Note disclosures for long-term debt generally include all of the following except?

a. restrictions imposed by the creditor.

b. names of specific creditors.

c. call provisions and conversion privileges.

d. assets pledged as security.

The correct answer is: names of specific creditors.

On July 1, 2013, Noble, Inc. issued 9% bonds in the face amount of $5,000,000, which
mature on July 1, 2019. The bonds were issued for $4,695,000 to yield 10%, resulting in
a bond discount of $305,000. Noble uses the effective-interest method of amortizing
bond discount. Interest is payable annually on June 30. At June 30, 2015, the carrying
value of the bonds should be?

a. $4,735,950.

b. $4,745,000.

c. $4,785,000.

d. $4,756,000.
The correct answer is: $4,735,950.
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. reported as an expense in the period the bonds mature or are retired.

c. recorded as a reduction in the carrying value of bonds payable.

d. accumulated in a deferred charge account and amortized over the life of the bonds.
The correct answer is: recorded as a reduction in the carrying value of bonds payable.
The printing costs and legal fees associated with the issuance of bonds should?

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

b. be reported as a deduction from the face amount of bonds payable.

c. be expensed when incurred.

d. not be reported as an expense until the period the bonds mature or are retired.
The correct answer is: be recorded as a reduction of the bond issue amount and then
amortized over the life of the bonds.
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 nominal rate of interest exceeded the market rate.

b. no necessary relationship exists between the two rates.

c. the market and nominal rates coincided.

d. the effective yield or market rate of interest exceeded the stated (nominal) rate.
The correct answer is: the nominal rate of interest exceeded the market rate.
All of the following are differences between IFRS and U.S. GAAP in according for
liabilities except?

a. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.”

b. 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.

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

d. 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.
The correct answer is: U.S. GAAP, but not IFRS uses the term “provisions” for
contingent liabilities which are accrued.
The debt to assets ratio is computed by dividing?

a. total liabilities by total assets.

b. long-term liabilities by total assets.

c. current liabilities by total assets.

d. total assets by total liabilities.

The correct answer is: total liabilities by total assets.
Long-term debt that matures within one year and is to be converted into shares should
be reported?

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

b. as part current and part non-current.

c. in a special section between liabilities and equity.

d. as a current liability.

The correct answer is: as non-current if the refinancing agreement is completed by the
end of the year.
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. 20 periods and 5% from the present value of 1 table.

b. 10 periods and 8% from the present value of 1 table.

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

d. 10 periods and 10% from the present value of 1 table.

The correct answer is: 20 periods and 4% from the present value of 1 table.
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 Expense.

c. credit to Unearned Interest.

d. credit to Interest Receivable.

The correct answer is: credit to Interest Expense.
On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market
rate of interest for these bonds is 10%. Interest is payable annually on December 31.
Martinez uses the effective-interest method of amortizing bond premium. At the end of
the first year, Martinez should report bonds payable of?

a. $3,185,130

b. $3,173,550

c. $3,165,000

d. $3,184,500
The correct answer is: $3,184,500
On July 1, 2015, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2015 and mature on April 1, 2025. Interest is
payable semiannually on April 1 and October 1. What amount did Spear receive from the
bond issuance?

a. $990,000

b. $1,000,000
c. $965,000

d. $1,015,000
The correct answer is: $1,015,000
The interest rate written in the terms of the bond indenture is known as the?

a. nominal rate only.

b. coupon rate, nominal rate, or stated rate.

c. coupon rate only.

d. stated rate only.

The correct answer is: coupon rate, nominal rate, or stated rate.
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. All of these answer choices are correct.

b. any costs of issuing the bonds must be amortized up to the purchase date.

c. the premium must be amortized up to the purchase date.

d. interest must be accrued from the last interest date to the purchase date.
The correct answer is: All of these answer choices are correct.
At the beginning of 2015, Winston Corporation issued 10% bonds with a face value of
$600,000. These bonds mature in five years, and interest is paid semiannually on June
30 and December 31. The bonds were sold for $555,840 to yield 12%. Winston uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2015 (Round your answer to the
nearest dollar)?

a. $66,500

b. $66,700

c. $68,832

d. $66,901
The correct answer is: $66,901
On January 1, 2015, Huff Co. sold $1,000,000 of its 10% bonds for $885,296 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should
Huff report as interest expense for the six months ended June 30, 2015?

a. $50,000

b. $60,000
c. $44,266

d. $53,118
The correct answer is: $53,118
On January 1, 2015, Crown Company sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $2,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $400,000, with the first
payment due December 31, 2015. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $1,442,000 at January 1, 2015. What
should be the balance of the Notes Payable account on the books of Leary at December
31, 2015 after adjusting entries are made, assuming that the effective-interest method is
used?

a. $1,553,600

b. $1,171,780

c. $2,000,000

d. $1,442,000
The correct answer is: $1,171,780
On January 1, 2015, Jantzen Company sold land to Dansko Company. There was no
established market price for the land. Dansko gave Jantzen a CHF2,400,000 Zero-
interest-bearing note payable in three equal annual installments of CHF800,000 with the
first payment due December 31, 2015. The note has no ready market. The prevailing
rate of interest for a note of this type is 10%. The present value of a CHF2,400,000 note
payable in three equal annual installments of CHF800,000 at a 10% rate of interest is
CHF1,989,600. The note will be reported on Dansko’s 2015 statement of financial
position at a carrying value of?

a. CHF2,126,400

b. CHF2,188,560

c. CHF2,400,000

d. CHF1,989,600
The correct answer is: CHF2,188,560
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. a loss on the settlement.

b. None of these answer choices are correct.

c. no gain or loss on the settlement.

d. a gain on the settlement.
The correct answer is: a gain on the settlement.
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 matures.

c. only in the year the note is issued.

d. using the effective-interest method.

The correct answer is: using the effective-interest method.
On January 1, 2015, Solis Co. issued its 10% bonds in the face amount of $3,000,000,
which mature on January 1, 2020. The bonds were issued for $3,405,000 to yield 8%,
resulting in bond premium of $405,000. Solis uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December
31, 2015, the carrying value of the bonds should be?

a. $3,364,500.

b. $3,377,400.

c. $3,405,000.

d. $3,304,500.
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 greater than the present value of the future cash
flows.

b. present value of the debt is less than the present value of the future cash flows.

c. carrying amount of the debt is less than the total future cash flows.

d. present value of the debt is greater than the present value of the future cash flows.
The correct answer is: carrying amount of the debt is greater than the present value of
the future cash flows.
On October 1, 2015 Bartley Corporation issued 5%, 10-year bonds with a face value of
$500,000 at 108 (a 4% yield). Interest is paid on October 1 and April 1, with any
premiums or discounts amortized on an effective-interest basis. Bond interest expense
reported on the December 31, 2015 income statement of Bartley Corporation would be?

a. $5,400

b. $10,800
c. $6,750

d. $6,250
The correct answer is: $5,400
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. no interest expense should be recognized in the future.

b. a loss should be recognized by the debtor.

c. a gain should be recognized by the debtor.

d. a new effective-interest rate must be computed.

The correct answer is: a gain should be recognized by the debtor.
On June 30, 2015, Omara Co. had outstanding 8%, $3,000,000 face amount, 15-year
bonds maturing on June 30, 2025. Interest is payable on June 30 and December 31.
The unamortized amount of the bond discount on June 30, 2015 was $135,000. On June
30, 2015, Omara acquired all of these bonds at 94 and retired them. What net carrying
amount should be used in computing gain or loss on this early extinguishment of debt?

a. $2,865,000.

b. $3,000,000.

c. $2,820,000.

d. $2,955,000.
The correct answer is: $2,865,000.
Carr Corporation retires its $100,000 face value bonds at 105 on January 1, following
the payment of interest. The carrying value of the bonds at the redemption date is
$103,745. The entry to record the redemption will include a?

a. debit of $3,745 to Bonds Payable.

b. credit of $1,255 to Gain on Extinguishment of Debt.

c. credit of $3,745 to Loss on Extinguishment of Debt.

d. debit of $103,745 to Bonds Payable.

The correct answer is: debit of $103,745 to Bonds Payable.
A ten-year bond was issued in 2013 at a discount with a call provision to retire the
bonds. When the bond issuer exercised the call provision on an interest date in 2015,
the carrying amount of the bond was less than the call price. The amount of bond liability
removed from the accounts in 2015 should have equaled the?
a. carrying amount.

b. call price.

c. call price less unamortized discount.

d. face amount.
The correct answer is: carrying amount.
On October 1, 2015 Bartley Corporation issued 5%, 10-year bonds with a face value of
$500,000 at 108 (a 4% yield). Interest is paid on October 1 and April 1, with any
premiums or discounts amortized on an effective-interest basis. The entry to record the
issuance of the bonds would include a?

a. credit of $540,000 to Bonds Payable.

b. credit of $500,000 to Bonds Payable.

c. debit of $40,000 to Bonds Payable.

d. credit of $12,500 to Interest Payable.

The correct answer is: credit of $540,000 to Bonds Payable.
Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2015.
Interest is paid on July 1 and January 1. The proceeds from the bonds are $9,802,073.
The balance reported in the bonds payable account on the December 31, 2015
statement of financial position?

a. €9,802,073

b. €9,804,156

c. €9,806,322

d. €10,000,000
The correct answer is: €9,804,156
Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated December
31, 2013. Because of Eddy’s financial difficulties developing in 2015, Eddy owed
accrued interest of $48,000 on the note at December 31, 2015. Under a debt settlement,
on December 31, 2015, Cole agreed to settle the note and accrued interest for a tract of
land having a fair value of $360,000. Eddy’s acquisition cost of the land is $290,000.
Ignoring income taxes, on its 2015 income statement Eddy should report as a result of
the debt settlement? Gain on Disposal?, Extinguishment Gain?

a. $158,000; $0

b. $70,000; $40,000

c. $70,000; $88,000
d. $110,000; $0
The correct answer is: $70,000; $88,000
On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market
rate of interest for these bonds is 10%. Interest is payable annually on December 31.
Patterson uses the effective-interest method of amortizing bond discount. At the end of
the first year, Patterson should report bonds payable of?

a. $4,745,000.

b. $4,714,500.

c. $4,725,500.

d. $258,050.
The correct answer is: $4,714,500.
On January 1, 2015, Chang Company sold HK$10,000,000 of its 10%, bonds for
HK$8,852,960, a yield of 12%. Interest is payable semiannually on January 1 and July1.
The July 1, 2015 entry to record the first interest payment will include?

a. a credit to Interest Expense for HK$442,648.

b. a debit to Interest Expense for HK$531,178.

c. a debit to Cash for HK$600,000.

d. a credit to Bonds Payable for HK$1,062,355.

The correct answer is: a debit to Interest Expense for HK$531,178.
Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2015.
Interest is paid on July 1 and January 1. The proceeds from the bonds are €9,802,073.
What amount of interest expense will be reported on the 2016 income statement?

a. €780,000

b. €392,083

c. €784,419

d. €784,249
The correct answer is: €784,419
On January 1, 2015, Ann Price loaned $45,078 to Joe Kiger. A zero-interest-bearing
note (face amount, $60,000) was exchanged solely for cash; no other rights or privileges
were exchanged. The note is to be repaid on December 31, 2017. The prevailing rate of
interest for a loan of this type is 10%. The present value of $60,000 at 10% for three
years is $45,078. What amount of interest income should Ms. Price recognize in 2015?

a. $4,508.
b. $13,524.

c. $6,000.

d. $18,000.
The correct answer is: $4,508.
At the beginning of 2015, Wallace Corporation issued 10% bonds with a face value of
$900,000. These bonds mature in the five years, and interest is paid semiannually on
June 30 and December 31. The bonds were sold for $833,760 to yield 12%. Wallace
uses a calendar-year reporting period. Using the effective-interest method of
amortization, what amount of interest expense should be reported for 2015 (Round your
answer to the nearest dollar)?

a. $100,050

b. $100,353

c. $99,750

d. $103,248
The correct answer is: $100,353
On January 1, 2015, Li Company purchased equipment from Keiko Distributors. There
was no established market price for the equipment which has a 10 year life and no
salvage value Li gave Keiko a HK$200,000 zero-interest-bearing note payable in 5 equal
annual installments of HK$40,000, with the first payment due December 31, 2015. The
prevailing rate of interest for a note of this type is 9%. The present value of the note at
9% was HK$144,200. Assuming that Li uses the straight-line method of depreciation,
what amounts will be reported on the company’s 2015 income statement for interest
expense and depreciation expense for the note and equipment?

a. HK$12,978; HK$14,420

b. HK$14,420; HK$28,840

c. HK$18,000; HK$20,000

d. HK$0; HK$20,000
The correct answer is: HK$12,978; HK$14,420
On January 1, 2015, Lorry Manufacturing Company purchased equipment from Wales
Inc. There was no established market price for the equipment which has an 8 year life
and no salvage value. Lorry gave Wales a £105,000 zero-interest-bearing note payable
in 3 equal annual installments of £35,000, with the first payment due December 31,
2015. The prevailing rate of interest for a note of this type is 8%. The present value of
the note at 8% was £90,199. Assuming that Lorry uses the straight-line method of
depreciation, what amounts will be reported in the company’s 2015 income statement for
interest expense and depreciation expense for the note and equipment?
a. £7,216; £11,275

b. £1,750; £8,750

c. £7,216; £30,066

d. £8,400; £13,125
The correct answer is: £7,216; £11,275
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 amount of interest expense will remain constant 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 balance of mortgage payable will remain a constant amount over the 10-year
period.
The correct answer is: 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.
Bonds that pay no interest unless the issuing company is profitable are called?

a. revenue bonds.

b. collateral trust bonds.

c. income bonds.

d. debenture bonds.
The correct answer is: income bonds.

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 20 periods and 5% from the present value of an
annuity table.

b. multiply $10,000 by the table value for 10 periods and 10% 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.

The correct answer is: multiply $10,000 by the table value for 20 periods and 4% from
the present value of an annuity table.
On January 1, 2015, Chang Company sold bonds with a face amount of CHF50,000,000
at 97, a yield of 11%. Interest is payable semiannually at 10% on July 1 and January 1.
The entry to record the July 1, 2015 interest payment will include?

a. a debit to Interest Expense for CHF2,667,500.

b. a debit to Interest Expense for CHF2,425,000.

c. a debit to Bonds Payable for CHF2,500,000.

d. a credit to Cash for CHF5,500,000.

The correct answer is: a debit to Interest Expense for CHF2,667,500.
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.

The correct answer is: can enhance the quality of its financial position and perhaps
permit credit to be obtained more readily and at less cost.
Bangalor Company issues Rs10,000,000, 8%, 10-year bonds at 96.5 on July 1, 2015.
Interest is paid on July 1 and January 1. The journal entry to record the issuance will
include?

a. a credit to cash for Rs9,650,000

b. a debit to cash for Rs10,000,000

c. a debit to discount on bonds payable for Rs350,000

d. a credit to bonds payable for Rs9,650,000

The correct answer is: a credit to bonds payable for Rs9,650,000
On its December 31, 2014 statement of financial position, Emig Corp. reported bonds
payable of $5,680,000. The bonds had a $6,000,000 face value. On January 2, 2015,
Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000.
What amount should Emig report in its 2015 income statement as loss on
extinguishment of debt (ignore taxes)?

a. $70,000

b. $230,000

c. $160,000

d. $0
The correct answer is: $230,000
Kant Corporation retires its $100,000 face value bonds at 102 on January 1, following
the payment of interest. The carrying value of the bonds at the redemption date is
$96,250. The entry to record the redemption will include a?

a. debit of $5,750 to Loss on Extinguishment of Debt.

b. credit of $3,750 to Gain on Extinguishment of Debt.

c. debit of $3,750 to Bonds Payable.

d. debit of $96,250 to Bonds Payable.

The correct answer is: debit of $96,250 to Bonds Payable.
On January 1, 2015, Jacobs Company sold property to Dains Company which originally
cost Jacobs $760,000. There was no established exchange price for this property. Dains
gave Jacobs a $1,200,000 zero-interest-bearing note payable in three equal annual
installments of $400,000 with the first payment due December 31, 2015. The note has
no ready market. The prevailing rate of interest for a note of this type is 10%. The
present value of a $1,200,000 note payable in three equal annual installments of
$400,000 at a 10% rate of interest is $994,800. What is the amount of interest income
that should be recognized by Jacobs in 2015, using the effective-interest method?

a. $99,480.

b. $120,000.

c. $40,000.

d. $0.
The correct answer is: $99,480.
Bonds for which the owners’ names are not registered with the issuing corporation are
called?

a. secured bonds.

b. term bonds.
c. bearer bonds.

d. debenture bonds.
The correct answer is: bearer bonds.
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 cash payment to bondholders.

d. increases the carrying amount of the bond.

The correct answer is: decreases the balance of the bonds payable account.
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. registered bond.

c. bond debenture.

d. bond coupon.
The correct answer is: bond indenture.
A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place?

a. it should not be recorded on the books of either party until the fair value of the property
becomes evident.

b. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.

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 present value of the debt instrument must be approximated using an

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