Chapter 11
Multiple Choice
1. A loss from early extinguishment of debt, if material, should be reported as a component of
income
2. Unamortized debt discount should be reported on the balance sheet of the issuer as
3. An example of an item that is not a liability is
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
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
6. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for
stockholders of companies having
7. Theoretically, a bond payable should be reported at the present value of the interest discounted at
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)
9. When it is necessary to impute an interest rate in connection with a note payable, the rate should
be
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 initially
records the note at $10,000, the overall effect will be
11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall
effect will be
12. How would the amortization of premium bonds payable affect each of the following?
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
14. How should the value of warrants attached to a debt security be account for?
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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
Discount Premium
16. Gain contingencies are usually recognized in the income statement when
17. An estimated loss from a loss contingency should be accrued when
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)
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?
This year Next Year
20. The interest rate used to calculate the cash interest payments by the issuer of bonds is
21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Ace’s financial
statements
22. Trading on the equity (leverage) refers to the
23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment
can be defended on what basis?
24. XYZ Company’s yearend is December 31, 20×1 and its financial statements are issued in the
following March. On January 24, 20×2. A 10 year note payable came due and was paid by
issuing XYZ common stock to the creditor. In its December 31, 20×1 balance sheet, XYZ should
25. A zero coupon bond is different from a typical bond issue because
26. An unearned revenue is an example of a(an)
27. A deferred credit meets the definition of a liability because
28. The physical capital maintenance concept of income would require that a company’s bonds
payable be
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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.
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?
31. In general, derivative instruments are
32. Under a troubled debt restructuring that results in a modification of terms the debtor will report
interest expense when
Essay
1. List and discuss five factors that may be employed to determine if a particular financial
instrument is a debt or equity security.
2. Discuss the definition and the proper accounting for mandatorily redeemable preferred stock.
3. Discuss the four basic reasons why a corporation may wish to issue debt rather than equity
securities
4. Define the following terms:
5. Explain how the selling price of a bond is determined.
6. What is a zero coupon bond? Discuss accounting for zero-coupon bonds.
A zero coupon or deep discount bond is a bond that does not carry a stated rate of interest and
7. Discuss the difference between the straight-line and the effective interest methods of bond
premium or discount amortizations.
8. List the three methods of accounting for bonds refunding. Under current GAAP, how are bond
refundings recorded?
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9. Discuss the factors that might motivate corporate management to decide to issue convertible debt.
10. Discuss accounting for long-term notes payable as originally described in APB Opinion No. 21.
11. Discuss accounting for contingencies
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12. What is a derivative? Describe the accounting treatment for fair value and cash flow hedges
required by SFAS No. 133.
13. Define the following terms:
14. What is a troubled debt restructuring? How is a troubled debt restructuring accomplished?
15. Obtain the financial statements of a company and ask the students to compute the:
16. How are compound financial instruments accounted for under IAS No. 32?
17. According to IAS No. 39, when are financial liabilities recognized?