Question 1

When bonds have a conversion feature, GAAP requires the difference between proceeds with and without the conversion feature should be allocated to additional paid-in-capital at the time of issuance.

Accepted Answer

A) True 
 B)False

Question 2

On May 1, 2016, Plotter, Inc., issued $30,000 of ten-year, 12% bonds payable dated January 1, 2016. The cash received amounted to $29,808. The bonds pay interest semiannually. Potter's fiscal year ends on June 30, 2016. What amount of interest expense should be reported on the income statement prepared on June 30, 2016, assuming straight-line amortization?

Accepted Answer

A)  $603.20 
B)  $669.60 
C)  $549.60 
D)  $609.60

Question 3

When zero-coupon bonds are issued, a company will record no interest expense until the bonds mature.

Accepted Answer

A) True 
 B)False

Question 4

When the market rate of interest is less than the contract rate of interest, the bonds will sell

Accepted Answer

A)  below face value. 
B)  at a discount. 
C)  behind par value. 
D)  at a premium.

Question 5

How should a company treat the issuance of convertible debt per GAAP? What two methods are available to record the issuance?

Accepted Answer

The answer of How should a company treat the issuance...

Question 6

Which of the following may not be equal to the contract rate of interest?

Accepted Answer

A)  stated rate 
B)  nominal rate 
C)  face rate 
D)  effective rate

Question 7

Debt financing typically has a higher cost of capital than equity.

Accepted Answer

A) True 
 B)False

Question 8

The portion of proceeds from the sale of bonds with detachable stock warrants attributable to the warrants is accounted for as an)

Accepted Answer

A)  additional paid-in capital account. 
B)  common stock account. 
C)  contra-liability account. 
D)  adjunct-liability account.

Question 9

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 payment of interest on December, 2016, would include a

Accepted Answer

A)  debit to Bond Interest Payable for $5,000. 
B)  debit to Bond Interest Expense for $15,000. 
C)  credit to Cash for $10,000. 
D)  credit to Cash for $5,000.

Question 10

Under current GAAP, the rate of interest assigned to non-interest-bearing notes is

Accepted Answer

A)  the borrower's incremental borrowing rate. 
B)  the lender's incremental borrowing rate. 
C)  the interest rate for long-term government securities. 
D)  the prime rate.

Question 11

On January 1, 2015, Leslie Co. issued $100,000 of 8% ten-year bonds at 97. Issuance costs amounted to $2,000. On July 1, 2020, all of the bonds were called at 103. What was the loss on bond retirement, assuming the use of straight- line amortization?

Accepted Answer

A)  $1,950 
B)  $2,500 
C)  $4,200 
D)  $4,350

Question 12

Exhibit 14-2
A $500,000, ten-year, 7% bond issue was sold to yield 6% interest payable annually. Actuarial information for 10 periods is as follows: 
-Refer to Exhibit 14-2. The discount or premium at the date of bond issuance would be

Accepted Answer

A)  $11,778 premium. 
B)  $36,798 premium. 
C)  $10,097 discount. 
D)  $35,117 discount.

Question 13

The creditor of a restructured loan calculates interest revenues during the periods after restructuring based on the

Accepted Answer

A)  original contract rate. 
B)  current market rate. 
C)  rate specified in the restructuring agreement. 
D)  weighted average rate.

Question 14

Which of the following bonds pay no interest until maturity?

Accepted Answer

A)  zero-coupon bonds 
B)  registered bonds 
C)  serial bonds 
D)  debenture bonds

Question 15

Exhibit 14-13
Yoho Corp. issued $500,000 of its ten-year 6% bonds at 104. Each $1,000 bond carries ten warrants. Each warrant allows the holder to purchase one share of $10 par common stock for $50. Following the sale, relevant market values were: 
-Refer to Exhibit 14-13. After a total of 4,000 warrants were exercised, the remaining warrants expired. The entry to record the expiration of the warrants would include a credit to Additional Paid-in Capital from Expired Warrants for

Accepted Answer

A)  $26,000. 
B)  $13,000. 
C)  $52,000. 
D)  $65,000.

Question 16

Under the straight-line amortization method, interest expense on a bond sold at a discount is equal to the

Accepted Answer

A)  interest paid plus bond discount amortization. 
B)  interest rate times the book value of the bonds. 
C)  interest rate times the face value of the bonds. 
D)  interest paid minus bond discount amortization.

Question 17

Exhibit 14-4
A $900,000, ten-year, 4% bond issue was sold to yield 5% interest payable annually. Actuarial information for 10 periods is as follows: 
-Refer to Exhibit 14-4. The discount or premium at the date of bond issuance would be

Accepted Answer

A)  $3 discount. 
B)  $69,498 discount. 
C)  $72,995 premium. 
D)  $73,004 premium.

Question 18

At the time of the issuance of a note payable the incremental interest rate is what one would pay for similar financing.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 14-10
Hawk issued $500,000 of its ten-year 5% bonds for $463,197 on October 1, 2016 so as to yield an effective rate of 6%. Interest is paid each October 1 and April 1
-Refer to Exhibit 14-10. Assuming Hawk uses the effective interest method, the adjusting entry on December 31, 2016, would include rounded to the nearest dollar)

Accepted Answer

A)  a credit to Discount on Bonds Payable for $698. 
B)  a credit to Cash for $6,250. 
C)  a debit to Interest Expense for $5,552. 
D)  a debit to Interest Expense for $5,790.

Question 20

Related to long-term liabilities, reading the notes to the financial statements is important because they contain

Accepted Answer

A)  the characteristics of the long-term debt. 
B)  the market rate of interest for the long-term debt. 
C)  the market value of the long-term debt. 
D)  the amount of debt converted into common stock.

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

When bonds have a conversion feature, GAAP requires the difference between proceeds with and without the conversion feature should be allocated to additional paid-in-capital at the time of issuance.

When zero-coupon bonds are issued, a company will record no interest expense until the bonds mature.

When the market rate of interest is less than the contract rate of interest, the bonds will sell

How should a company treat the issuance of convertible debt per GAAP? What two methods are available to record the issuance?

Which of the following may not be equal to the contract rate of interest?

Debt financing typically has a higher cost of capital than equity.

The portion of proceeds from the sale of bonds with detachable stock warrants attributable to the warrants is accounted for as an)

Under current GAAP, the rate of interest assigned to non-interest-bearing notes is

On January 1, 2015, Leslie Co. issued $100,000 of 8% ten-year bonds at 97. Issuance costs amounted to $2,000. On July 1, 2020, all of the bonds were called at 103. What was the loss on bond retirement, assuming the use of straight- line amortization?

Exhibit 14-2 A $500,000, ten-year, 7% bond issue was sold to yield 6% interest payable annually. Actuarial information for 10 periods is as follows: -Refer to Exhibit 14-2. The discount or premium at the date of bond issuance would be

The creditor of a restructured loan calculates interest revenues during the periods after restructuring based on the

Which of the following bonds pay no interest until maturity?

Under the straight-line amortization method, interest expense on a bond sold at a discount is equal to the

Exhibit 14-4 A $900,000, ten-year, 4% bond issue was sold to yield 5% interest payable annually. Actuarial information for 10 periods is as follows: -Refer to Exhibit 14-4. The discount or premium at the date of bond issuance would be

At the time of the issuance of a note payable the incremental interest rate is what one would pay for similar financing.

Related to long-term liabilities, reading the notes to the financial statements is important because they contain