Question 1

Annual amortization of discount on bonds payable (bond discount)increases as a bond matures.

Accepted Answer

A) True 
 B)False

Question 2

A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.

Accepted Answer

A) True 
 B)False

Question 3

A call option contract requires the holder to buy a specific underlying asset at a set price during a specific time period.

Accepted Answer

A) True 
 B)False

Question 4

Dot Company issued $200,000 of bonds on January 1,2014 with interest payable each year.The bonds had a stated rate of 8%.The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.Interest expense for year one if LIBOR is 7% will be which one of the following?

Accepted Answer

A) $6,000 
B) $14,000 
C) $16,000 
D) $20,000

Question 5

Under IFRS,debt issue costs are treated as an expense of the period when the debt is issued.

Accepted Answer

A) True 
 B)False

Question 6

A five-year bond with a maturity value of $900,000 and a stated interest rate of 8% initially sold for $879,000;total interest expense during the five-year life of the bond will be $339,000.

Accepted Answer

A) True 
 B)False

Question 7

When a debt is retired on the maturity date,the book value is always equal to the market value.

Accepted Answer

A) True 
 B)False

Question 8

A company is considering offering for sale one of two bond issues.The two bond issues are equivalent except that one bond pays semi-annual interest while the other bond pays annual interest.The proceeds from the sale of the bond with annual interest payments will be greater than the proceeds from the sale of the bonds with semi-annual payments.

Accepted Answer

A) True 
 B)False

Question 9

When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%,the discount rate used would be

Accepted Answer

A) 8%. 
B) 10%. 
C) 4%. 
D) 5%.

Question 10

On January 1,2014,Ross Corporation issued bonds with a maturity value of $200,000;the bond's stated rate of interest equaled the market interest rate on the issue date.On December 31,2014,the market value of the bonds was $188,926;on December 31,2015,the market value of the bonds was $191,325.Which of the following correctly describes Ross Corporation's financial reporting if Ross elects to measure the bond liability using the fair value option?

Accepted Answer

A) For the year ending December 31,2014,Ross will report an unrealized holding loss of $11,074 in its income statement. 
B) For the year ending December 31,2015,Ross will report an unrealized holding gain of $8,675 in its income statement. 
C) For the year ending December 31,2015,Ross will report an unrealized holding loss of $8,675 in its income statement. 
D) For the year ending December 31,2015,Ross will report an unrealized holding loss of $2,399 in its income statement.

Question 11

A product warranty provided with the sale of an item of merchandise gives rise to a nonmonetary liability.

Accepted Answer

A) True 
 B)False

Question 12

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 discount amortization for 2015 is

Accepted Answer

A) $1,696. 
B) $2,458. 
C) $3,080. 
D) $4,000.

Question 13

When a bond is sold at a discount the effective interest rate is

Accepted Answer

A) equal to the stated rate. 
B) above the stated rate. 
C) below the stated rate. 
D) equal to the stated rate for a period of time and then above the stated rate for a period of time.

Question 14

The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.

Accepted Answer

A) True 
 B)False

Question 15

When a bond is sold at a premium the

Accepted Answer

A) effective interest rate is less than the stated rate. 
B) effective interest rate is greater than the stated rate. 
C) effective interest rate relative to the stated rate is not known. 
D) interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bonD.

Question 16

When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an

Accepted Answer

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

Question 17

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 value at the end of 2015 is

Accepted Answer

A) $175,422. 
B) $178,660. 
C) $200,000. 
D) $203,238.

Question 18

Strauss Company sold $100,000 of long-term bonds in the open market for $100,000.The entry to record the transaction would be

Accepted Answer

A)  DR Cash$\quad$$\quad$100,000
CR Bonds payable$\quad$100,000 
B)  DR Bonds payable$\quad$100,000
CR Cash$\quad$$\quad$100,000 
C)  DR Accounts payable$\quad$100,000
CR Bonds payable$\quad$$\quad$100,000 
D)  DR Cash$\quad$100,000
CR Interest payable$\quad$100,000

Question 19

Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?

Accepted Answer

A) Firms may elect the fair value option for a single eligible instrument without electing it for other identical instruments. 
B) Once the choice is made to adopt the fair value option,the decision is irrevocable. 
C) Financial statement disclosures must include management's rationale for electing the fair value option. 
D) The fair value option is not available for security investments that are accounted for using the equity methoD.

Question 20

A year-by-year transfer of wealth from bondholders to stockholders occurs when the market rate of interest increases and the historical cost accounting model is used to account for bonds.

Accepted Answer

A) True 
 B)False

Exam 11: Financial Instruments As Liabilities

Annual amortization of discount on bonds payable (bond discount)increases as a bond matures.

A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.

A call option contract requires the holder to buy a specific underlying asset at a set price during a specific time period.

Dot Company issued $200,000 of bonds on January 1,2014 with interest payable each year.The bonds had a stated rate of 8%.The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.Interest expense for year one if LIBOR is 7% will be which one of the following?

Under IFRS,debt issue costs are treated as an expense of the period when the debt is issued.

A five-year bond with a maturity value of $900,000 and a stated interest rate of 8% initially sold for $879,000;total interest expense during the five-year life of the bond will be $339,000.

When a debt is retired on the maturity date,the book value is always equal to the market value.

When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%,the discount rate used would be

A product warranty provided with the sale of an item of merchandise gives rise to a nonmonetary liability.

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 discount amortization for 2015 is

When a bond is sold at a discount the effective interest rate is

The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.

When a bond is sold at a premium the

When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an

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 value at the end of 2015 is

Strauss Company sold $100,000 of long-term bonds in the open market for $100,000.The entry to record the transaction would be

Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?

A year-by-year transfer of wealth from bondholders to stockholders occurs when the market rate of interest increases and the historical cost accounting model is used to account for bonds.