Deck 14: Long-Term Liabilities

Question 1

An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded.

Answer 1

True

Question 2

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

Answer 2

True

Question 3

In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor.

Answer 3

False

Question 4

The replacement of an existing bond issue with a new one is called refunding.

Question 5

If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

Question 6

The interest rate of variable-rate mortgages is tied to changes in the fluctuating market rate.

Question 7

The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

Question 8

The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

Question 9

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

Question 10

If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

Question 11

Bond issues that mature in installments are called serial bonds.

Question 12

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

Question 13

A mortgage bond is referred to as a debenture bond.

Question 14

The stated rate is the same as the coupon rate.

Question 15

A bond may only be issued on an interest payment date.

Question 16

The times interest earned ratio is computed by dividing income before interest expense by interest expense.

Question 17

Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

Question 18

Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

Question 19

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

Question 20

The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected undiscounted future cash flows from the loan.

Question 21

Bonds that pay no interest unless the issuing company is profitable are called

A) collateral trust bonds.
B) debenture bonds.
C) revenue bonds.
D) income bonds.

Question 22

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

A) bond indenture.
B) bond debenture.
C) registered bond.
D) bond coupon.

Question 23

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

A) exceed what it would have been had the effective-interest method of amortization been used.
B) be less than what it would have been had the effective-interest method of amortization been used.
C) be the same as what it would have been had the effective-interest method of amortiza-tion been used.
D) be less than the stated (nominal) rate of interest.

Question 24

Another step in calculating the issue price of the bonds is to

A) multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.
B) multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.
C) multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.
D) None of these answers is correct.

Question 25

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition

A) any costs of issuing the bonds must be amortized up to the purchase date.
B) the premium must be amortized up to the purchase date.
C) interest must be accrued from the last interest date to the purchase date.
D) All of these answers are correct.

Question 26

The term used for bonds that are unsecured as to principal is

A) mortgage bonds.
B) debenture bonds.
C) indebenture bonds.
D) callable bonds.

Question 27

Theoretically, the costs of issuing bonds could be

A) expensed when incurred.
B) reported as a reduction of the bond liability.
C) debited to a deferred charge account and amortized over the life of the bonds.
D) any of these answers are correct.

Question 28

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

A) decreased by accrued interest from June 1 to November 1.
B) decreased by accrued interest from May 1 to June 1.
C) increased by accrued interest from June 1 to November 1.
D) increased by accrued interest from May 1 to June 1.

Question 29

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

A) the stated (nominal) rate of interest multiplied by the face value of the bonds.
B) the market rate of interest multiplied by the face value of the bonds.
C) the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
D) the market rate multiplied by the beginning-of-period carrying amount of the bonds.

Question 30

Bonds for which the owners' names are not registered with the issuing corporation are called

A) bearer bonds.
B) term bonds.
C) debenture bonds.
D) secured bonds.

Question 31

The interest rate written in the terms of the bond indenture is known as the

A) coupon rate.
B) nominal rate.
C) stated rate.
D) coupon rate, nominal rate, or stated rate.

Question 32

An example of an item which is not a liability is

A) dividends payable in stock.
B) advances from customers on contracts.
C) accrued estimated warranty costs.
D) the portion of long-term debt due within one year.

Question 33

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

A) debit to Interest Payable.
B) credit to Interest Receivable.
C) credit to Interest Expense.
D) credit to Unearned Interest.

Question 34

Use the following information for questions 29 and 30:
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.
One step in calculating the issue price of the bonds is to multiply the principal by the table value for

A) 10 periods and 10% from the present value of 1 table.
B) 20 periods and 5% from the present value of 1 table.
C) 10 periods and 8% from the present value of 1 table.
D) 20 periods and 4% from the present value of 1 table.

Question 35

The printing costs and legal fees associated with the issuance of bonds should

A) be expensed when incurred.
B) be reported as a deduction from the face amount of bonds payable.
C) be accumulated in a deferred charge account and amortized over the life of the bonds.
D) not be reported as an expense until the period the bonds mature or are retired.

Question 36

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

A) the effective yield or market rate of interest exceeded the stated (nominal) rate.
B) the nominal rate of interest exceeded the market rate.
C) the market and nominal rates coincided.
D) no necessary relationship exists between the two rates.

Question 37

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

A) increase only if the bonds were issued at a discount.
B) decrease only if the bonds were issued at a premium.
C) increase only if the bonds were issued at a premium.
D) increase if the bonds were issued at either a discount or a premium.

Question 38

The rate of interest actually earned by bondholders is called the

A) stated rate.
B) coupon rate.
C) nominal rate.
D) effective rate.

Question 39

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

A) greater than if the straight-line method were used.
B) greater than the amount of the interest payments. c the same as if the straight-line method were used.
D) less than if the straight-line method were used.

Question 40

Treasury bonds should be shown on the balance sheet as

A) an asset.
B) a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
C) a reduction of stockholders' equity.
D) both an asset and a liability.

Question 41

A troubled debt restructuring will generally result in a

A) loss by the debtor and a gain by the creditor.
B) loss by both the debtor and the creditor.
C) gain by both the debtor and the creditor.
D) gain by the debtor and a loss by the creditor.

Question 42

Long-term debt that matures within one year and is to be converted into stock should be reported

A) as a current liability.
B) in a special section between liabilities and stockholders' equity.
C) as noncurrent.
D) as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

Question 43

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
The present value of the principal is

A) $2,136,000.
B) $2,160,000.
C) $2,492,000.
D) $2,508,000.

Question 44

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?

A) The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
B) The balance of mortgage payable will remain a constant amount over the 10-year period.
C) The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
D) The amount of interest expense will remain constant over the 10-year period.

Question 45

Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?

A) The shareholders' loss is the debtholders' gain.
B) The income of the company will increase as the amount of interest payment will reduce.
C) The decrease in market rate will increase the value of equity shares.
D) The debtholders' loss is the shareholders' gain.

Question 46

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should

A) compute a new effective-interest rate.
B) not recognize a loss.
C) calculate its loss using the historical effective rate of the loan.
D) calculate its loss using the current effective rate of the loan.

Question 47

The times interest earned ratio is computed by dividing

A) net income by interest expense.
B) income before taxes by interest expense.
C) income before income taxes and interest expense by interest expense.
D) net income and interest expense by interest expense.

Question 48

The debt to assets ratio is computed by dividing

A) current liabilities by total assets.
B) long-term liabilities by total assets.
C) total liabilities by total assets.
D) total assets by total liabilities.

Question 49

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

A) is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet.
B) wishes to confine all information related to the debt to the income statement and the statement of cash flow.
C) can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
D) is in violation of generally accepted accounting principles.

Question 50

Note disclosures for long-term debt generally include all of the following except

A) assets pledged as security.
B) call provisions and conversion privileges.
C) restrictions imposed by the creditor.
D) names of specific creditors.

Question 51

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the

A) carrying amount of the pre-restructure debt is less than the total future cash flows.
B) carrying amount of the pre-restructure debt is greater than the total future cash flows.
C) present value of the pre-restructure debt is less than the present value of the future cash flows.
D) present value of the pre-restructure debt is greater than the present value of the future cash flows.

Question 52

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,

A) a loss should be recognized by the debtor.
B) a gain should be recognized by the debtor.
C) a new effective-interest rate must be computed.
D) no interest expense or revenue should be recognized in the future.

Question 53

A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place

A) the present value of the debt instrument must be approximated using an imputed interest rate.
B) it should not be recorded on the books of either party until the fair value of the property becomes evident.
C) the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.
D) the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.

Question 54

"In-substance defeasance" is a term used to refer to an arrangement whereby

A) a company gets another company to cover its payments due on long-term debt.
B) a governmental unit issues debt instruments to corporations.
C) a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
D) a company legally extinguishes debt before its due date.

Question 55

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless

A) no interest rate is stated.
B) the stated interest rate is unreasonable.
C) the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note.
D) any of these answers are correct.

Question 56

In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize

A) no gain or loss on the restructuring.
B) a gain on the restructuring.
C) a loss on the restructuring.
D) None of these answers are correct.

Question 57

A project financing arrangement refers to:

A) an arrangement where a company creates a special-purpose entity to perform a special project.
B) an arrangement where a company borrows from its subsidiary to finance a project.
C) an arrangement where a company promises future repayment by placing purchased assets in an irrevocable trust.
D) an arrangement where a company finances a project from a sinking fund established for bond repayments.

Question 58

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting

A) Bonds Payable.
B) Gain on Restructuring of Debt.
C) Unrealized Holding Gain/Loss-Income.
D) None of these answers are correct.

Question 59

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

A) The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
B) The present value of scheduled interest payments on long-term debt during each of the next five years.
C) The amount of scheduled interest payments on long-term debt during each of the next five years.
D) The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

Question 60

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

A) an adjustment to the cost basis of the asset obtained by the debt issue.
B) an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
C) an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
D) a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

Question 61

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2013. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2015?

A) $9,835,115
B) $9,970,311
C) $9,816,916
D) $9,831,761

Question 62

Farmer Company issues $25,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

A) $24,250,000
B) $25,562,500
C) $24,625,000
D) $23,875,000

Question 63

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using effective-interest amortization, how much interest expense will be recognized in 2014?

A) $780,000
B) $1,560,000
C) $1,568,498
D) $1,568,332

Question 64

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
The present value of the interest is

A) $1,379,280.
B) $1,398,240.
C) $1,490,400.
D) $1,507,320.

Question 65

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
The issue price of the bonds is

A) $3,534,240.
B) $3,539,280.
C) $3,558,240.
D) $3,998,400.

Question 66

The following information applies to both questions 77 and 78.
On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.
The entry to record the issuance of the bonds would include a credit of

A) $100,000 to Interest Payable.
B) $160,000 to Discount on Bonds Payable.
C) $3,840,000 to Bonds Payable.
D) $160,000 to Premium on Bonds Payable.

Question 67

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?

A) $9,806,321
B) $10,000,000
C) $9,812,563
D) $9,804,155

Question 68

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?

A) $1,026,805
B) $780,000
C) $784,596
D) $789,896

Question 69

Downing Company issues $4,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

A) $4,000,000
B) $4,173,195
C) $4,175,047
D) $4,173,847

Question 70

The following information applies to both questions 77 and 78.
On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of $4,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.
Bond interest expense reported on the December 31, 2014 income statement of Macklin Corporation would be

A) $46,000
B) $50,000
C) $54,000
D) $92,000
The following information applies to both questions 79 and 80.
On October 1, 2014 Bartley Corporation issued 5%, 10-year bonds with a face value of $5,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

Question 71

Feller Company issues $15,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

A) $14,550,000
B) $15,337,500
C) $14,775,000
D) $14,325,000

Question 72

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2013. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2015?

A) $19,670,232
B) $19,940,624
C) $19,633,832
D) $19,663,522

Question 73

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2014?

A) $390,000
B) $780,000
C) $784,249
D) $784,166

Question 74

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?

A) $19,612,642
B) $20,000,000
C) $19,625,124
D) $19,608,308

Question 75

Everhart Company issues $20,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

A) $20,000,000
B) $20,865,976
C) $20,875,236
D) $20,869,232

Question 76

A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. What is interest expense for 2015, using straight-line amortization?

A) $1,540,208
B) $1,560,000
C) $1,569,192
D) $1,579,793

Question 77

On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense for 2014 is

A) $100,000.
B) $107,419.
C) $107,700.
D) $120,000.

Question 78

The entry to record the issuance of the bonds would include a

A) credit of $125,000 to Interest Payable.
B) credit of $200,000 to Premium on Bonds Payable.
C) credit of $4,800,000 to Bonds Payable.
D) debit of $200,000 to Discount on Bonds Payable.

Question 79

Bond interest expense reported on the December 31, 2014 income statement of Bartley Corporation would be

A) $67,500
B) $115,000
C) $57,500
D) $62,500

Question 80

On January 2, 2014, a calendar-year corporation sold 8% bonds with a face value of $1,500,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,384,000 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2014?

A) $120,000.
B) $138,400.
C) $138,860.
D) $150,000.