Chapter 14 - Intermediate Accounting
A bond for which the issuer has the right to call and retire the bonds prior to maturity is a
A. convertible bond.
B. callable bond.
C. retirable bond.
D. debenture bond. - ANS-B. callable bond.
Callable bonds give the issuer the right to call and retire the bonds prior to maturity.
\A bond issued in the name of the owner is a:
A. bearer bond.
B. convertible bond.
C. income bond.
D. registered bond. - ANS-D. registered bond.
Registered bonds are issued in the name of the owner.
\A bond that matures in installments is called a:
A. term bond.
B. serial bond.
C. callable bond.
D. bearer bond. - ANS-B. serial bond.
Bonds that mature in installments are referred to as serial bonds.
\A debt instrument with no ready market is exchanged for property whose fair market value is
currently indeterminable. When such a transaction takes place
A. the present value of the debt instrument must be approximated using an imputed interest
rate.
B. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
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 directors of both entities involved in the transaction should negotiate a value to be
assigned to the property. - ANS-A. the present value of the debt instrument must be
approximated using an imputed interest rate.
When such a transaction takes place the present value of the debt instrument must be
approximated using an imputed interest rate.
\All of the following statements are true regarding IFRS treatment of reporting and recognition of
liabilities except:
A. IFRS allows the recognition of liabilities for future losses.
, B. IFRS requires that companies present current and noncurrent liabilities on the face of the
balance sheet, with current liabilities generally presented in order of liquidity.
C. For contingencies, IFRS requires insurance recoveries be "virtually certain" before
recognition of an asset is permitted.
D. The recognition criteria for asset retirement obligations is less stringent under IFRS than it is
under U.S. GAAP - ANS-A. IFRS allows the recognition of liabilities for future losses.
Both U.S.GAAP and IFRS prohibit the recognition of liabilities for future losses.
\Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8%
for $922,780,000, to yield 10%. If the company uses the effective interest method of
amortization, interest expense for the first six months would be $4,000,000. - ANS-False.
Using the effective interest method of amortization, interest expense for the first six months
would be $4,614,000 (10% X .5 X $922,780,000).
\Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond
issue will be a certain amount. - ANS-False.
Firm underwriting means that the investment bank guarantees the proceeds of the bond issue
will be a certain amount.
\Bonds that are not recorded in the name of the bondholder are called unsecured bonds. -
ANS-False.
Bonds not recorded in the name of the bondholder are called coupon bonds.
\Bonds which do not pay interest unless the issuing company is profitable are called
A. income bonds.
B. term bonds.
C. debenture bonds.
D. secured bonds. - ANS-A. income bonds.
Income bonds are bonds which do not pay interest unless the issuing company is profitable.
\Boomchickapop Company elects the fair value option for a long-term note payable. In 2014, the
company reported an unrealized holding gains which was reported as a component of Other
Comprehensive Income. - ANS-False.
Unrealized holding gains and losses are included in net income if a company elects the fair
value option
\Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone
record for the June 30 payment?
A. $390,000
B. $392,082
C. $400,000
A bond for which the issuer has the right to call and retire the bonds prior to maturity is a
A. convertible bond.
B. callable bond.
C. retirable bond.
D. debenture bond. - ANS-B. callable bond.
Callable bonds give the issuer the right to call and retire the bonds prior to maturity.
\A bond issued in the name of the owner is a:
A. bearer bond.
B. convertible bond.
C. income bond.
D. registered bond. - ANS-D. registered bond.
Registered bonds are issued in the name of the owner.
\A bond that matures in installments is called a:
A. term bond.
B. serial bond.
C. callable bond.
D. bearer bond. - ANS-B. serial bond.
Bonds that mature in installments are referred to as serial bonds.
\A debt instrument with no ready market is exchanged for property whose fair market value is
currently indeterminable. When such a transaction takes place
A. the present value of the debt instrument must be approximated using an imputed interest
rate.
B. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
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 directors of both entities involved in the transaction should negotiate a value to be
assigned to the property. - ANS-A. the present value of the debt instrument must be
approximated using an imputed interest rate.
When such a transaction takes place the present value of the debt instrument must be
approximated using an imputed interest rate.
\All of the following statements are true regarding IFRS treatment of reporting and recognition of
liabilities except:
A. IFRS allows the recognition of liabilities for future losses.
, B. IFRS requires that companies present current and noncurrent liabilities on the face of the
balance sheet, with current liabilities generally presented in order of liquidity.
C. For contingencies, IFRS requires insurance recoveries be "virtually certain" before
recognition of an asset is permitted.
D. The recognition criteria for asset retirement obligations is less stringent under IFRS than it is
under U.S. GAAP - ANS-A. IFRS allows the recognition of liabilities for future losses.
Both U.S.GAAP and IFRS prohibit the recognition of liabilities for future losses.
\Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8%
for $922,780,000, to yield 10%. If the company uses the effective interest method of
amortization, interest expense for the first six months would be $4,000,000. - ANS-False.
Using the effective interest method of amortization, interest expense for the first six months
would be $4,614,000 (10% X .5 X $922,780,000).
\Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond
issue will be a certain amount. - ANS-False.
Firm underwriting means that the investment bank guarantees the proceeds of the bond issue
will be a certain amount.
\Bonds that are not recorded in the name of the bondholder are called unsecured bonds. -
ANS-False.
Bonds not recorded in the name of the bondholder are called coupon bonds.
\Bonds which do not pay interest unless the issuing company is profitable are called
A. income bonds.
B. term bonds.
C. debenture bonds.
D. secured bonds. - ANS-A. income bonds.
Income bonds are bonds which do not pay interest unless the issuing company is profitable.
\Boomchickapop Company elects the fair value option for a long-term note payable. In 2014, the
company reported an unrealized holding gains which was reported as a component of Other
Comprehensive Income. - ANS-False.
Unrealized holding gains and losses are included in net income if a company elects the fair
value option
\Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014.
Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072.
Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone
record for the June 30 payment?
A. $390,000
B. $392,082
C. $400,000
