978-1337276337 Test Bank Chapter 10 Part 1

Chapter 10

Page 1

True / False

1. Discount on Bonds Payable is classified as a current liability.

a. True

b. False

2. All liabilities that are not classified as current liabilities are classified as long-term.

a. True

b. False

3. Bonds are generally issued in denominations of $1,000.

a. True

b. False

Chapter 10

Page 2

4. Serial bonds are unique because the interest is paid as a series of daily payments.

a. True

b. False

5. Bonds are typically issued in denominations of $10,000.

a. True

b. False

6. If Tanner Company becomes less creditworthy, the market price of its bonds will decline.

a. True

b. False

Chapter 10

Page 3

7. Debenture bonds are backed by specific collateral of the issuing company.

a. True

b. False

8. Convertible bonds normally sell at a higher price than nonconvertible bonds.

a. True

b. False

9. If an investor has the right to retire the bonds, they are referred to as callable.

a. True

b. False

Chapter 10

Page 4

10. Callable bonds may be retired by the issuer before their specified due date.

a. True

b. False

11. The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.

a. True

b. False

12. The face rate is also called the nominal or stated rate.

a. True

b. False

Chapter 10

Page 5

13. A bond issue price is the present value of the cash flows that the bond will produce.

a. True

b. False

14. The issue price of a bond is always calculated at present value using the market rate of interest.

a. True

b. False

15. When the market rate of interest is less than the face rate, then the bond issue will be sold at a discount.

a. True

b. False

Chapter 10

Page 6

16. The excess of the face value of bonds over the issue price is known as a premium.

a. True

b. False

17. The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a

constant amount of interest expense from period to period.

a. True

b. False

18. The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the

market rate of interest at the time the bonds are issued.

a. True

b. False

Chapter 10

Page 7

19. The amortization of bond discount increases the effective interest expense incurred each period for the issuer while

amortization of bond premium decreases it.

a. True

b. False

20. When a bond is issued at a discount, the interest expense each year is less than the cash payment for interest.

a. True

b. False

21. The sum of the carrying value and the redemption price at the time bonds are redeemed results in the gain or loss on

redemption.

a. True

b. False

Chapter 10

Page 8

22. When a bond issue is retired early, the amount of unamortized discount or premium is not considered in the

calculation of a gain or loss.

a. True

b. False

23. In an operating lease, the lessee acquires the right to use an asset for only a limited period of time.

a. True

b. False

24. A lease is accounted for as a capital lease if the lease term is 75% or more of the property’s economic life.

a. True

b. False

Chapter 10

Page 9

25. When a lease is classified as an operating lease, the lease liability should be presented on the balance sheet of the

lessee.

a. True

b. False

26. IFRS typically use a more “rule–based” approach than U.S. GAAP.

a. True

b. False

27. In general, the international accounting standards provide lease criteria that are similar to the U.S. standards.

a. True

b. False

Chapter 10

Page 10

28. The accounting for leases is an excellent example of the differences in how U.S. and IFRS accounting standards are

applied.

a. True

b. False

29. The terms of a lease can only be structured in one way to meet the lessor and lessee and satisfy accounting standards.

a. True

b. False

30. In an operating lease, the lessee is not required to record the right to use the property as an asset or to record the

obligation for payments as a liability.

a. True

b. False

Chapter 10

Page 11

31. In an operating lease, the lessee has acquired sufficient rights of ownership and control of the property to be

considered its owner.

a. True

b. False

32. If the lease term is 75% or more of the property’s economic life, the lease agreement should be accounted for as an

operating lease.

a. True

b. False

33. The asset leased under an operating lease requires the lessee to record depreciation expense.

a. True

b. False

Chapter 10

Page 12

34. An investor views a high debt-to-equity ratio and a low times interest earned ratio as favorable signs of a company’s

abilities to meet its long-term obligations.

a. True

b. False

35. Long-term liabilities are a component of the “capital structure” of a company.

a. True

b. False

36. The debt-to-equity ratio is defined as total long-term liabilities divided by total stockholders’ equity.

a. True

b. False

Chapter 10

Page 13

37. Most investors would prefer to see equity rather than debt on the balance sheet.

a. True

b. False

38. Stock investors view equity as a claim against the company that must be satisfied before they get a return on their

money.

a. True

b. False

39. All changes in long-term liabilities are reflected in the Financing Activities category of the statement of cash flows.

a. True

b. False

Chapter 10

Page 14

40. Most long-term liabilities are related to a firm’s investing activities.

a. True

b. False

41. The change in the Deferred Taxes account is reflected in the Operating Activities category of the statement of cash

flows.

a. True

b. False

42. [APPENDIX] Deferred tax is an amount that reconciles the differences between the income for financial purposes

with the income reported for tax purposes. In most cases, it is a long-term liability.

a. True

b. False

Chapter 10

Page 15

43. [APPENDIX] A permanent difference with respect to taxes is a difference that affects the tax records but not the

accounting records, or vice versa.

a. True

b. False

44. [APPENDIX] Temporary differences occur when an item affects both book and tax calculations but not in the same

time period.

a. True

b. False

45. [APPENDIX] The Deferred Tax account should reflect permanent differences but not items that are temporary

differences between book accounting and tax reporting.

a. True

b. False

Chapter 10

Page 16

Multiple Choice

46. The current portion of long-term debt is a balance sheet item for Flavorful Products Company. How would it most

likely be classified on the balance sheet?

a. Current liability

b. Long-term liability

c. Current asset

d. Long-term asset

47. A ten-year lease obligation appears on the balance sheet of Generic Products Company. How would it most likely be

classified on the balance sheet?

a. Long-term liability

b. Current asset

c. Long-term asset

d. Contra-liability

Chapter 10

Page 17

48. Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be

classified on the balance sheet?

a. Current liability

b. Long-term liability

c. Current asset

d. Owners’ equity

49. Which of the following statements is true with respect to long-term liabilities?

a. They are obligations that will be satisfied within one year.

b. An account payable is a good example of a long-term liability because it is interest-bearing.

c. Long-term liabilities include bonds, other long-term liabilities, and deferred income taxes.

d. Accrued expenses are considered to be long-term liabilities.

50. Which of the following items should not appear in the Long-Term Liability section of the balance sheet?

a. Accrued income taxes

b. Capital lease with a ten-year term

c. Bonds payable

d. Pension obligations

Chapter 10

Page 18

51. A convertible bond is one where

a. the issuer can convert from a fixed interest rate to a floating one.

b. the issuer can convert it from long-term to short-term.

c. the issuer can retire the bond before its specified due date.

d. the holder can convert the bond into common stock at a future time.

52. Irwin, Inc. issued $41,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds

sold was

a. 41,000,000.

b. 410,000.

c. 4,100,000.

d. 41,000.

53. Which of the following statements regarding bonds payable is true?

a. Generally, bonds are issued in denominations of $100.

b. When an issuing company’s bonds are traded in the “secondary” market, the company will receive part of the

proceeds when the bonds are sold from the first purchaser to the second purchaser.

c. A debenture bond is backed by specific assets of the issuing company.

d. Most bonds are term bonds, meaning that the entire principal amount will mature on a single date.

Chapter 10

Page 19

54. If a company’s bonds are callable,

a. the investor or buyer of the bonds has the right to retire the bonds.

b. the issuing company is likely to retire the bonds before maturity if, for example, the bonds are paying 9% interest

while the market rate of interest is 6%.

c. the bonds are never allowed to remain outstanding until the maturity date.

d. the investor never knows what the redemption price will be until the bonds are actually called.

55. Convertible bonds are attractive to investors because

a. they usually carry a higher rate of interest than non-convertible bonds.

b. they carry a convertible interest rate that can be increased when the prime rate of interest increases.

c. they can be converted into stock at a future time.

d. the issuing company cannot retire the bonds before maturity.

56. Which of the following statements regarding serial bonds is true?

a. They are the most common type of bond issued.

b. They have shorter lives than term bonds.

c. They are always backed by the issuer’s collateral.

d. The bonds do not all mature on the same date.

Chapter 10

Page 20

57. Bonds are a popular source of financing because

a. bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment of interest to bondholders.

d. the bondholders can always convert their bonds into stock if they choose.

58. On January 2, 2017, Roof Master Construction, Inc. issued $500,000, ten-year bonds for $574,540. The bonds pay

interest on June 30 and December 31. The face rate is 8%, and the market rate is 6%. At the maturity date, besides an

interest payment, Roof Master would repay the bondholders

a. $574,540.

b. $520,000.

c. $500,000.

d. only the last interest payment.

59. When bonds are issued by a company, the accounting entry shows an

a. increase in liabilities and a decrease in stockholders’ equity.

b. increase in liabilities and an increase in stockholders’ equity.

c. increase in assets and an increase in liabilities.

d. increase in assets and an increase in stockholders’ equity.

60. Bonds in the amount of $100,000 with a life of ten years were issued by Focus Company. If the face rate is 6% and

interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

a. $60,000

b. $120,000

c. $30,000

d. $6,000