ch14 Non-current liabilities

Question 1

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

Answer 1

TRUE

Question 2

A mortgage bond is referred to as a debenture bond

Answer 2

FALSE

Question 3

Bond issues that mature in installments are called serial bonds

Answer 3

TRUE

Question 4

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

Answer 4

FALSE

Question 5

The stated rate is the same as the coupon rate

Answer 5

TRUE

Question 6

The proceeds of a bond with a face amount of ¥100,000,000 which sells at 98 will be ¥98,000,000.

Answer 6

TRUE

Question 7

When bonds are issued at a discount, the bonds payable account is credited for the proceeds from the issue

Answer 7

TRUE

Question 8

When bonds are issued at a premium, the bonds payable account is credited for the face amount

Answer 8

FALSE

Question 9

When bonds are issued at a discount, the bonds payable account is credited for proceeds from the issue

Answer 9

TRUE

Question 10

When bonds are issued at a premium, the bonds payable account is credited for the face amount.

Answer 10

FALSE

Question 11

At any point during the term of the bond, the balance in the bonds payable account should be the carrying value of the bond

Answer 11

TRUE

Question 12

The semi-annual interest payment on a 6.5% HK$10,000,000 bond is HK$650,000.

Answer 12

FALSE

Question 13

The journal entry to record amortization of bond discount includes a debit to the bonds payable account

Answer 13

FALSE

The amortization of bond discount is credited.

Question 14

Amortization of bond premium reduces the balance in bonds payable

Answer 14

TRUE

Question 15

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

Answer 15

FALSE

Question 16

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

Answer 16

FALSE

Question 17

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

Answer 17

FALSE

Question 18

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

Answer 18

FALSE

Question 19

The process of interest rate approximation is called imputation, and the resulting interest rate is called an imputed interest rate

Answer 19

TRUE

Question 20

When a zero-interest bearing note is issued, the note payable account will be credited for the PV of the maturity value

Answer 20

TRUE

Question 21

Amortization of the discount on a zero-interest bearing note decreases the balance
in notes payable.

Answer 21

FALSE

Question 22

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

Answer 22

TRUE

Question 23

The IASB’s position is that fair value measurement of financial liabilities is more relevant and understandable than amortized cost

Answer 23

TRUE

Question 24

Under IFRS, subsidiaries in which the parent company holds a less than 50% interest do not have to be included in the consolidated financial statements

Answer 24

TRUE

Question 25

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

Answer 25

TRUE

Question 26

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

Answer 26

TRUE

Question 27

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

Answer 27

FALSE

Question 28

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

Answer 28

FALSE

Question 29

Debt issuance costs are recorded as an asset and amortized to expense over the life of the bond.

Answer 29

FALSE

Question 30

IFRS recognition criteria for environment liabilities are more stringent than that of US GAAP.

Answer 30

FALSE

Question 31

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.

Answer 31

BOND INDENTURE

Question 32

The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

Answer 32

DEBENTURE BONDS

Question 33

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.

Answer 33

BEARER BONDS

Question 34

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.

Answer 34

INCOME BONDS

Question 35

The interest rate written in the terms of the bond indenture is known as the
a. coupon rate only.
b. nominal rate only.
c. stated rate only.
d. coupon rate, nominal rate, or stated rate.

Answer 35

COUPON RATE, NOMINAL RATE, or STATED RATE

Question 36

The rate of interest actually earned by bondholders is called the
a. stated rate only.
b. yield rate only.
c. effective rate only.
d. effective, yield or market rate.

Answer 36

EFFECTIVE, YIELD, or MARKET RATE

Question 37

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.

Answer 37

20 periods and 4% from the present value of 1 table.

Question 38

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.

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 answer choices are correct.

Answer 38

Multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.

Question 39

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.

Answer 39

The nominal rate of interest exceeded the market rate.

Question 40

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.

Answer 40

The market rate multiplied by the beginning-of-period carrying amount of the bonds.

Question 41

When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

Answer 41

Increase if the bonds were issued at either a discount or a premium.

Question 42

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.

Answer 42

Credit to Interest Expense.

Question 43

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.

Answer 43

Increased by accrued interest from May 1 to June 1.

Question 44

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 recorded as a reduction of the bond issue amount and then amortized over the life
of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

Answer 44

Be recorded as a reduction of the bond issue amount and then amortized over the life
of the bonds.

Question 45

Bond issuance costs, including the printing costs and legal fees associated with the issuance, should be
a. expensed in the period when the debt is issued.
b. recorded as a reduction in the carrying value of bonds payable.
c. accumulated in a deferred charge account and amortized over the life of the bonds.
d. reported as an expense in the period the bonds mature or are retired.

Answer 45

Recorded as a reduction in the carrying value of bonds payable.

Question 46

The amortization of a premium on bonds payable
a. decreases the balance of the bonds payable account.
b. increases the amount of interest expense reported.
c. increases the carrying amount of the bond.
d. increases the cash payment to bondholders.

Answer 46

Decreases the balance of the bonds payable account.

Question 47

“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.

Answer 47

A company provides for the future repayment of a long-term debt by placing purchased
securities in an irrevocable trust.

Question 48

An 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 answer choices are correct.

Answer 48

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.

Question 49

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 statement of financial position date will be reported as a non-current 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

Answer 49

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.

Question 50

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.

Answer 50

The present value of the debt instrument must be approximated using an imputed interest rate.

Question 51

When a note payable is issued for property, goods, or services, the present value of
the note may be measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. All of these answer choices are correct.

Answer 51

a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.

Question 52

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. All of these answer choices are correct.

Answer 52

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.

Question 53

A discount on notes payable is charged to interest expense
a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.

Answer 53

Using the effective-interest method.

Question 54

In a debt extinguishment in which the debt is continued with modified terms and the
carrying value of the debt is more than the fair value of the debt,
a. a loss should be recognized by the debtor.
b. a new effective-interest rate must be computed.
c. a gain should be recognized by the debtor.
d. no interest expense should be recognized in the future

Answer 54

A gain should be recognized by the debtor.

Question 55

In a debt extinguishment in which the debt is settled 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 settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. None of these answer choices are correct.

Answer 55

A gain on the settlement.

Question 56

In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the date of settlement whenever the
a. carrying amount of the debt is less than the total future cash flows.
b. carrying amount of the debt is greater than the present value of the future cash flows.
c. present value of the debt is less than the present value of the future cash flows.
d. present value of the debt is greater than the present value of the future cash flows

Answer 56

Carrying amount of the debt is greater than the present value of the future cash flows.

Question 57

Which of the following is an example of “off-balance-sheet financing“?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.

a. 1
b. 2
c. 3
d. All of these are examples of “off-balance-sheet financing.”

Answer 57

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases

Question 58

Many companies believe that off-balance-sheet financing
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 flows.
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 IFRS.

Answer 58

Can enhance the quality of its financial position and perhaps permit credit to be
obtained more readily and at less cost

Question 59

Long-term debt that matures within one year and is to be converted into shares
should be reported
a. as a current liability.
b. in a special section between liabilities and equity.
c. as part current and part non-current.
d. as non-current if the refinancing agreement is completed by the end of the year.

Answer 59

As non-current if the refinancing agreement is completed by the end of the year.

Question 60

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.

Answer 60

The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.

Question 61

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.

Answer 61

NAMES OF SPECIFIC CREDITORS

Question 62

The times interest earned 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.

Answer 62

Income before income taxes and interest expense by interest expense.

Question 63

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.

Answer 63

Total liabilities by total assets.

Question 64

Which of the following is not a difference between IFRS and U.S. GAAP in according
for non-current liabilities?
a. Non-current liabilities follow current liabilities on the statement of financial position
under U.S. GAAP, but precede current liabilities under IFRS.
b. The criteria for recognizing environment liabilities is more stringent under U.S. GAAP
compared to IFRS.
c. Bond issuance costs are recorded as a reduction of the carrying value of the debt
under U.S. GAAP but are recorded as an asset and amortized to expense over the
term of the debt under IFRS.
d. Under U.S. GAAP, bonds payable is recorded at the face amount and any premium or
discount is recorded in a separate account. Under IFRS, bonds payable is recorded at
the carrying value so no separate premium or discount accounts are used.

Answer 64

Bond issuance costs are recorded as a reduction of the carrying value of the debt
under U.S. GAAP but are recorded as an asset and amortized to expense over the
term of the debt under IFRS.

Question 65

All of the following are differences between IFRS and U.S. GAAP in according for
liabilities except:
a. When a bond is issued at a discount, U.S. GAAP records the discount in a separate
contra-liability account. IFRS records the bond net of the discount.
b. Under IFRS, bond issuance costs reduces the carrying value of the debt. Under U.S.
GAAP, these costs are recorded as an asset and amortized to expense over the term
of the bond.
c. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.”
d. U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are
accrued.

Answer 65

U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are
accrued.