Question 1

The annual amortization of both discount on bonds payable (bond discount)and premium on bonds payable (bond premium)increases as the bond matures.

Accepted Answer

A) True 
 B)False

Question 2

IFRS allows the fair value option for liabilities only to eliminate or significantly reduce the "mismatch" that arises when different measurement bases are used for related financial instruments.

Accepted Answer

A) True 
 B)False

Question 3

When the effective yield of a bond is the same as the stated rate on the bond,the bond is sold at par.

Accepted Answer

A) True 
 B)False

Question 4

When market rates of interest increase,the use of floating-rate debt benefits the issuing company.

Accepted Answer

A) True 
 B)False

Question 5

A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an

Accepted Answer

A) futures contract. 
B) swap contract. 
C) performance contract. 
D) options contract.

Question 6

A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest.The premium on bonds payable (bond premium)at the retirement date is $17,500.Which of the following statements is correct?

Accepted Answer

A) The loss on the debt extinguishment is $32,500. 
B) The gain on the debt extinguishment is $2,500. 
C) The gain on the debt extinguishment is $32,500. 
D) The gain or loss on the debt extinguishment can't be determined without knowing the dollar amount of the accrued interest.

Question 7

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 cash interest paid in 2014 on the bonds is

Accepted Answer

A) $14,458. 
B) $16,000. 
C) $17,542. 
D) $20,000.

Question 8

Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of

Accepted Answer

A) increases in the market interest rate. 
B) decreases in the market interest rate. 
C) increases in the stated interest rate on bonds. 
D) decreases in the stated rate on bonds.

Question 9

A hedge of the exposure to changes in the fair market value of an existing asset or liability or a firm commitment is a/an

Accepted Answer

A) fair value hedge. 
B) cash flow hedge. 
C) foreign currency exposure hedge. 
D) marked-to-market hedge.

Question 10

When the market rate of interest is below the nominal rate,a bond sells at

Accepted Answer

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

Question 11

An example of a derivative instrument is a forward contract.

Accepted Answer

A) True 
 B)False

Question 12

When market rates of interest decrease,the use of floating-rate debt benefits

Accepted Answer

A) investors. 
B) issuing companies. 
C) all parties. 
D) no one.

Question 13

The market value of floating-rate debt of $200,000 will

Accepted Answer

A) rise by $2,000 with a 1% rise in interest rates. 
B) fall by $2,000 with a 1% fall in interest rates. 
C) remain unchanged with a change in interest rates. 
D) will rise in the short run and fall in the long run with a change in interest rates.

Question 14

On February 1,2015,Hills Company had 10,000 pounds of inventory costing $1.50 per pound;the market value per pound was $1.95 on this date.Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2015 at $2.25 per pound.Which of the following statements does not accurately describe the impact of this futures contract?

Accepted Answer

A) Hills has foregone the benefit of additional profits (the upside potential)if the price per pound exceeds $2.25 during the month of May. 
B) Hills has eliminated the risk of reduced profits (the downside potential)if the price per pound is less than $2.25 during the month of May. 
C) Hills' gross profit in May will be $3,000 regardless of the actual price per pound in May. 
D) The value of the futures contract decreases as the market price per pound of inventory increases.

Question 15

A bond with a maturity value of $700,000 was initially issued for $715,000.The bond has a ten-year life and a stated interest rate of 10%.The total interest expense over the life of the bond is

Accepted Answer

A) $700,000. 
B) $715,000. 
C) $685,000. 
D) not determinable without knowing the bond's effective yielD.

Question 16

Baker Company issued $200,000 of ten-year bonds to yield 11% when the stated rate of the bonds was 9%.Present value factors are: $\begin{array}{lll}&9\%&11\%\
\text { PVIF of } \$ 1,10 \text { years } & 0.42241 & 0.35218 \
\text { PVIF of Annuity of } \$ 1,10 \text { years } & 6.41766 & 5.88923
\end{array}$
The entry to record the sale would be

Accepted Answer

A)  DR Cash $\quad 176,442$
DR Bond premium$\quad$23,558
CR Bonds payable$\quad$200,000 
B)  DR Cash$\quad$176,442
DR Bond discount$\quad$23,558
CR Bonds payable$\quad$200,000 
C)  DR Cash$\quad$223,558
CR Bond premium$\quad$23,558
CR Bonds payable$\quad$200,000 
D)  DR Cash$\quad$223,558
CR Bond discount $\quad$23,558
CR Bonds payable$\quad$200,000

Question 17

Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of increases in the market interest rate.

Accepted Answer

A) True 
 B)False

Question 18

Current GAAP has eliminated the opportunity for a company to attempt to generate income statement gains and the resulting favorable financial ratio effects associated with many debt-for-debt and debt-for-equity swaps.

Accepted Answer

A) True 
 B)False

Question 19

When the market rate of interest is above the nominal rate,a bond sells at a premium.

Accepted Answer

A) True 
 B)False

Question 20

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%.These bonds will sell in the market at

Accepted Answer

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

Exam 11: Financial Instruments As Liabilities

The annual amortization of both discount on bonds payable (bond discount)and premium on bonds payable (bond premium)increases as the bond matures.

IFRS allows the fair value option for liabilities only to eliminate or significantly reduce the "mismatch" that arises when different measurement bases are used for related financial instruments.

When the effective yield of a bond is the same as the stated rate on the bond,the bond is sold at par.

When market rates of interest increase,the use of floating-rate debt benefits the issuing company.

A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an

A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest.The premium on bonds payable (bond premium) at the retirement date is $17,500.Which of the following statements is correct?

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 cash interest paid in 2014 on the bonds is

Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of

A hedge of the exposure to changes in the fair market value of an existing asset or liability or a firm commitment is a/an

When the market rate of interest is below the nominal rate,a bond sells at

An example of a derivative instrument is a forward contract.

When market rates of interest decrease,the use of floating-rate debt benefits

The market value of floating-rate debt of $200,000 will

A bond with a maturity value of $700,000 was initially issued for $715,000.The bond has a ten-year life and a stated interest rate of 10%.The total interest expense over the life of the bond is

Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of increases in the market interest rate.

Current GAAP has eliminated the opportunity for a company to attempt to generate income statement gains and the resulting favorable financial ratio effects associated with many debt-for-debt and debt-for-equity swaps.

When the market rate of interest is above the nominal rate,a bond sells at a premium.

Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%.These bonds will sell in the market at