Chapter 14 - Long-Term Liabilities

Question 1

Is unearned revenue a long-term liability?

Answer 1

No

Question 2

Are bonds payable a long-term liability?

Answer 2

Yes

Question 3

Is a lease payable a long-term liability?

Answer 3

Yes

Question 4

Is a mortgage payable a long-term liability?

Answer 4

Yes

Question 5

Bonds arise from a contract known as a bond _____.

Answer 5

Debenture

Question 6

How often do bonds normally pay interest?

Answer 6

Semiannually

Question 7

What is the typical face value of a single bond?

Answer 7

$1,000

Question 8

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

Answer 8

Indenture

Question 9

Bonds that are not recorded in the name of the bondholder are called ____ bonds.

Answer 9

Coupon

Question 10

____ bonds give the issuer the right to retire bonds prior to maturity.

Answer 10

Callable

Question 11

A bond that matures in installments is called a _____ bond.

Answer 11

Serial

Question 12

Bonds which do not pay interest unless the issuing company is profitable are called ____ bonds.

Answer 12

Income

Question 13

A debenture bond is a (an) (unsecured/secured) bond.

Answer 13

Unsecured

Question 14

A bond issued in the name of the owner is a ____ bond.

Answer 14

Registered

Question 15

When the effective rate of a bond is lower than the stated rate, the bond sells at a (discount/premium).

Answer 15

Premium

Question 16

If a bond is sold at 98, the market rate was (greater/less than/equal to) the stated rate.

Answer 16

Greater than

Question 17

Bond issue costs are recorded as a(n):

expense, asset, reduction in bonds payable, deferred charge

Answer 17

Deferred charge

Question 18

Bond issue costs are amortized over the life of the bond. (True/False)

Answer 18

True

Question 19

When bonds are sold between interest dates, why does the buyer pay the seller accrued interest?

Answer 19

Because the buyer will receive interest for the entire period at the next interest payment date.

Question 20

What rate is used to determine the selling price of a bond?

stated, nominal, coupon, market

Answer 20

Market

Question 21

What is the interest rate actually earned by bondholders?

stated, nominal, coupon, market

Answer 21

Market

Question 22

What is another term for market rate?

Answer 22

Effective rate

Question 23

What interest rate is written in the terms of the bond indenture?

(effective, market, coupon)

Answer 23

Coupon

Question 24

What are two other terms for a coupon rate?

Answer 24

Nominal rate, Stated rate

Question 25

Bond printing costs and legal fees are known as bond ____ costs.

Answer 25

Issue

Question 26

Which method is preferred when amortizing bond premiums and discounts? (effective interest, straight-line)

Answer 26

effective interest

Question 27

Bond premium amortization _____ interest expense and ____ the premium on bonds payable balance. (increases, decreases)

Answer 27

decreases | decreases

Question 28

The effective interest method calculates interest expenses by multiplying the carrying value of the bonds by the _____ rate of interest. (Market, Stated)

Answer 28

market

Question 29

Discount on bonds payable and premium on bonds payable are liability _____ accounts.

Answer 29

Valuation

Question 30

If bonds are sold at a discount, interest expense in earlier years is higher with the ______ method than with the ______ method. (straight line, effective interest)

Answer 30

Straight line | Effective interest

Question 31

Over the term of the bonds, the straight-line method and effective-interest method produce (the same, different) amounts of interest expense.

Answer 31

the same

Question 32

When a bond sells at a premium, bond interest expense is (greater than/less than/equal to) the bond interest payment.

Answer 32

Less than

Question 33

Should gains and losses on early extinguishment of debt be reported as other gains and losses on the income statement, or as extraordinary items?

Answer 33

Other gains and losses

Question 34

In an early extinguishment of premium bonds in between interest dates, what must be amortized up to the purchase date?

Answer 34

Bond issue costs | Bond premium

Question 35

In an early extinguishment of premium bonds in between interest dates, what must be accrued up to the purchase date?

Answer 35

Interest

Question 36

In an early extinguishment of a bond, how are gains or losses calculated?

Answer 36

The difference between the reacquisition price and the net carrying amount of the bond.

Question 37

Long-term notes payable are valued at their ____ value.

Answer 37

present

Question 38

The discount on a zero-interest bearing note is amortized to interest expense how? (in the period the note is issued, over the life of the note)

Answer 38

Over the life of the note

Question 39

When a debt instrument with no ready market is exchanged for property whose fair market value is indeterminable, how is the present value of the debt instrument approximated?

Answer 39

By using an imputed interest rate

Question 40

The most common form of long-term notes payable are ____ notes.

Answer 40

Mortgage

Question 41

A ____ note payable is a promissory note secured by a document that pledges title to property as security for the loan.

Answer 41

Mortgage

Question 42

How are mortgage notes payable reported? Long-term liability Part current, part long-term liability

Answer 42

Part current, part long-term liability

Question 43

Are there any comparable institutions to the SEC in the international securities market?

Answer 43

No

Question 44

Is a non-interest bearing note an example of off-balance-sheet financing?

Answer 44

Yes

Question 45

Is an operating lease an example of off-balance-sheet financing?

Answer 45

No

Question 46

Is a non-consolidated subsidiary an example of off-balance-sheet financing?

Answer 46

Yes

Question 47

Is a special purpose entity an example of off-balance-sheet financing?

Answer 47

Yes

Question 48

Is a consolidated subsidiary an example of off-balance-sheet financing?

Answer 48

No

Question 49

When a business enterprise enters into off-balance-sheet financing, the company can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. (True/False)

Answer 49

True

Question 50

When a business enterprise enters into off-balance-sheet financing, the company is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. (True/False)

Answer 50

False

Question 51

When a business enterprise enters into off-balance-sheet financing, the company wishes to confine all information related to the debt to the income statement and the statement of cash flows. (True/False)

Answer 51

False

Question 52

Off-balance-sheet financing is a violation of GAAP.

Answer 52

False

Question 53

Are capital leases an example of off-balance-sheet financing?

Answer 53

No

Question 54

What is the "times interest earned" ratio?

Answer 54

Income before interest and taxes divided by interest expense

Question 55

Assets pledged as security are included in note disclosures for long-term debt. (True/False)

Answer 55

True

Question 56

Call provisions and conversion privileges are included in note disclosures for long-term debt. (True/False)

Answer 56

True

Question 57

Restrictions imposed by the creditor are included in note disclosures for long-term debt. (True/False)

Answer 57

True

Question 58

Names of specific creditors are included in note disclosures for long-term debt. (True/False)

Answer 58

False

Question 59

Does the IFRS allow recognition of liabilities for future losses?

Answer 59

No

Question 60

Does GAAP allow recognition of liabilities for future losses?

Answer 60

No

Question 61

Long-term debt that matures within one year and is to be converted into stock should be reported as: (Current/Non-Current)

Answer 61

Non-Current