Question 1

Which of the following statements is true?

Accepted Answer

A)  The carrying amount of the bonds will increase each year if the bonds were issued at a discount. 
B)  The carrying amount of the bonds will increase each year if the bonds were issued at a premium. 
C)  Total interest expense will increase each year if the bonds are issued at a discount and the straight-line method of amortization is used. 
D)  Total interest expense will increase each year if the bonds are issued at a premium and the effective interest method of amortization is used.

Question 2

A bond liability can be extinguished so that the issuing company is legally released from being the primary obligor of the liability. This process is referred to as

Accepted Answer

A)  early retirement. 
B)  bond guarantee. 
C)  defeasance. 
D)  debt restructuring.

Question 3

The assumption of a stable interest expense per year is inherent under which of the following amortization methods?

Accepted Answer

A)  present-value method 
B)  effective interest method 
C)  stated-interest method 
D)  straight-line method

Question 4

Companies report cash flows associated with long term liability transactions in the investing section of the statement of cash flows, because the money was an investment in the future of the company.

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 14-7
Magenta Corporation issued $500,000 of its 6%, 10-year bonds, dated January 1, 2016, at face value plus accrued interest on September 1, 2016. Interest is paid on June 30 and December 31. Magenta uses the most common method to record the sale of the bonds between interest payment periods.
-Refer to Exhibit 14-7. The entry to record the sale would include a

Accepted Answer

A)  debit to Interest Expense for $20,000. 
B)  debit to Cash for $505,000. 
C)  credit to Bonds Payable for $520,000. 
D)  credit to Interest Expense for $20,000.

Question 6

Eatsy Corp. owes Hardy, Inc., $30,000 on a note payable, plus $1,800 interest. Hardy agrees to accept 400 shares of Eatsy common stock in full settlement of the debt. Eatsy stock has a par value of $10 and a current market value of
$70 per share. As a result of the debt restructuring, Eatsy Corp. should record an

Accepted Answer

A)  ordinary loss of $1,800. 
B)  extraordinary gain of $1,800. 
C)  ordinary gain of $3,800. 
D)  extraordinary gain of $3,800.

Question 7

On December 31, 2013, Manny Ltd. owes Stew Corp. $50,000 on a 10% note payable. Two years of interest is also unpaid and due. Manny cannot pay off the debt. Stew agrees to reduce the principal amount to $30,000, forgive the accrued interest owed, extend the due date to December 31, 2016, and reduce the interest rate to 5% per year for the extended period. What amount of gain on restructuring should Manny record?

Accepted Answer

A)  $25,500 
B)  $21,000 
C)  $20,000 
D)  $11,000

Question 8

A $700,000, 20-year, 8% bond issue was sold to yield 10%. Interest was payable annually. Actuarial information for
20 periods follows:  Required:
Compute the amount of cash that was received when the bonds were issued.

Accepted Answer

The answer of A $700,000, 20-year, 8% bond issue was...

Question 9

On April 1, 2016, Quicke Mart issued $1,000,000, 9% bonds at par plus accrued interest dated January 1, 2014.
Interest is payable semi-annually on January 1 and July 1. The bonds mature on January 1, 2023.
Requirements
Prepare journal entries to record the following transactions related to long-term bonds of Quicke Mart:
1) The issuance of the bonds.
2) The first interest payments.

Accepted Answer

The answer of On April 1, 2016, Quicke Mart issued...

Question 10

Exhibit 14-1
A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: 
-Refer to Exhibit 14-1. The discount at the date of bond issuance would be

Accepted Answer

A)  $2. 
B)  $7,019. 
C)  $12,235. 
D)  $19,253.

Question 11

Premium on Bonds Payable is a contra asset account.

Accepted Answer

A) True 
 B)False

Question 12

What are advantages and disadvantages of issuing long term debt?

Accepted Answer

The answer of What are advantages and disadvantages of issuing...

Question 13

Exhibit 14-6
Jones Corporation issued $400,000 of its 8%, 10-year bonds, dated January 1, 2016, at face value plus accrued interest on May 1, 2016. Interest is paid on January 1 and July 1. Jones uses the most common method to record the sale of the bonds between interest payment periods.
-Refer to Exhibit 14-6. The entry to record the payment of interest on July 1, 2016, would include a

Accepted Answer

A)  credit to Bond Interest Expense for $10,667. 
B)  debit to Premium on Bonds Payable for $154. 
C)  credit to Cash for $16,000. 
D)  debit to Bond Interest Payable for $16,000.

Question 14

What is the difference between the straight line method and the effective interest method of amortization of bond discount/premium? Which method is more commonly utilized? Why?

Accepted Answer

The answer of What is the difference between the straight...

Question 15

If a company is having trouble paying its obligations, a modification of terms can be granted in the form of interest rate reduction, maturity date extension, and/or a reduction in the amount owed.

Accepted Answer

A) True 
 B)False

Question 16

How do the classification requirements of IFRS for instruments as financial liabilities versus equity differ from those of GAAP?

Accepted Answer

The answer of How do the classification requirements of IFRS...

Question 17

Exhibit 14-16
Harry's Inc. issued a four-year, $75,000, non-interest-bearing note to a customer on January 1, 2016. Harry also agrees to sell inventory to the customer at reduced rates over a five-year period. Sales are to be evenly spread over the five-year period. Harry's incremental interest rate is 8%, and the present value of the note is $55,125.
-Refer to Exhibit 14-16. If the face value of a note is materially different from the cash sales price of the property it was exchanged for, and the note is recorded at its present value, the correct interest rate to use is the

Accepted Answer

A)  borrower's incremental rate. 
B)  note's stated interest rate. 
C)  the effective interest rate. 
D)  note's implied interest rate.

Question 18

Bond interest expense is calculated as the stated rate times the carrying value of the bonds.

Accepted Answer

A) True 
 B)False

Question 19

Serial bonds come due in installments in periodic future dates.

Accepted Answer

A) True 
 B)False

Question 20

When the conversion of bonds payable to common stock is recorded under the book value method and the par value of the common stock exceeds the book value of the bonds, the difference is recorded as a

Accepted Answer

A)  debit to Retained Earnings. 
B)  debit to Loss on Conversion. 
C)  debit to Additional Paid-in Capital−Common Stock. 
D)  debit to Discount on Bonds Payable.

Exam 14: Financing Liabilities: Bonds and Long-Term Notes Payable

Which of the following statements is true?

A bond liability can be extinguished so that the issuing company is legally released from being the primary obligor of the liability. This process is referred to as

The assumption of a stable interest expense per year is inherent under which of the following amortization methods?

Companies report cash flows associated with long term liability transactions in the investing section of the statement of cash flows, because the money was an investment in the future of the company.

A $700,000, 20-year, 8% bond issue was sold to yield 10%. Interest was payable annually. Actuarial information for 20 periods follows: Required: Compute the amount of cash that was received when the bonds were issued.

Exhibit 14-1 A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10 periods is as follows: -Refer to Exhibit 14-1. The discount at the date of bond issuance would be

Premium on Bonds Payable is a contra asset account.

What are advantages and disadvantages of issuing long term debt?

What is the difference between the straight line method and the effective interest method of amortization of bond discount/premium? Which method is more commonly utilized? Why?

If a company is having trouble paying its obligations, a modification of terms can be granted in the form of interest rate reduction, maturity date extension, and/or a reduction in the amount owed.

How do the classification requirements of IFRS for instruments as financial liabilities versus equity differ from those of GAAP?

Bond interest expense is calculated as the stated rate times the carrying value of the bonds.

Serial bonds come due in installments in periodic future dates.

When the conversion of bonds payable to common stock is recorded under the book value method and the par value of the common stock exceeds the book value of the bonds, the difference is recorded as a