CHAPTER 14: FINANCING LIABILITIES: BONDS AND NOTES PAYABLE
1. A company looking to issue debt instead of equity may want to consider debt due to favorable tax benefits.
a.
True
b.
False
1
Easy
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
2. Debt financing typically has a higher cost of capital than equity.
a.
True
b.
False
False
Easy
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
3. Small and medium-size companies typically have more difficulty attracting equity capital than debt capital.
a.
True
b.
False
1
Easy
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
Bloom’s: Remembering
4. An advantage of debt financing is that it decreases financial leverage.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
5. Debenture bonds are only issued by companies with an excellent credit rating.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
6. For bonds, yield rate is another term for nominal rate
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
7. For bonds, nominal rate is another term for contract rate.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
8. Serial bonds come due in installments in periodic future dates.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
9. Interest expense is less than the interest paid when a bond is issued for a premium.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
10. The effective rate is less than the contract rate when bonds are issued at a discount.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
11. The nominal rate is greater than the yield rate when bonds are issued at a premium.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
12. When bonds are issued to the general public, the company typically does not use the services of an underwriter.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
13. Premium on Bonds Payable is a contra asset account.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.4 – LO: 14.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
14. Discount on Bonds Payable is a contra liability account
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.4 – LO: 14.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
15. When a company sells bonds between interest dates, the company normally will collect from the investors both the
selling price and the interest accrued on the bonds from the interest payment date prior to the date of sale.
a.
True
b.
False
True
1
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
16. The carrying value of a bond issue is the face value of the bonds plus the unamortized discount.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.5 – LO: 14.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
17. Bond interest expense is the interest cash payment minus the amount of bond premium amortization.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
18. Bond interest expense is calculated as the stated rate times the carrying value of the bonds.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.5 – LO: 14.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
19. With the straight-line method of bond amortization, interest expense is the same amount every period.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
| Bloom’s: Remembering
20. When zero-coupon bonds are issued, a company will record no interest expense until the bonds mature.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
21. A company could decide to call its bonds because it will eliminate any restrictions on operations from certain debt
covenants.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.6 – LO: 14.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
22. On the maturity date after the last interest payment is recorded, any premium or discount on bonds payable is always
fully amortized.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.6 – LO: 14.6
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
23. A call provision gives the issuing company the option to recall the debt issue at an effective interest rate less than the
contract rate.
a.
True
b.
False
False
1
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
24. A company may want to increase its equity capital at a later date in time, in order to accomplish this goal the company
decides to issue convertible debt.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.7 – LO: 14.7
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
25. Stock warrants allow bond holders to exchange bonds for common equity shares.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
26. When stock warrants are attached to bonds, they generally result in greater proceeds from the bond issue
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.7 – LO: 14.7
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
27. When bonds have a conversion feature, GAAP requires the difference between proceeds with and without the
conversion feature should be allocated to additional paid-in-capital at the time of issuance.
a.
True
b.
False
False
1
Easy
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
28. The market value method for recording bond conversion to common stock results in no gain or loss at the time of
conversion.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
29. At the time of the issuance of a note payable the incremental interest rate is what one would pay for similar financing.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.8 – LO: 14.8
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
30. GAAP requires the borrowers to record the note payable at its present value and use straight line method to record the
interest expense.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.8 – LO: 14.8
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
31. Companies report cash flows associated with long term liability transactions in the investing section of the statement
of cash flows, because the money was an investment in the future of the company.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.9 – LO: 14.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
32. GAAP requires that cash paid for interest on a note payable is always recorded in the operating activities of the cash
flow statement.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.9 – LO: 14.9
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
33. If a company is having trouble paying its obligations, a modification of terms can be granted in the form of interest
rate reduction, maturity date extension, and/or a reduction in the amount owed.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
34. In the event of a debt restructuring, the required disclosures are only for the related income tax effects associated with
the debt.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
35. When a debtor satisfies a liability by exchanging an asset of lesser value, it records the transfer based on the fair value
of the asset and recognizes a loss on the debt restructuring.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
36. Which of the following is not a reason for the issuance of long-term liabilities?
a.
Debt financing offers an income tax advantage.
b.
Debt financing dilutes ownership interest.
c.
Debt may be the only available source of funds.
d.
Debt financing may have a lower cost.
b
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
37. Which of the following statements is false?
a.
b.
c.
d.
b
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
38. Leverage occurs when a company’s
a.
interest payment exceed its rate of return.
b.
rate of return equals its interest payments.
c.
rate of return exceeds its interest payments.
d.
interest payments are made on time.
c
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
39. ________ is a contractual obligation that requires a company to deliver cash or other financial asset to another party.
a.
Detachable warrant
b.
Capital structure
c.
Financial leverage
d.
Financial liability
d
1
Easy
ACCT.WHAL.16.14.1 – LO: 14.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
40. Which of the following is always equal to the face rate of interest?
a.
effective rate
b.
yield rate
c.
market rate
d.
nominal rate
d
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
41. Which of the following statements is false?
a.
Debenture bonds are secured liabilities
b.
Debenture bonds are issued based upon the credit rating of the company
c.
A company must have a long history of profitability to issue debenture bonds.
d.
A company must have strong positive cash flows to issue debenture bonds.
a
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
42. For which of the following types of bonds is interest expense recognized each year even though no interest is paid?
a.
debenture bonds
b.
zero-coupon bonds
c.
serial bonds
d.
mortgage bonds
b
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
43. Which of the following characteristics of a bond would an investor look for if they are wanting to become a
shareholder at a later date in time?
a.
Callable Bond
b.
Mortgage Bond
c.
Convertible Bond
d.
Serial Bond
c
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
44. Which of the following bonds pay no interest until maturity?
a.
zero-coupon bonds
b.
registered bonds
c.
serial bonds
d.
debenture bonds
a
1
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
45. An unsecured bond is called a
a.
debenture bond.
b.
mortgage bond.
c.
registered bond.
d.
serial bond.
a
1
Easy
ACCT.WHAL.16.14.2 – LO: 14.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
46. When a debtor satisfies a liability by exchanging an asset of lesser value, it records the transfer
a.
Debenture bonds.
b.
Serial bonds.
c.
Convertible bonds.
d.
Callable bonds.
d
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
47. ________ are bonds that give bondholders the option to exchange the bonds for a predetermined number of common
equity shares of the issuing company.
a.
Exchangeable bonds
b.
Serial bonds
c.
Convertible bonds
d.
Callable bonds
c
1
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
48. Zero-coupon bonds are bonds
a.
on which no interest is paid.
b.
on which the interest is not paid until the maturity date.
c.
on which no interest expense accrues until the maturity date.
d.
which have no detachable coupon warrants.
d
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA – FN-Decision Modeling
Bloom’s: Remembering
49. When a company sells its bonds at less than face value, the effective interest rate is
a.
lower than the yield rate.
b.
higher than the contract interest rate.
c.
lower than the nominal rate.
d.
higher than the market interest rate.
b
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
50. When the market rate of interest is less than the contract rate of interest, the bonds will sell
a.
below face value.
b.
at a discount.
c.
behind par value.
d.
at a premium.
d
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
51. When the market rate of interest is equal to the contract rate of interest, the bonds should sell at
a.
a premium.
b.
par value.
c.
the call price.
d.
the conversion price.
b
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
52. If a company sells its bonds at face value, the effective interest rate is
a.
lower than the nominal rate.
b.
higher than the nominal rate.
c.
equal to the contract rate.
d.
equal to the warrant rate.
c
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
53. When is interest expense less than interest paid?
a.
when bonds are sold at a premium
b.
when bonds are sold at par
c.
when bonds are sold at a discount
d.
when bonds are sold at a yield
a
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
54. Which of the following may not be equal to the contract rate of interest?
a.
stated rate
b.
nominal rate
c.
face rate
d.
effective rate
d
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
55. When the market rate of interest is greater than the contract rate of interest, the bonds should sell at
a.
a premium.
b.
par value.
c.
a discount.
d.
face value.
c
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
56. In which of the following situations will the book value of a bond be equal to its maturity value?
a.
The effective rate exceeds the stated rate.
b.
The nominal rate exceeds the yield rate.
c.
The market rate equals the contract rate.
d.
The effective rate equals the yield rate.
c
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
57. Discount on Bonds Payable is a(n)
a.
contra account.
b.
valuation account.
c.
accumulation account.
d.
adjunct account.
a
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
58. On January 1, 2016, Medley Corporation sold $200,000 of its 14%, five-year bonds dated January 1, 2016, for
$206,000 total cash. The bonds sold at
a.
6.
b.
a discount.
c.
103.
d.
206.
c
1
Easy
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPORG: Analytic
Bloom’s: Applying
Exhibit 14-1
A $300,000, ten-year, 8% bond issue was sold to yield 9% interest payable annually. Actuarial information for 10
periods is as follows:
8%
9%
Present value of 1
0.46319
0.42241
Present value of an annuity of 1
6.71008
6.41766
59. Refer to Exhibit 14-1. These bonds sold at
a.
margin.
b.
a discount.
c.
par.
d.
a premium.
b
1
Moderate
ACCT.WHAL.16.14.3 – LO: 14.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Applying