Chapter 14

Question 1

Debenture bond

Answer 1

Backed only by full faith and credit issuing corporations

Question 2

Subordinated Debenture

Answer 2

Not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied

Question 3

Mortgage Bond

Answer 3

Backed by a lien on real estate owned by the issuer

Commands lower interest rate

Question 4

Callable (redeemable)

Answer 4

Issuing company can buy back before scheduled maturity date

Question 5

Call Price must:

Answer 5

-Be prespecified
-Exceeds face amouts

Question 6

serial bonds

Answer 6

retired installments during all or part of life of issue

Question 7

convertible bonds

Answer 7

Retired as a consequence of bondholders choosing to convert them into shares of stock

Question 8

Sinking Fund Debentures

Answer 8

Bonds that must be redeemed on a prespecified year-by-year basis
specified debt issues are satisfied

Question 9

Effective Interest Rate Formula

Answer 9

Interest Expense= Effective market rate of interest X Outstanding Balance

Question 10

Straight Line Method

Answer 10

Allocates Discounts (or Premium) equally to each interest period

Question 11

Underwriting Fee Formula

Answer 11

Spread between the price the underwrite pays and the resale price

Question 12

Private Placement

Answer 12

Debt securities are sold directly to a single investor

Question 13

Debt issue costs for the issuing company

Answer 13

-underwriting frees
-Legal and accounting fees
-Registration

Question 14

Recording Debt Issue Costs

Answer 14

-Combine with discount (or subtracted from premium)
-Amortized over life of debt

Question 15

If the note interest rate does NOT equal market rate

Answer 15

Value of the asset or service exchanged for the note establishes the market rate

Question 16

In the balance sheet, disclosure should include for all long-term borrowings:

Answer 16

-the aggregate amounts maturing
-sinking fund requirements (if any) for each of the next five years.

Question 17

Supplemental disclosures are needed for

Answer 17

(a) off-balance-sheet credit or market risk,
(b) concentrations of credit risk, and
(c) the fair value of financial instruments.

Question 18

Debt to equity ratio

Answer 18

Total liabilities ÷ Shareholders’ equity

Question 19

Times interest earned ratio

Answer 19

(Net income + interest + Taxes) ÷ Interest

Question 20

Return on assets

Answer 20

Net income ÷ Total assets

Question 21

Return on equity

Answer 21

Net income ÷ Shareholders’ equity

Question 22

Gain or Loss on early extinguishment of debt Formula

Answer 22

Book Value - Reacquisition price

Question 23

bond indenture

Answer 23

document that describes specific promises made to bondholders.

Question 24

premium

Answer 24

arises when bonds are sold for more than face amount.

Question 25

discount

Answer 25

arises when bonds are sold for less than face amount.

Question 27

When discounted interest free bonds are issued

Answer 27

The amount of cash receive is less than the face value of the bond

(Cash received represents present value of the face value)

Effective annual interest rate will be higher than discount rate

Question 28

Face value

Answer 28

Amount to be repaid at maturity

Question 29

notes payable

Answer 29

when a company borrows cash from a bank and signs a promissoy note

Question 30

Electing FVO

Answer 30

reporting unrealized holding gains and losses in OCI

Question 31

When debt is issued at a premium, interest expense over the term of debt equals the

Answer 31

cash interest paid minus premium

Question 32

bonds’ carrying amount at the end of Year formula

Answer 32

Carrying Amount at Beginning of Year + Amortization of Discount