008; the company redeems one half of the bond issue on the open market at 98.Prepare the journal entry on July 2,2008.
b.Repeat the above requirements on the assumption the straight-line method is used.

Accepted Answer

N.B: The solution below does not use a s

Question 16

In theory (disregarding any other marketplace variables)the proceeds from the sale of a bond will be equal to:

Accepted Answer

A)  The face amount of the bond plus the present value of the interest payments made during the life of the bond discounted at the prevailing market rate of interest. 
B)  The sum of the face amount of the bond and the periodic interest payments. 
C)  The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the stated rate of interest. 
D)  The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest. 
A)  The face amount of the bond plus the present value of the interest payments made during the life of the bond discounted at the prevailing market rate of interest. 
B)  The sum of the face amount of the bond and the periodic interest payments. 
C)  The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the stated rate of interest. 
D)  The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest.

Question 17

Which of the following is not one of the conditions that must be met to qualify as extinguishment of debt by in-substance defeasance?

Accepted Answer

A)  Trust must own monetary assets that are essentially risk free. 
B)  Cash inflows into the trust must approximately coincide with required cash outflows. 
C)  There is a reasonable possibility that the debtor will be called on to make additional payments on the debt. 
D)  The qualifying assets must not be used for trustee fees. 
A)  Trust must own monetary assets that are essentially risk free. 
B)  Cash inflows into the trust must approximately coincide with required cash outflows. 
C)  There is a reasonable possibility that the debtor will be called on to make additional payments on the debt. 
D)  The qualifying assets must not be used for trustee fees.

Question 18

Under the effective interest method,interest expense is calculated by multiplying the market interest rate by the carrying value of the bonds.

Accepted Answer

A) True 
 B)False

Question 19

The present value of any bond payable issued between interest-payment dates will include any interest accrued since the last interest payment date.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is true?

Accepted Answer

A)  If a bond is sold "at a discount," the effective interest rate on the bond is lower than the stated interest rate. 
B)  If a bond is sold between interest dates, it is necessary to record the interest accrued since the last payment date before sale. 
C)  If a bond is sold "at a premium," the effective interest rate on the bond is higher than the stated interest rate. 
D)  Bond price of 98 means that the yield rate is 98% of the stated rate. 
A)  If a bond is sold "at a discount," the effective interest rate on the bond is lower than the stated interest rate. 
B)  If a bond is sold between interest dates, it is necessary to record the interest accrued since the last payment date before sale. 
C)  If a bond is sold "at a premium," the effective interest rate on the bond is higher than the stated interest rate. 
D)  Bond price of 98 means that the yield rate is 98% of the stated rate.

Debt issue costs on long-term debt are expensed upon issue.

In-substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt.In such situations,the debt is always recorded as paid when the trust fund is set up (i.e.removed from the books).

Interest may be recognized on a note even though the note does not explicitly state an interest rate.

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Gains or losses from the early extinguishment of debt,if material,should be:

When the interest payment dates of a bond are May 31 and November 30,and a bond issue is sold on July 1,the amount of cash received by the issuer will be:

Assume that a company issues bonds at a discount.Under the effective interest method,the company will record progressively less interest expense with the passage of time.

A firm retired a long-term note by in-substance defeasance.This means that:

If a bond was sold at $108,the stated rate of interest was:

$5,000 (face value)of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest)paid to retire the bonds was $4,700.The entry to record the retirement would include:

In theory (disregarding any other marketplace variables)the proceeds from the sale of a bond will be equal to:

Which of the following is not one of the conditions that must be met to qualify as extinguishment of debt by in-substance defeasance?

Under the effective interest method,interest expense is calculated by multiplying the market interest rate by the carrying value of the bonds.

The present value of any bond payable issued between interest-payment dates will include any interest accrued since the last interest payment date.

Which of the following statements is true?

The Framework for Financial Reporting

Statements of Income and Comprehensive Income

Statements of Financial Position and Changes in Equity; Disclosure Notes

The Statement of Cash Flows

Revenue Recognition

Financial Assets: Cash and Receivables

Cost-Based Inventories and Cost of Sales

Long-Lived Assets

Depreciation, Amortization, and Impairment

Financial Instruments: Investments in Bonds and Equity Securities

Filters

Exam 2: Accounting Judgements

Debt issue costs on long-term debt are expensed upon issue.

In-substance defeasance means that a debtor irrevocably places cash or other monetary assets in a trust fund to pay interest on an outstanding debt.In such situations,the debt is always recorded as paid when the trust fund is set up (i.e.removed from the books).

Interest may be recognized on a note even though the note does not explicitly state an interest rate.

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Gains or losses from the early extinguishment of debt,if material,should be:

When the interest payment dates of a bond are May 31 and November 30,and a bond issue is sold on July 1,the amount of cash received by the issuer will be:

Assume that a company issues bonds at a discount.Under the effective interest method,the company will record progressively less interest expense with the passage of time.

A firm retired a long-term note by in-substance defeasance.This means that:

If a bond was sold at $108,the stated rate of interest was:

$5,000 (face value)of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest)paid to retire the bonds was $4,700.The entry to record the retirement would include:

In theory (disregarding any other marketplace variables)the proceeds from the sale of a bond will be equal to:

Which of the following is not one of the conditions that must be met to qualify as extinguishment of debt by in-substance defeasance?

Under the effective interest method,interest expense is calculated by multiplying the market interest rate by the carrying value of the bonds.

The present value of any bond payable issued between interest-payment dates will include any interest accrued since the last interest payment date.

Which of the following statements is true?

The Framework for Financial Reporting

Statements of Income and Comprehensive Income

Statements of Financial Position and Changes in Equity; Disclosure Notes

The Statement of Cash Flows

Revenue Recognition

Financial Assets: Cash and Receivables

Cost-Based Inventories and Cost of Sales

Long-Lived Assets

Depreciation, Amortization, and Impairment

Financial Instruments: Investments in Bonds and Equity Securities

Filters