Chapter 13 MC

Question 1

24. Bonds payable (due 5 years from the balance sheet date) should be classified as follows: 
A. A contingent liability.
B. An element of the owners' equity.
C. A long-term liability.
D. A current liability.

Answer 1

c

Question 2

25. AB sold its 10-year bond at a discount. In reporting the bonds and the related discount on a balance sheet shortly thereafter, the discount should be:
    A. Added to the bonds.
    B. Recorded as expense in the period of sale.
    C. Reported as a deferred charge.
    D. Deducted from the bonds payable

Answer 2

d

Question 3

26. JMR bought 15 Z Corporation's $1,000 bonds for $15,270 total, on April 1, 2014, (five years prior to maturity). The bonds pay 8% semi-annual interest on April 1 and October 1. On December 31, 2014, the bonds had a market value of $14,950 (not a permanent decline). JMR purchased these bonds at: 
A. Par.
B. Par plus accrued interest.
C. A premium.
D. A discount.
E. A discount plus accrued interest.

Answer 3

c

Question 4

27. R Company was indebted to A Inc. at January 1, 2014. The note called for a $25,000 payment to be made on December 31, 2014 and also on December 31, 2015. The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued. What is the book value of the note on R's January 1, 2014 balance sheet (rounded)? 
A. $47,727
B. $47,500
C. $43,388
D. $50,000
E. $38,962

Answer 4

c

Question 5

28. $5,000 (face value) of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity. The dollar amount (excluding interest) paid to retire the bonds was $4,700. The entry to record the retirement would include: 
A. dr. bonds payable $5,000
B. cr. cash $4,300
C. dr. bonds payable $4,700
D. cr. unusual gain $400

Answer 5

a

Question 6

29. ER issued for $2,060,000, two thousand of its 9%, $1,000 callable bonds. The bonds are dated January 1, 2019, and mature many years from now. Interest is payable semi-annually on January 1 and July 1. The bonds can be called by the issuer at $102 on any interest payment date after December 31, 2023. The unamortized bond premium was $28,000 at December 31, 2021, and the market price of the bonds was $99 on this date. In its December 31, 2021, balance sheet, at what amount should GC report the carrying value of the bonds?
    A. $1,980,000
    B. $2,028,000
    C. $2,032,000
    D. $2,040,000
    E. Cannot answer; the bond term is not given

Answer 6

b

Question 7

30. Gains or losses from the early extinguishment of debt, if material, should be:
    A. recognized in income as ordinary gains and losses or as unusual items.
    B. recognized as an extraordinary item in the period of extinguishment.
    C. amortized over the remaining original life of the extinguished issue.
    D. amortized over the life of the new issue.

Answer 7

a

Question 8

31. All of the following are true with respect to sinking funds except:
    A. A sinking fund is a cash fund that is restricted for retiring the debt of a company.
    B. A sinking fund may be handled by a trustee or by the individual company.
    C. A sinking fund may make the investment more attractive to investors.
    D. Once the sinking fund is established, the company has no more responsibility to the debt.

Answer 8

d

Question 9

32. The rate of interest specified on the face of the debt is called the: 
A. Effective interest rate.
B. Stated interest rate.
C. Yield interest rate.
D. Market interest rate.

Answer 9

b

Question 10

33. The rate of interest used to discount the future cash payments on a debt to the cash equivalent borrowed is least likely to be described by which of the following terms: 
A. Effective interest rate.
B. Yield interest rate.
C. Stated interest rate.
D. Prevailing interest rate.

Answer 10

c

Question 11

34. KR issued bonds payable with a face amount of $200,000 and a maturity date ten years from date of issuance. If the bonds were issued at a premium, this indicated that:
    A. The effective and stated rates of interest were the same.
    B. The stated rate of interest exceeded the effective rate of interest.
    C. The stated interest rate and the market interest rate were the same.
    D. No necessary relationship exists between the two rates.
    E. The effective rate of interest exceeded the stated interest rate.

Answer 11

b

Question 12

35. In theory (disregarding any other marketplace variables) the proceeds from the sale of a bond will be equal to:
    A. The face amount of the bond plus the present value of the interest payments made during the life of the bond discounted at the prevailing market rate of interest.
    B. The sum of the face amount of the bond and the periodic interest payments.
    C. The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the stated rate of interest.
    D. The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest.

Answer 12

d

Question 13

36. AB Company issued a $100,000, 10%, bond at $99. Therefore, the bond:
    A. was sold at a premium because the stated interest rate was higher than the yield rate.
    B. sold at a discount because the stated interest rate was lower than the market interest rate.
    C. sold at a premium because the $1,000 accrued interest is added to the $100,000 face amount.
    D. was sold for $100,000 less $1,000 of accrued interest.

Answer 13

b

Question 14

37. For bonds payable, the cash interest paid in each interest period is:
    A. The same amount regardless of whether the bond was sold at par, a discount, or a premium.
    B. Different depending upon the date of sale.
    C. Not the same amount when the stated and yield interest rates are different.
    D. Dependent on the initial amount of accrued interest.

Answer 14

a

Question 15

38. Straight-line amortization of bond premium or discount:
    A. Can be used as an optional method of amortization in all situations.
    B. Provides the same amounts of interest expense and interest revenue each interest period as the effective interest method.
    C. Provides the same total amount of interest expense and interest revenue as the effective interest method over the life of the bonds.
    D. is appropriate when the bond term is especially long.
    E. is appropriate for deep discount bonds.

Answer 15

c

Question 16

39. If a bond was sold at $108, the stated rate of interest was: 
A. Equal to market rate.
B. Not related to market rate.
C. Higher than market rate.
D. Lower than market rate.

Answer 16

c

Question 17

40. Bond A and Bond B both have a maturity value of $1,000 and pay annual interest of 9%. The market rate of interest is also 9%. Bond A matures in 4 years and Bond B matures in 5 years. Which of the following is correct?
    A. Both bonds sell for more than $1,000.
    B. Bond A will sell for more than Bond B.
    C. Both bonds sell for the same amount, $1,000.
    D. Bond B will sell for more than Bond A.
    E. There is not sufficient information to answer the question.

Answer 17

c

Question 18

41. Bonds payable should be reported as a long-term liability in the balance sheet of the issuer at:
    A. Current market price.
    B. lower-of-cost-or-market.
    C. Issue price, excluding any accrued interest at purchase date.
    D. Issue price less any unamortized bond premium or plus any unamortized discount.
    E. Issue price plus any unamortized bond premium or less any unamortized discount

Answer 18

e

Question 19

42. When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the amount of cash received by the issuer will be:
    A. Decreased by accrued interest from July 1 to November 30.
    B. Decreased by accrued interest from May 31 to July 1.
    C. Increased by accrued interest from May 31 to July 1.
    D. Increased by accrued interest from July 1 to November 30.
    E. Unaffected by accrued interest.

Answer 19

c

Question 20

43. When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the price of the bond will be:
    A. Decreased by accrued interest from July 1 to November 30.
    B. Decreased by accrued interest from May 31 to July 1.
    C. Increased by accrued interest from May 31 to July 1.
    D. Increased by accrued interest from July 1 to November 30.
    E. Unaffected by accrued interest

Answer 20

e

Question 21

44. A firm retired a long-term note by in-substance defeasance. This means that:
    A. the creditors have been paid.
    B. the debtor has been released of its legal responsibility for all remaining debt payments.
    C. there is only a remote chance that the debtor will be required to make further payments on the liability.
    D. the debt is shown as an offset against the assets used to retire the debt, in the debtor’s balance sheet.
    E. the debtor will continue to recognize interest expense on the debt but will make no more payments.

Answer 21

c

Question 22

45. There are two methods for amortizing premiums and discounts on the sale of bonds. The differences between the two methods are:
    A. Both methods charge a constant amount of interest to the financial statements each year; however, the effective interest method charges a larger total amount of interest expense over the life of the bond.
    B. The effective interest method charges a different interest expense each year while the straight-line method results in a constant amount of expense each year.
    C. There are no differences between the two methods.
    D. None of these answers are correct.

Answer 22

b

Question 23

46. In-substance defeasance is sometimes used as a method of bond retirement. Choose the correct statement about this practice.
    A. The bonds are legally retired as a result
    B. The firm may invest in any investment-grade debt security to retire the bonds as long as the investment securities are transferred irrevocably to a trustee
    C. Neither the assets used to effect the defeasance, nor the bonds themselves, are reported in the balance sheet, even though the bonds remain outstanding
    D. The process may require the company which issued the bonds to make substantial payments in addition to the investments purchased for the defeasance

Answer 23

c

Question 24

47. Which of the following is not one of the conditions that must be met to qualify as extinguishment of debt by in-substance defeasance?
    A. Trust must own monetary assets that are essentially risk free.
    B. Cash inflows into the trust must approximately coincide with required cash outflows.
    C. There is a reasonable possibility that the debtor will be called on to make additional payments on the debt.
    D. The qualifying assets must not be used for trustee fees.

Answer 24

c

Question 25

48. The result of an effective interest rate that is higher than the stated rate on a debt security is the: A. Carrying value of the debt will decrease each interest period. B. Security will sell at a premium. C. Cash interest paid on each interest date will be changed. D. Dollar amount of interest expense reported on the income statement, assuming the interest method is used, will increase each interest period.

Answer 25

d

Question 26

49. Which of the following statements is true? A. If a bond is sold "at a discount," the effective interest rate on the bond is lower than the stated interest rate. B. If a bond is sold between interest dates, it is necessary to record the interest accrued since the last payment date before sale. C. If a bond is sold "at a premium," the effective interest rate on the bond is higher than the stated interest rate. D. Bond price of 98 means that the yield rate is 98% of the stated rate.

Answer 26

b

Question 27

50. If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the early years will be: A. less than if the interest method is used. B. less than the amount of the interest payments. C. more than if the interest method is used. D. The same as if the interest method is used

Answer 27

c

Question 28

``` 51. VB owes a $200,000, 8%, five-year note payable dated January 1, 2020. It is the end of year 2020, and instead of making the interest payment now due, VB has made arrangements to pay the debt and the 2020 interest payment in four equal instalments based on the same interest rate. The first payment is to be made on January 1, 2021. The amount of the equal annual payments is (rounded to the nearest dollar): A. $54,000 B. $60,384 C. $55,912 D. $65,214 ```

Answer 28

b

Question 29

``` 52. On January 1, 2014, ER signed a $120,000, 10%, three-year, note payable. The proceeds are to be used to purchase a computer and related software for the company. The lending institution advanced proceeds of $115,800 and took a mortgage on the computer. The note is payable in three equal annual instalments starting on December 31, 2014. The effective interest rate to use for this debt is (rounded to the nearest percent; do not interpolate): A. 10%. B. 11%. C. 12%. D. 13%. ```

Answer 29

c

Question 30

``` 53. On November 1, 2009, WC purchased CX, 10-year, 7%, bonds with a face value of $100,000 for $96,000. The bonds are intended to be held to maturity. An additional $2,333 was paid for the accrued interest. Interest is payable semi-annually on January 1 and July 1. The bonds mature on July 1, 2016. WC uses the straight-line method of amortization. Ignoring income taxes, the amount of interest revenue reported in WC's 2019 income statement (year-end December 31) as a result of WC's long-term bond investment in CX was: A. $1,267 B. $1,167 C. $1,120 D. $1,067 ```

Answer 30

b

Question 31

``` 54. On March 1, 2012, WC issued 10% stated interest rate, 10 year debentures dated January 1, 2012, in the face amount of $1,000,000, with interest payable on January 1 and July 1. The debentures were sold to yield 12% plus accrued interest. How much should WC debit to cash on March 1, 2012? A. $901,967 B. $903,003 C. $1,016,667 D. $1,033,333 E. $902,336 ```

Answer 31

a

Question 32

55. On September 1, 2020, ER issued 11%, 10 year bonds dated June 1, 2020, in the face amount of $140,000, with interest payable July 1 and December 31. The bonds were sold for $140,000. How much should ER debit to cash on September 1, 2020? A. $140,000 B. $142,567 C. $147,700 D. Cannot be determined from the information given

Answer 32

b

Question 33

56. Which of the following is true with respect to bond retirement? A. If interest rates increase, the issuer can retire bonds at a gain by buying them on the open market. B. Gains and losses on bond retirements may be classified as ordinary gains and losses or unusual gains and losses. C. On debt retirement all related accounts should be update. D. All of these answers are correct.

Answer 33

d

Question 34

57. ASPE and IFRS differ in their treatment of long-term Bonds Payable in that: A. Under IFRS, exchange gains and losses on short-term debt are recorded in the income statement immediately. B. The straight-line method may be used under ASPE but not under IFRS. C. ASPE ignores foreign exchanges gains and losses. D. IFRS does not account for foreign exchange gains and losses on Bonds Payable.

Answer 34

b

Question 35

``` 58. Which of the following is not a required disclosure for Bonds Payable under IFRS? A. Interest rate risk. B. Credit risk. C. Transaction risk. D. Liquidity risk. ```

Answer 35

c