Question 1

For bonds payable, the cash interest paid in each interest period is:

Accepted Answer

A)  Not the same amount when the stated and yield interest rates are different.
B)  Different depending upon the date of sale.
C)  The same amount regardless of whether the bond was sold at par, a discount, or a premium.
D)  Dependent on the initial amount of accrued interest. C

Question 2

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  False

Question 3

In-substance defeasance leads to the de-recognition of a company's long-term debt.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Question 5

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

Accepted Answer

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

Question 6

The rate of interest used to discount the future cash payments on a debt to the cash equivalent borrowed is least likely to be described by which of the following terms:

Accepted Answer

A)  Prevailing interest rate.
B)  Effective interest rate.
C)  Stated interest rate.
D)  Yield interest rate.

Question 7

A company wishes to finance a long-term construction project and in doing so, capitalize the related interest expense.The company requires $2 million in financing.
The company currently has the following debt and equity items on its December 31st, 2019 Balance Sheet:  There are 10,000 common shares outstanding which pay an annual dividend of $5 per share.The company can borrow a maximum of $5 million on its unsecured line of credit.
The company's bank has indicated its willingness to extend an additional credit facility in the amount of $1.5 million at an annual rate of 5% as of March 31st, Year 6.These amounts remained outstanding throughout Year 6.
On March 1st, Year 6 the company borrowed $600,000.On April 1st, Year 6, and additional $1.4 million was wired to the company's account, drawn on its new credit facility.
Determine the amount of interest that the company would be able to capitalize as per IFRS for Year

Accepted Answer

The answer of A company wishes to finance a long-term...

Question 8

Bonds payable (due 5 years from the balance sheet date)should be classified as follows:

Accepted Answer

A)  A contingent liability.
B)  A long-term liability.
C)  A current liability.
D)  An element of the owners' equity.

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

The answer of On January 1, 1999, a company incurred...

Question 10

A firm has two bonds outstanding today, each with: (1)$1,000 face value, (2)a term of 5 years at issuance, (3)3 years remaining to maturity, and (4)10% yield rate at issuance.Bond A is a zero coupon bond; bond B pays 10% annually and just paid interest yesterday.The yield rate today on both bonds is 12%.Which bond has experienced the greatest percentage change in value since issuance?

Accepted Answer

The answer of A firm has two bonds outstanding today,...

Question 11

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

Accepted Answer

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

Question 12

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 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.
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 sum of the face amount of the bond and the periodic interest payments.

Question 13

The carrying value of a bond from the issuing corporation's standpoint will always move closer to its face value, regardless of whether the bond is issued at a premium or a discount.

Accepted Answer

A) True 
 B)False

Question 14

A company issuing shares to comply with its debt covenants for cash would simultaneously decrease (improve)its debt-to-assets and debt-to equity ratios.

Accepted Answer

A) True 
 B)False

Question 15

KR issued bonds payable with a face amount of $200,000 and a maturity date ten years from date of issuance.If the bonds were issued at a premium, this indicated that:

Accepted Answer

A)  The effective and stated rates of interest were the same.
B)  The stated rate of interest exceeded the effective rate of interest.
C)  The effective rate of interest exceeded the stated interest rate.
D)  No necessary relationship exists between the two rates.
E)  The stated interest rate and the market interest rate were the same.

Question 16

On January 1, 2000, a company purchased a machine (an operational asset)with a list price of
$4,000.$2,000 was paid in cash and a three-year, noninterest-bearing note was signed.The note was for $3,000 and required payment of equal amounts of $1,000 each December 31, 2000, 2001, and 2002.The going rate of interest was 12%.Using this information, complete the following requirements.
(a)Give the entry on January 1, 2000, to record the purchase of the machine (show computations and round to the nearest dollar):
(b)Prepare the related debt amortization schedule.
(c)Give any adjusting entry related to the note payable required for 2001, assuming the accounting period ends March 31.If none is required, state the reason.
(d)Assuming that the accounting period ends March 31 and there were no reversing entries, give the entry to record the annual payment made on December 31, 2001.

Accepted Answer

The answer of On January 1, 2000, a company purchased...

Question 17

ER issued for $2,060,000, two thousand of its 9%, $1,000 callable bonds.The bonds are dated January 1, 2019, and mature many years from now.Interest is payable semi-annually on January 1 and July 1.The bonds can be called by the issuer at $102 on any interest payment date after December 31, 2023.The unamortized bond premium was
$28,000 at December 31, 2021, and the market price of the bonds was $99 on this date.In its December 31, 2021, balance sheet, at what amount should GC report the carrying value of the bonds?

Accepted Answer

A)  $2,028,000
B)  $2,040,000
C)  $2,032,000
D)  $1,980,000
E)  Cannot answer; the bond term is not given

Question 18

R Company was indebted to A Inc.at January 1, 2014.The note called for a $25,000 payment to be made on December 31, 2014 and also on December 31, 2015.The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued.What is the book value of the note on R's January 1, 2014 balance sheet (rounded)?

Accepted Answer

A)  $50,000
B)  $38,962
C)  $47,727
D)  $43,388
E)  $47,500

Question 19

Bond A and Bond B both have a maturity value of $1,000 and pay annual interest of 9%.The market rate of interest is also 9%.Bond A matures in 4 years and Bond B matures in 5 years.Which of the following is correct?

Accepted Answer

A)  Bond A will sell for more than Bond B.
B)  Both bonds sell for the same amount, $1,000.
C)  Both bonds sell for more than $1,000.
D)  Bond B will sell for more than Bond A.
E)  There is not sufficient information to answer the question.

Question 20

On July 1, 2012, RC sold two of its $10,000, 9%, bonds payable at an effective interest rate of 8%.Interest is paid each June 30 and the bond matures in six years on June 30, 2018.Round all amounts to the nearest dollar.
(a)What was the amount of the premium $ ________ or discount $ ?
(b)The income statement for the accounting year ended December 31, 2012, should report interest expense of, assuming:
(1)Straight-line amortization, $ .
(2)Interest-method amortization, $ _.

Accepted Answer

The answer of On July 1, 2012, RC sold two...

Exam 13: Financial Instruments: Long-Term Debt