Question 1

If a debt refunding is viewed as a modification or renegotiation, then
A)a new effective interest rate is calculated.
B)a gain or loss is recorded.
C)there is no change in the accounting for the debt.
D)the old debt is derecognized.

Accepted Answer

The answer of If a debt refunding is viewed as...

Question 2

A bond's face value is also called
A)the par value or the present value.
B)the principal amount or the present value.
C)the future value or the maturity value.
D)the par value or the maturity value.

Accepted Answer

The face value of a bond is also known as the par value or the maturity value. The principal amount refers to the amount of money borrowed by the issuer and the present value and future value refer to the value of the bond at different points in time.

Question 3

If a long-term note is issued with zero interest or for non-monetary consideration,
A)the debtor must first try to value the non-monetary asset(s)involved in the transaction.
B)a reasonable interest rate must be imputed.
C)the debtor always tries to create a gain with such a transaction.
D)the note is a non-monetary liability.

Accepted Answer

According to accounting standards, if a long-term note is issued with zero interest or for non-monetary consideration, a reasonable interest rate must be imputed to properly value the transaction. The imputed interest rate is based on current market rates for similar transactions. This is to ensure that the transaction is recorded at its fair value and reflects the true economic substance.

Question 4

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
A)decreased by accrued interest from June 1 to November 1.
B)decreased by accrued interest from May 1 to June 1.
C)increased by accrued interest from June 1 to November 1.
D)increased by accrued interest from May 1 to June 1.

Accepted Answer

The answer of When the interest payment dates of a...

Question 5

The times interest earned ratio is calculated by dividing
A)net income by interest expense.
B)income before taxes by interest expense.
C)income before income taxes and interest expense by interest expense.
D)net income and interest expense by interest expense.

Accepted Answer

The times interest earned ratio is calculated by dividing income before income taxes and interest expense by interest expense. This ratio helps to determine a company's ability to pay interest on its outstanding debt. A higher ratio indicates that the company is capable of meeting its interest obligations and has lower default risk. Therefore, option C is the correct choice for calculating the times interest earned ratio.

Question 6

Note disclosures for long-term debt generally include all of the following EXCEPT
A)assets pledged as security.
B)names of specific creditors.
C)restrictions imposed by creditors.
D)call provisions and conversion privileges.

Accepted Answer

Note disclosures for long-term debt typically include information on assets pledged as security, restrictions imposed by creditors, call provisions and conversion privileges. However, the names of specific creditors are not usually disclosed in the notes to the financial statements.

Question 7

When the debtor sets aside money in a trust such that the investment and any return will be sufficient to pay the principal and the interest to the creditor, but the creditor does NOT release the company from the primary obligation to settle the debt, this type of arrangement is known as
A)in-substance defeasance.
B)in-substance refunding.
C)substantive repayment.
D)legal defeasance.

Accepted Answer

This type of arrangement is known as in-substance defeasance. In this arrangement, the debtor sets aside money in a trust to ensure that there will be sufficient funds to pay the principal and interest to the creditor, but the creditor does not release the debtor from the primary obligation to settle the debt. This differs from legal defeasance, where the creditor agrees to release the debtor from the obligation to settle the debt once the trust is established. Therefore, option A is the correct answer.

Question 8

The times interest earned ratio measures
A)the amount of interest expense related to long term debt.
B)the percentage of total assets financed by creditors.
C)the profitability of an enterprise.
D)an enterprise's ability to meet interest payments as they come due.

Accepted Answer

The times interest earned ratio measures an enterprise's ability to meet interest payments as they come due. It is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense for the period. A higher ratio indicates that the company is better able to meet its interest obligations.

Question 9

When valuing financial instruments at fair value (the fair value option),
A)ASPE allows this option only for certain financial instruments.
B)IFRS allows this for all financial instruments.
C)IFRS requires that this option be used only where fair value does not result in more
Relevant information.
D)IFRS requires that non-performance risk be included in the fair value measurement.

Accepted Answer

The answer of When valuing financial instruments at fair value...

Question 10

A ten-year bond was issued in 2014 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2016, the carrying value of the bond was less than the call price.The amount of bond liability removed from the accounts in 2016 would be the
A)call price.
B)maturity value.
C)carrying value.
D)face amount plus unamortized discount.

Accepted Answer

The amount of bond liability removed from the accounts when a bond is called is the carrying value of the bond at the time of the call.

Question 11

A troubled debt restructuring will generally result in a
A)loss by the debtor and a gain by the creditor.
B)loss by both the debtor and the creditor.
C)gain by both the debtor and the creditor.
D)gain by the debtor and a loss by the creditor.

Accepted Answer

In a troubled debt restructuring, the debtor is typically able to renegotiate the terms of the debt to more favorable conditions, which can result in a gain for the debtor due to reduced liabilities or more manageable repayment terms. Conversely, the creditor may incur a loss because the restructuring often involves the creditor agreeing to accept less than the full amount owed or extending the payment terms, which reduces the present value of the receivable.

Question 12

In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less the carrying amount of the debt, the debtor would
A)not recognize a gain or loss on the settlement.
B)recognize a gain on the settlement.
C)recognize a loss on the settlement.
D)only record a memo in the general ledger.

Accepted Answer

In a troubled debt restructuring where the debt is settled by transferring assets with a fair market value less than the carrying amount of the debt, the debtor recognizes a gain. This gain is the difference between the carrying amount of the debt and the fair market value of the assets transferred, reflecting the reduction in the debtor's obligation.

Question 13

How should a long term bond initially be valued?
A)at the future value of the future cash flows
B)at the present value of the future cash flows
C)at the present value of the interest to be paid
D)at the maturity value of the bond

Accepted Answer

A long term bond should be initially valued at the present value of its future cash flows, taking into account the time value of money and the relevant interest rates. This involves using techniques such as discounted cash flow analysis or present value calculations to arrive at a fair value for the bond. Valuing the bond based on future value, interest payments or maturity value would not provide an accurate representation of its true worth.

Question 14

In a troubled debt restructuring in which the debt is continued with modified terms and the Long-Term Financial Liabilities 14- 11 carrying amount of the debt is less than the total future cash flows,
A)an extraordinary gain should be recognized by the debtor.
B)a gain should be recognized by the debtor.
C)a new effective interest rate must be calculated.
D)no interest expense or revenue should be recognized in the future.

Accepted Answer

A new effective interest rate must be calculated to reflect the modified terms of the debt, ensuring that the carrying amount of the debt is adjusted to the present value of the future cash flows.

Question 15

Which of the following arrangements would NOT represent a possible example of "off- balance-sheet financing"?
A)non-consolidated subsidiaries
B)variable interest entities
C)operating leases
D)capital or financing leases

Accepted Answer

Capital or financing leases are recognized on the balance sheet, reflecting both an asset and a liability, and thus do not qualify as off-balance-sheet financing. Off-balance-sheet financing is a way to keep large capital expenditures off a company's balance sheet, which can make the company appear more financially stable.

Question 16

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
A)debit to Interest Payable.
B)credit to Interest Receivable.
C)credit to Interest Expense.
D)credit to Unearned Interest.

Accepted Answer

The answer of If bonds are issued between interest dates,...

Question 17

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
A)calculate a new effective interest rate.
B)not recognize a loss.
C)calculate its loss using the historical effective rate of the loan.
D)calculate its loss using the current effective rate of the loan.

Accepted Answer

The answer of In a troubled debt restructuring in which...

Question 18

When the effective interest method is used to amortize bond premium or discount, the periodic amortization will
A)increase if the bonds were issued at a discount.
B)decrease if the bonds were issued at a premium.
C)increase if the bonds were issued at a premium.
D)increase if the bonds were issued at either a discount or a premium.

Accepted Answer

The effective-interest method of amortization involves applying a constant interest rate to the carrying amount of the bond for each period. As the carrying amount of the bond increases (for a discount) or decreases (for a premium) over time, the amount of interest expense recognized also changes, leading to a change in the periodic amortization amount. This means that whether the bonds were issued at a discount or a premium, the periodic amortization amount will indeed increase over time as the carrying amount of the bond approaches its face value.

Question 19

When a note payable is issued for property, goods, or services, the present value of the note should preferably be measured by
A)the present value of the property, goods or services.
B)the fair value of the property, goods, or services.
C)the fair value of the debt instrument.
D)the present value of the debt instrument.

Accepted Answer

The answer of When a note payable is issued for...

Question 20

The debt to total assets ratio is calculated by dividing
A)total liabilities by total assets.
B)long-term liabilities by total assets.
C)current liabilities by total assets.
D)total assets by total liabilities.

Accepted Answer

The debt to total assets ratio measures the percentage of assets financed by debt. Therefore, it is calculated by dividing total liabilities (which represent the total amount of debt) by total assets. Choice A is the correct option as it divides total liabilities by total assets.

Quiz 2: Intermediate Accounting Volume 2

If a debt refunding is viewed as a modification or renegotiation, then

A bond's face value is also called

If a long-term note is issued with zero interest or for non-monetary consideration,

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

The times interest earned ratio is calculated by dividing

Note disclosures for long-term debt generally include all of the following EXCEPT

When the debtor sets aside money in a trust such that the investment and any return will be sufficient to pay the principal and the interest to the creditor, but the creditor does NOT release the company from the primary obligation to settle the debt, this type of arrangement is known as

The times interest earned ratio measures

When valuing financial instruments at fair value (the fair value option) ,

A troubled debt restructuring will generally result in a

In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less the carrying amount of the debt, the debtor would

How should a long term bond initially be valued?

In a troubled debt restructuring in which the debt is continued with modified terms and the Long-Term Financial Liabilities 14- 11 carrying amount of the debt is less than the total future cash flows,

Which of the following arrangements would NOT represent a possible example of "off- balance-sheet financing"?

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should

When the effective interest method is used to amortize bond premium or discount, the periodic amortization will

When a note payable is issued for property, goods, or services, the present value of the note should preferably be measured by

The debt to total assets ratio is calculated by dividing