Question 1

All of the statements below are true of futures contracts except that futures contracts

Accepted Answer

A) result in predictable cash flows. 
B) eliminate downside risk and upside potential. 
C) eliminate downside risk while allowing for upside potential. 
D) result in predictable gross profits.

Question 2

Which of the following is not an accurate description of the controversies surrounding the fair value option?

Accepted Answer

A) Advocates argue that accounting-induced volatility is eliminated and financial statement transparency is improved. 
B) Proponents argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet. 
C) Proponents argue that companies that can use the fair value option in situations where there is not necessarily a relationship between the financial assets and liabilities which promotes the opportunity to manage earnings. 
D) Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.

Question 3

Discount on bonds payable (bond discount)is a liability valuation account.

Accepted Answer

A) True 
 B)False

Question 4

When interest rates have increased and bonds are retired before maturity,market value is below book value generating an accounting loss.

Accepted Answer

A) True 
 B)False

Question 5

The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $\begin{array}{lll}&10\%&9\%\
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$
The amount of bond interest expense for Year 2 is

Accepted Answer

A) $450,000. 
B) $464,578. 
C) $500,000. 
D) $535,422.

Question 6

Which one of the following contingencies requires financial statement disclosure?

Accepted Answer

A) A lawsuit that the firm's attorneys believe will be dropped. 
B) A lawsuit that the firm's attorneys believe will probably be settled for $75,000. 
C) A reasonably possible loss on a lawsuit that the firm's attorneys cannot estimate the loss. 
D) A reasonably possible loss on a lawsuit that the firm's attorneys believe will be settled for $100,000.

Question 7

During the past year a company reported bond interest expense of $29,875 and a cash interest payment of $27,500;therefore the bond's carrying value must have increased by $2,375 during the past year.

Accepted Answer

A) True 
 B)False

Question 8

The precise terms of a bond issue are found in the bond indenture agreement.

Accepted Answer

A) True 
 B)False

Question 9

When a debt is retired on the maturity date,a loss occurs if the market rate of interest increased subsequent to the issue of the bond.

Accepted Answer

A) True 
 B)False

Question 10

Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The amount of bond interest expense for 2015 is

Accepted Answer

A) $16,000. 
B) $17,696. 
C) $18,458. 
D) $19,280.

Question 11

The value of a futures contract entered into to hedge inventory being held for sale increases as the selling price of the inventory increases.

Accepted Answer

A) True 
 B)False

Question 12

Noncurrent monetary liabilities are initially recorded at their

Accepted Answer

A) future value. 
B) historical value. 
C) present value when incurred. 
D) undiscounted amount due.

Question 13

The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 } \% } & \underline { \mathbf { 9 \% } } \
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$$
The bonds will sell for

Accepted Answer

A) $4,805,525. 
B) $5,000,000. 
C) $5,050,000. 
D) $5,194,475.

Question 14

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%.These bonds will sell in the market at

Accepted Answer

A) par. 
B) a discount. 
C) a premium. 
D) stated value.

Question 15

A hedged item can be any of the following except:

Accepted Answer

A) an anticipated (forecasted)transaction. 
B) an existing asset or liability on the company's books. 
C) a past transaction. 
D) a firm commitment.

Question 16

Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?

Accepted Answer

A) Amortization of discount on bonds payable (bond discount)increases in later years relative to earlier years of a bond's life. 
B) Amortization of premium on bonds payable (bond premium)increases in later years relative to earlier years of a bond's life. 
C) Amortization of both premium on bonds payable (bond premium)and discount on bonds payable (bond discount)decreases in later years relative to earlier years of a bonds life. 
D) Amortization of discount on bonds payable (bond discount)results in an increase in interest expense and in an increase in the bond's carrying value.

Question 17

Floating-rate debt protects investors from losses because the market value of this debt remains constant when the market rate of interest changes.

Accepted Answer

A) True 
 B)False

Question 18

Generally accepted accounting principles require that when bonds are sold at a discount,the discount must be allocated to interest expense using the

Accepted Answer

A) cash interest method. 
B) effective interest method. 
C) bond yield method. 
D) cumulative interest methoD.

Question 19

Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The bond carrying amount at the end of 2014 is

Accepted Answer

A) $175,422. 
B) $176,964. 
C) $200,000. 
D) $201,542.

Question 20

On January 1,2014 when the effective interest rate was 14%,a company issued bonds with a maturity value of $1,000,000.The stated rate of interest is 12%,the bonds pay interest semi-annually and sold for $893,640.The amount of bond discount amortized on July 1,2014 is approximately

Accepted Answer

A) $1,000. 
B) $2,555. 
C) $2,000. 
D) $5,110.

Exam 11: Financial Instruments As Liabilities

All of the statements below are true of futures contracts except that futures contracts

Which of the following is not an accurate description of the controversies surrounding the fair value option?

Discount on bonds payable (bond discount)is a liability valuation account.

When interest rates have increased and bonds are retired before maturity,market value is below book value generating an accounting loss.

Which one of the following contingencies requires financial statement disclosure?

During the past year a company reported bond interest expense of $29,875 and a cash interest payment of $27,500;therefore the bond's carrying value must have increased by $2,375 during the past year.

The precise terms of a bond issue are found in the bond indenture agreement.

When a debt is retired on the maturity date,a loss occurs if the market rate of interest increased subsequent to the issue of the bond.

Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The amount of bond interest expense for 2015 is

The value of a futures contract entered into to hedge inventory being held for sale increases as the selling price of the inventory increases.

Noncurrent monetary liabilities are initially recorded at their

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%.These bonds will sell in the market at

A hedged item can be any of the following except:

Which of the following statements is not correct regarding amortization when using the effective interest method (basis) ?

Floating-rate debt protects investors from losses because the market value of this debt remains constant when the market rate of interest changes.

Generally accepted accounting principles require that when bonds are sold at a discount,the discount must be allocated to interest expense using the

Hooker Company sells $200,000 of ten-year,8% bonds to yield 10% on January 1,2014.The bonds pay interest annually on December 31.The bonds were sold at a discount of $24,578.The bond carrying amount at the end of 2014 is

On January 1,2014 when the effective interest rate was 14%,a company issued bonds with a maturity value of $1,000,000.The stated rate of interest is 12%,the bonds pay interest semi-annually and sold for $893,640.The amount of bond discount amortized on July 1,2014 is approximately