Question 1

All of the following are true with respect to sinking funds except:

Accepted Answer

Sinking funds require ongoing contributions from the company to ensure that there is enough money to retire the debt at maturity. The establishment of a sinking fund does not absolve the company of its responsibility to repay the debt.

Question 2

In theory (disregarding any other marketplace variables)the proceeds from the sale of a bond will be equal to:

Accepted Answer

The most accurate answer is D. The proceeds from the sale of a bond are determined by the present value of the principal amount due at the end of the life of the bond (also known as the face value or par value), plus the present value of the interest payments (also known as coupon payments) made during the life of the bond. The present values are discounted at the prevailing market rate of interest, which represents the cost of borrowing or the required rate of return for investors. This is because the prevailing market rate of interest reflects the current conditions of the market, including the rates of inflation, economic growth, creditworthiness of the issuer, and supply and demand for bonds. Therefore, the proceeds from the sale of a bond can vary depending on the prevailing market rate of interest, which affects the present value of the interest payments and the discount rate applied to them.

Question 3

AB Company issued a $100,000,10%,bond at $99.Therefore,the bond:

Accepted Answer

The bond was sold at a discount because the stated interest rate (10%) was lower than the market interest rate, which caused the bond to sell for less than its face value ($100,000). The fact that the bond was sold at $99 means investors were only willing to pay $99 for a $100,000 bond, which indicates a lower yield than the stated 10% interest rate.

Question 4

Bonds payable (due 5 years from the balance sheet date)should be classified as follows:

Accepted Answer

Bonds payable due 5 years from the balance sheet date should be classified as a long-term liability because they are not due within the next 12 months and will be paid off over a period of more than one year.

Question 5

R Company was indebted to A Inc.at January 1,2014.The note called for a $25,000 payment to be made on December 31,2014 and also on December 31,2015.The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued.What is the book value of the note on R's January 1,2014 balance sheet (rounded)?

Accepted Answer

Since the prevailing interest rate is 10%, we can calculate the present value of the note's future payments using the present value of an annuity formula. 
PV = (Payment / (1 + r)^n) + (Payment / (1 + r)^(n+1))
Where:
PV = present value
Payment = $25,000
r = 10%
n = 2
PV = ($25,000 / (1 + 0.1)^1) + ($25,000 / (1 + 0.1)^2) = $43,388. 
Therefore, the book value of the note on R's January 1, 2014 balance sheet should be $43,388.

Question 6

Bonds payable should be reported as a long-term liability in the balance sheet of the issuer at:

Accepted Answer

Bonds payable are reported at the issue price adjusted for any unamortized bond premium or discount, which reflects the carrying amount of the bonds.

Question 7

An increase in interest rates may make bond defeasance more attractive to the issuing corporation.

Accepted Answer

When interest rates increase, new bonds are typically issued with higher coupon rates, making older bonds with lower coupon rates less attractive to investors. This may lead corporations to consider defeasance, which involves issuing a new bond to retire an older bond before its maturity date, in order to take advantage of lower interest rates and potentially save on interest payments.

Question 8

$5,000 (face value)of bonds with a book value of $4,300 was retired 4 years and 9 months prior to maturity.The dollar amount (excluding interest)paid to retire the bonds was $4,700.The entry to record the retirement would include:

Accepted Answer

The entry to record the retirement of bonds would include a debit to Bonds Payable for the face value of the bonds, which is $5,000.

Question 9

The rate of interest specified on the face of the debt is called the:

Accepted Answer

The stated interest rate is the rate that is specified on the face of the debt, also known as the coupon rate. It is the rate that the borrower agrees to pay the lender for the use of their funds. The other options listed are different types of interest rates that may be used to calculate the true cost of a debt, but they are not the rate specified on the face of the debt itself.

Question 10

Straight-line amortization of bond premium or discount:

Accepted Answer

Straight-line amortization of bond premium or discount is appropriate when the bond term is relatively short, and it provides the same total amount of interest expense and interest revenue as the effective interest method over the life of the bonds. It is not suitable for deep discount bonds. Therefore, option C is correct in this scenario.

Question 11

The rate of interest used to discount the future cash payments on a debt to the cash equivalent borrowed is least likely to be described by which of the following terms:

Accepted Answer

The stated interest rate is the rate that is initially agreed upon and disclosed in the contract. However, it does not necessarily reflect the actual rate used to discount future cash payments. Options A, B, and D are all possible ways to describe the rate used for discounting future cash payments.

Question 12

For bonds payable,the cash interest paid in each interest period is:

Accepted Answer

The cash interest paid is determined by the bond's stated interest rate and face value, which remain constant regardless of whether the bond was sold at par, a discount, or a premium.

Question 13

ER issued for $2,060,000,two thousand of its 9%,$1,000 callable bonds.The bonds are dated January 1,2019,and mature many years from now.Interest is payable semi-annually on January 1 and July 1.The bonds can be called by the issuer at $102 on any interest payment date after December 31,2023.The unamortized bond premium was $28,000 at December 31,2021,and the market price of the bonds was $99 on this date.In its December 31,2021,balance sheet,at what amount should GC report the carrying value of the bonds?

Accepted Answer

The carrying value of the bonds is $2,028,000. The unamortized bond premium is $28,000, and the market price of the bonds is $99 on December 31, 2021. The carrying value of the bonds is calculated as follows:Carrying value = Face value + Unamortized bond premium - Discount on bonds payableCarrying value = $2,060,000 + $28,000 - $0Carrying value = $2,028,000

Question 14

Debt issue costs on long-term debt are expensed upon issue.

Accepted Answer

Debt issue costs on long-term debt are usually amortized and recognized as an expense over the life of the debt.

Question 15

If a bond was sold at $108,the stated rate of interest was:

Accepted Answer

When a bond is sold at a premium (above its face value, such as $108), it indicates that the stated rate of interest is higher than the market rate. Investors are willing to pay more for the bond because it offers a higher return than what is currently available in the market.

Question 16

AB sold its 10-year bond at a discount.In reporting the bonds and the related discount on a balance sheet shortly thereafter,the discount should be:

Accepted Answer

When a bond is sold at a discount, it means that the bond was sold for less than its face value. The discount represents the difference between the face value of the bond and the amount received from the sale. Therefore, the discount should be deducted from the bonds payable on the balance sheet. This will result in a net bond payable amount that reflects the true liability of the company.

Question 17

A company issuing shares to comply with its debt covenants for cash would simultaneously decrease (improve)its debt-to-assets and debt-to equity ratios.

Accepted Answer

When a company issues shares, it receives cash which can be used to pay off debt, thus decreasing its debt-to-assets and debt-to-equity ratios. The infusion of equity from the issuance of new shares also increases the equity side of the balance sheet, which further helps to improve these ratios.

Question 18

JMR bought 15 Z Corporation's $1,000 bonds for $15,270 total,on April 1,2014,(five years prior to maturity).The bonds pay 8% semi-annual interest on April 1 and October 1.On December 31,2014,the bonds had a market value of $14,950 (not a permanent decline).JMR purchased these bonds at:

Accepted Answer

The market value of the bonds decreased from the original purchase price of $15,270 to $14,950, indicating that the bonds were purchased at a premium.

Question 19

KR issued bonds payable with a face amount of $200,000 and a maturity date ten years from date of issuance.If the bonds were issued at a premium,this indicated that:

Accepted Answer

When bonds are issued at a premium, it means the stated rate of interest is higher than the market (effective) rate of interest, leading investors to pay more than the face value.

Question 20

Gains or losses from the early extinguishment of debt,if material,should be:

Accepted Answer

Gains or losses from the early extinguishment of debt, if material, should be recognized in income as ordinary gains and losses or as unusual items. This is because such gains or losses arise from a typical business activity and are not considered to be exceptional events that would be classified as extraordinary items. Therefore, option A is the best choice. Option B is incorrect because it suggests that the gains or losses should be recognized as an extraordinary item, which is not the case. Option C and D are also incorrect because the gains or losses should not be amortized over the remaining original life of the extinguished issue or the life of the new issue, respectively.

Quiz 2: Accounting Judgements