Question_CHAP11_9Dec

1. A loss from early extinguishment of debt, if material, should be reported as a component of
income
a. After cumulative effect f accounting changes and after discontinued operations of a segment
of a business
b. After cumulative effect of accounting changes and before discontinued operations of a
segment of a business
c. Income from continuing operations
d. Before cumulative effect of accounting changes and before discontinued operation s of a
segment of a business
2. Unamortized debt discount should be reported on the balance sheet of the issuer as
a. A direct deduction from the face amount of the debt
b. A direct deduction from the present value of the debt
c. A deferred charge
d. Part of the issue costs
3. An example of an item that is not a liability is
a. Dividends payable in stock
b. Advances from customers on contracts
c. Accrued estimated warranty costs
d. The portion of long-term debt due within one year
4. If bonds are issued initially at a discount and the straight-line method of amortization is used for
the discount, interest expense in the earlier years will be
a. Greater than if the compound interest method were used
b. The same as if the compound interest method were used
c. Less than if the compound interest method were used
d. Less than the amount of the interest payments
5. Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity
10 years from date of issue. If the bonds were issued at a premium, this indicates that
a. The yield (effective or market) rate of interest exceeded the nominal (coupon) rate
b. The nominal rate of interest exceeded the yield rate
c. The yield and nominal rates coincided
d. No necessary relationship exists between the two rates
6. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for
stockholders of companies having
a. Cyclical high and low amounts of reported earnings
b. Steady amounts of reported earnings
c. Volatile fluctuation in reported earnings over short periods of time
d. Steadily declining amounts of reported earnings
7. Theoretically, a bond payable should be reported at the present value of the interest discounted at
a. Stated interest rate for both principal and interest
b. Effective interest rate for both principal and interest
c. Stated interest rate for principal and effective interest rate for interest
d. Effective interest rate for principal and stated interest rate for interest
8. A threat of expropriation of assets that is reasonably possible, and for which the amount of loss
can be reasonably estimated, is an example of a (an)
a. Loss contingency that should be disclosed, but not accrued
b. Loss contingency that should be accrued and disclosed
c. Appropriation of retained earnings against which losses should be charged
d. General business risk which should not be accrued and need not be disclosed
9. When it is necessary to impute an interest rate in connection with a note payable, the rate should
be
a. Two-thirds of the prime rate effective at the time the obligation is incurred
b. The same as that used in the GNP Implicit Price Deflator
c. At least equal to the rate at which the debtor can obtain financing of a similar nature from
other sources at the date of the transaction
d. As near zero as can be justified
10. Taft Company sells Lee Company a machine, the usual cash price of which is $10,000, in
exchange for an $11,800 non-interest-bearing note due three years from date. If Taft records the
note at $10,000, the overall effect will be
a. A correct sales price and correct interest revenue
b. A correct sales price and understated interest revenue
c. An understated sales price and understated interest revenue
d. An overstated interest price and understated interest revenue
11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall
effect will be
a. A correct acquisition cost and correct interest expense
b. A correct acquisition cost and understated interest expense
c. An understated acquisition cost and understated interest expense
d. An overstated acquisition cost and understated interest expense
12. How would the amortization of premium bonds payable affect each of the following?
Carrying value of
Bond Net Income
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase
13. For a trouble debt restructuring involving only modification of terms, it is appropriate for a debtor
to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments specified by the new terms
b. Is less than the total future cash payments specified by the new terms
c. Exceeds the present value specified by the new terms
d. Is less than the present value specified by the new terms
14. How should the value of warrants attached to a debt security be account for?
a. No value assigned
b. A separate portion of paid-in capital
c. An appropriation of retained earnings
d. A liability
15. For the issuer of a 10-year term bond, the amount of amortization using the interest method
would increase each year if the bond was sold at a
a. No No
b. Yes Yes
c. No Yes
d. Yes No
Discount Premium
16. Gain contingencies are usually recognized in the income statement when
a. Realized
b. Occurrence is reasonably possible and the amount can be reasonably estimated
c. Occurrence is probable and the amount can be reasonably estimated
d. The amount can be reasonably estimated
17. An estimated loss from a loss contingency should be accrued when
a. It is probable at the date of the financial statements that a loss has been incurred and the
amount of the loss can be reasonably estimated
b. The loss has been incurred by the date of the financial statements and the amount of the loss
may be material
c. It is probable at the date of the financial statements that a loss has been incurred and the
amount of the loss may be material
d. It is probable that a loss will be incurred in a future period and the amount of the loss can be
reasonably estimated
18. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash
paid over the carrying amount of the bonds should be recognized separately as a (an)
a. Extraordinary loss
b. Extraordinary gain
c. Loss from continuing operations
d. Loss from discontinued operations
19. A two-year note was issued in an arm’s-length transaction at face value solely for cash at the
beginning of the year. There were no other rights or privileges exchanged. The interest rate is
specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate
of interest for a loan of this type is 15 percent per year. What annual interest rate should be used
to record interest expense for this year and next year?
a. 10 percent 15 percent
b. 10 percent 10 percent
c. 15 percent 10 percent
d. 15 percent 15 percent
This year Next Year
20. The interest rate used to calculate the cash interest payments by the issuer of bonds is
a. The market rate of interest
b. The effective interest rate
c. The stated interest rate
d. Equal to the actual interest expense rate
21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Ace’s financial
statements
a. Ace is getting a 35% return on its assets
b. There is a risk Ace cannot pay its debts as they come due
c. 65% of the assets are financed by the stockholders
d. Ace should issue more debt to reduce its risk
22. Trading on the equity (leverage) refers to the
a. Amount of working capital
b. Amount of capital provided by owners
c. Use of borrowed money to increase the return to owners
d. Number of times interest is earned
23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment
can be defended on what basis?
a. Convertible debt is a complex financial instrument.
b. Convertible debt comprises two financial instruments – a debt instrument and the option to
convert.
c. The debt instrument and the option to convert are not separable.
d. The option to convert is equity.
24. XYZ Company’s yearend is December 31, 20x1 and its financial statements are issued in the
following March. On January 24, 20x2. A 10 year note payable came due and was paid by
issuing XYZ common stock to the creditor. In its December 31, 20x1 balance sheet, XYZ should
a. Report the note as a current liability because it was due on January 24, 20x2 – only 24 days
after the year end.
b. Report the note as a long-term liability because it was not paid off with a current asset or
replaced by another current liability.
c. Report the note as a long-term liability because it was extinguished (paid off) on January 24,
20x2 – only 24 days after the year end.
d. Report the note as a long-term liability because it was a 10 year note.
25. A zero coupon bond is different from a typical bond issue because
a. The investor can clip the coupons and get paid for the periodic interest on the bond while a
typical bond does not have coupons.
b. It is reported in the balance sheet net of the discount on the bond.
c. The zero coupon bond’s deep discount is reported as an asset and a typical bond that is issued
at a discount is reported net of the discount.
d. It does not pay any periodic interest while the typical bond does.
26. An unearned revenue is an example of a(an)
a. Deferred credit.
b. Accrued liability.
c. Customer billing that takes place before a job is finished.
d. Accounts receivable.

27. A deferred credit meets the definition of a liability because
a. It is a probable future sacrifice of assets as the result of a past transaction or event.
b. It is a present obligation to transfer assets to another entity.
c. It is an accrual representing an obligation to pay money in the future.
d. It is a present obligation to provide services to another entity.
28. The physical capital maintenance concept of income would require that a company’s bonds
payable be
a. Reported in the balance sheet at their amortized issue price and that changes in their market
values be reported in earnings.
b. Reported in the balance sheet at their amortized issue price and that changes in their market
values not be reported in earnings.
c. Reported in the balance sheet at their fair market values and that changes in their market
values be reported in earnings.
d. Reported in the balance sheet at their fair market values and that changes in their market
values be reported in other comprehensive income.
29. ABC Company has a note payable that is due six months after its year end. Under which of the
following conditions will ABC be able to classify the note as a long term debt.
a. ABC cannot classify the note as long term because it is due within the current operating cycle
or one year, whichever is longer.
b. ABC can classify the note as long term because it is due next year.
c. ABC can classify the note as long term because management intends to refinance it with long
term debt and has an agreement to do so with a qualified creditor.
d. ABC can classify the note as long term because it is a 10 year note and management intends
to pay the maturity value at the end of the 10 year period.
30. Current accounting treatment for gain contingencies is different from the accounting treatment for
loss contingencies. Which accounting concept is this differential concept consistent with?
a. Conservatism
b. Materiality
c. Full disclosure
d. Revenue recognition