Longterm Debt

Question 1

Effective method of interest recognition

Answer 1

recognizes interest based on the unpaid balance of debt

Question 2

Straight line method of interest recognition

Answer 2

recognizes same amt of int and discount amortization each period

Question 3

Stated rate on a note is presumed to be fair unless

Answer 3

1. Face amt of note is materially diff from current cash price for item exchanged or the current FV of the debt instrument
2. No interest rate stated (non-int bearing note)
3. the stated rate is unreasonable

Question 4

Indenture

Answer 4

a legal contract representing debt

Question 5

Debenture

Answer 5

unsecured bond

Question 6

Sinking fund

Answer 6

funds set aside typically with a trustee to retire bonds

Question 7

Discount

Answer 7

bond sold for less than Face value, effective rate > stated rate

Question 8

Premium

Answer 8

bond sold for more than Face value, effective rate < stated rate

Question 9

Term Bond

Answer 9

int payments are made periodically, face value is paid on maturity date

Question 10

Serial Bond

Answer 10

structured so a portion of the bonds mature at intervals

Question 11

Convertible Bond

Answer 11

rights to convert a bond into shares of stock

Question 12

Zero coupon

Answer 12

no periodic payments are made. Bond sold at discount with full face value paid at maturity

Question 13

Mortgage Bond

Answer 13

Bond secured with real estate

Question 14

Junk Bond

Answer 14

unsecured bond of high risk issuer

Question 15

Bond issue costs

Answer 15

accounting, legal, printing, registering and underwriting fees

Question 16

Troubled Debt Restructuring (TDR)

Answer 16

modification of terms or a settlement amount

Question 17

Debt Covenant

Answer 17

clause in a debt instrument contract included to protect the creditor, rights and actions of two parties if conditions defined in the covenant occur

Question 18

Annuity due

Answer 18

Series of payments/receipts which occur at beginning of the period

Question 19

Imputed interest rate

Answer 19

Represents the debtor’s incremental borrowing rate

Question 20

Fair value of note

Answer 20

Maturity value of note and interest payments discounted to the present value

Question 21

Note issued at a discount

Answer 21

This will result when face rate of the note < yield rate

Question 22

Premium on a note

Answer 22

The difference between the present value of the note and the cash exchanged when the market rate of interest < rate on note

Question 23

Simple interest method

Answer 23

Periodic interest is computed based on the principal balance only

Question 24

Interest revenue/expense

Answer 24

Effective interest rate × Net receivable or payable balance at the beginning of the period

Question 25

Future value of annuity

Answer 25

The amount which will be available in the future as a result of consecutive payments/receipts at the end of each period—compounded at a specified interest rate

Question 26

Face of note equals present value of the note

Answer 26

No premium or discount exists