I.
Multiple Choice (Answer the best)
1. An example of an item which is not a liability is
a. dividends
payable in stock.
b. advances
from customers on contracts.
c. accrued
estimated warranty costs.
d. the
portion of long-term debt due within one year.
2. The covenants and other terms of the agreement between
the issuer of bonds and the lender are set forth in the
a. bond
indenture.
b. bond
debenture.
c. registered
bond.
d. bond
coupon.
3. The
term used for bonds that are unsecured as to principal is
a. junk
bonds.
b. debenture
bonds.
c. indebenture bonds.
d. callable bonds.
4. The interest
rate written in the terms of the bond indenture is known as the
a. coupon
rate.
b. nominal
rate.
c. stated
rate.
d. coupon
rate, nominal rate, or stated rate.
5. The
rate of interest actually earned by bondholders is called the
a. stated
rate.
b. yield
rate.
c. effective
rate.
d. effective,
yield, or market rate.
6. Stone,
Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were
issued at a premium, this indicates that
a. the
effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the
nominal rate of interest exceeded the market rate.
c. the
market and nominal rates coincided.
d. no
necessary relationship exists between the two rates.
7. Under the effective interest method of bond discount or
premium amortization, the periodic interest expense is equal to
a. the
stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the
market rate of interest multiplied by the face value of the bonds.
c. the
stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the
market rate multiplied by the beginning-of-period carrying amount of the bonds.
8. 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.
9. Theoretically, the costs of issuing bonds
could be
a. expensed
when incurred.
b. reported
as a reduction of the bond liability.
c. debited
to a deferred charge account and amortized over the life of the bonds.
d. any
of these.
10. An early
extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any
costs of issuing the bonds must be amortized up to the purchase date.
b. the
premium must be amortized up to the purchase date.
c. interest
must be accrued from the last interest date to the purchase date.
d. all
of these.
11. The
generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an
adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash
adjustment to the cost of any other debt issued over the remaining life of the
old debt instrument.
c. an amount received or paid to obtain a new
debt instrument and, as such, should be amortized over the life of the new
debt.
d. a difference between the reacquisition price
and the net carrying amount of the debt which should be recognized in the
period of redemption.
12. Note
disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call
provisions and conversion privileges.
c. restrictions
imposed by the creditor.
d. names
of specific creditors.
13. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
14. A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
15. Securities which could be classified as
held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.
16. A requirement for a security to be
classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
17. Solo
Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the securities
to maturity, the entry to record the investment includes
a. a
debit to Held-to-Maturity Securities at $300,000.
b. a
credit to Premium on Investments of $15,000.
c. a
debit to Held-to-Maturity Securities at $315,000.
d. none
of these.
18. Which
of the following is not correct in
regard to trading securities?
a. They are held with the intention of selling
them in a short period of time.
b. Unrealized holding gains and losses are
reported as part of net income.
c. Any
discount or premium is not amortized.
d. All
of these are correct.
19. Unrealized
holding gains or losses which are recognized in income are from securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none
of these.
20. An unrealized holding loss on a company's
available-for-sale securities should be reflected in the current financial
statements as
a. an
extraordinary item shown as a direct reduction from retained earnings.
b. a
current loss resulting from holding securities.
c. a
note or parenthetical disclosure only.
d. other
comprehensive income and deducted in the equity section of the balance sheet.
21. An
unrealized holding gain on a company's available-for-sale securities should be
reflected in the current financial statements as
a. an
extraordinary item shown as a direct increase to retained earnings.
b. a
current gain resulting from holding securities.
c. a
note or parenthetical disclosure only.
d. other
comprehensive income and included in the equity section of the balance sheet.
22. In
accounting for investments in debt securities that are classified as trading
securities,
a. a
discount is reported separately.
b. a
premium is reported separately.
c. any
discount or premium is not amortized.
d. none
of these.
23. Investments
in debt securities are generally recorded at
a. cost
including accrued interest.
b. maturity
value.
c. cost
including brokerage and other fees.
d. maturity
value with a separate discount or premium account.
24. Investments in debt securities should be
recorded on the date of acquisition at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other
costs incident to the purchase.
d. face value plus brokerage fees and other
costs incident to the purchase.
25. An available-for-sale debt security is
purchased at a discount. The entry to record the amortization of the discount
includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
26. APB
Opinion No. 21 specifies that, regarding the amortization of a premium or
discount on a debt security, the
a. effective interest method of allocation must
be used.
b. straight-line method of allocation must be
used.
c. effective
interest method of allocation should be used but other methods can be applied
if there is no material difference in the results obtained.
d. par value method must be used and therefore
no allocation is necessary.
27. When
a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
a. The
investor should always use the equity method to account for its investment.
b. The
investor should use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise "significant
influence" over the investee.
c. The investor must use the fair value method
unless it can clearly demonstrate the ability to exercise "significant
influence" over the investee.
d. The
investor should always use the fair value method to account for its investment.
28. If
the parent company owns 90% of the subsidiary company's outstanding common
stock, the company should generally account for the income of the subsidiary
under the
a. cost
method.
b. fair
value method.
c. divesture
method.
d. equity
method.
29. Byner Corporation accounts for its investment in the common
stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend
received from Yount as
a. a
reduction of the carrying value of the investment.
b. additional
paid-in capital.
c. an
addition to the carrying value of the investment.
d. dividend
income.
30. Under the equity method of accounting for
investments, an investor recognizes its share of the earnings in the period in
which the
a. investor
sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings
are reported by the investee in its financial
statements.
II. Problem: Bond
issue price and amortization.
On January 1, 2004, Lowry
Co. issued ten-year bonds with a face value of $2,000,000 and a stated interest
rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present
value of 1 for 10 periods at 10% ......................................... .386
Present
value of 1 for 10 periods at 12% ......................................... .322
Present
value of 1 for 20 periods at 5% ........................................... .377
Present
value of 1 for 20 periods at 6% ........................................... .312
Present
value of annuity for 10 periods at 10% ........................... 6.145
Present
value of annuity for 10 periods at 12% ........................... 5.650
Present
value of annuity for 20 periods at 5% ............................ 12.462
Present
value of annuity for 20 periods at 6% ............................ 11.470
Instructions (Show computations in good form)
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a),
assume that the issue price was $1,768,000.
Prepare the amortization table for 2004 and 2005, assuming that
amortization is recorded on interest payment dates.
III. Problem:Retirement of
bonds.
Instructions: Prepare
journal entries to record the following retirement. (Show computations in good form)
The
7.5%
bonds payable due
Unamortized discount on
bonds payable
.32,000
The
bonds were issued on
On
IV. Problem: Entries for Bonds Payable.
Instructions: Prepare
journal entries to record the following transactions related to long-term bonds
of Renn Co.
Show computations in good form.
(a) On
(b) On
V. Problem: Investment in debt securities
On
Instructions
(a) Prepare the journal entry on
(b) The bonds are sold on
VI.
Problem:
Fill
in the dollar changes caused in the Investment account and Dividend Revenue or
Investment Revenue account by each of the following transactions, assuming
Maxey Company uses (a) the fair value method and (b) the equity method for
accounting for its investments in Kerwin Company.
(a) Fair Value Method
(b) Equity Method
Investment Dividend Investment Investment
Account Revenue Account Revenue
1.
At the beginning of Year 1,
Maxey bought 30% of Kerwin's
common stock at
its book value. Total book value of all Kerwin's
common stock was
$1,800,000 on this date.
2.
During Year 1, Kerwin reported $100,000
of net income and paid $50,000 of dividends.
3.
During Year 2, Kerwin reported $40,000
of net income and paid $50,000 of dividends.
4.
During Year 3, Kerwin reported a net loss
of $24,000 and paid $10,000 of dividends.
5.
Indicate the Year 3 ending
balance in the
Investment account, and cumulative totals for Years 1,
2, and 3
for dividend revenue and investment revenue.
VII. Problem: Trading equity securities.
Gordon Company has the following securities in its
portfolio of trading equity securities on
Cost Fair Value
5,000 shares of Milner Corp., Common $160,000 $139,000
10,000 shares of Eddy, Common 182,000 190,000
$342,000 $329,000
All of the securities had been purchased in 2003. In 2004, Gordon completed the following
securities transactions:
March 1 Sold 5,000 shares of Milner Corp., Common @
$31 less fees of $1,500.
April 1 Bought 600
shares of Yount Stores, Common @ $50 plus fees of
$550.
The Gordon Company
portfolio of trading equity securities appeared as follows on
Cost Fair
Value
10,000 shares of Eddy, Common $182,000 $195,500
600 shares of Yount Stores,
Common 30,550 25,500
$212,550 $221,000
Instructions
Prepare the general
journal entries for Gordon Company for:
(a) the 2003
adjusting entry.
(b) the sale of
the Milner Corp. stock.
(c) the purchase
of the Yount Stores' stock.
(d) the
2004 adjusting entry.