Chapter 12-14 McGraw Quizzes

Interest revenue is recognized for debt investments, typically using the effective interest method.

a.) True

b.) False

True

Both debt and equity securities can be categorized as trading securities.

a.) True

b.) False

False

Purchases and sales of trading securities are always reported as investing activities in a statement of cash flows.

a.) True

b.) False

False

Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

a.) True

b.) False

False

The fair value option cannot be elected for significant-influence investments because those must be accounted for under the equity method.

a.) True

b.) False

False

The investment category for which the investor's "positive intent and ability to hold" is important is:

a.) Trading securities.

b.) Securities classified as held-to-maturity.

c.) Securities available-for-sale.

d.) Securities reported under the equity method.

b.) Securities classified as held-to-maturity.

In which investment category are fair values and subsequent growth of an investee not relevant for reporting?

a.) Held-to-maturity securities

b.) Securities reported under the equity method

c.) Trading securities

d.) Securities available-for-sale

a.) Held-to-maturity securities

The income statement reports changes in fair value for which type of investment securities?

a.) Securities reported under the equity method.

b.) Trading securities.

c.) Held-to-maturity securities.

d.) Available-for-sale securities.

b.) Trading securities.

Trading securities, by definition, are properly classified in the balance sheet as:

a.) Intangible assets.

b.) Current assets.

c.) Shareholders' equity.

d.) Other assets.

b.) Current assets.

Under U.S. GAAP, all investment securities are initially recorded at:

a.) cost.

b.) present value.

c.) equity value.

d.) none of these answer choices are correct.

a.) cost.

Because debt investments specify the cash flows to be received by the investor, its fair value does not fluctuate over time.

a.) True

b.) False

False

All securities considered available-for-sale should be reported as current assets in a classified balance sheet.

a.) True

b.) False

False

In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

a.) Investing activities.

b.) Financing activities.

c.) Noncash financing activities.

d.) Operating activities.

d.) Operating activities.

What is the effect on a company's cash flows and reported profit from accounting for an investment as a trading security as compared to accounting for it as an available-for-sale security?

Effect on Total Cash Flows Effect on Net Income

a. Little, if any, effect Little, if any, effect

b. Significant effect Significant effect

c. Little, if any, effect Significant effect

d. Significant effect Little, if any, effect

Option C

Debt investments to be held for an unspecified period of time are reported at:

a.) historical cost.

b.) present value.

c.) fair value.

d.) lower of cost or market.

c.) fair value.

Some liabilities are not contractual obligations and may not be payable in cash.

a.) True

b.) False

True

Liabilities are classified as current if they are expected to be satisfied by the creation of other current liabilities.

a.) True

b.) False

True

A line of credit is an agreement to provide long-term financing, typically made with a bank or a group of banks.

a.) True

b.) False

False

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

a.) True

b.) False

False

Which of the following is not a characteristic of a liability?

a.) It must be payable in cash.

b.) It involves the future transfer of an economic benefit.

c.) It can arise from a contract but also be implied by past behavior.

d.) It is a present obligation to other entities.

a.) It must be payable in cash.

Which of the following is not a liability?

a.) Estimated income taxes

b.) Advances from customers

c.) An unused line of credit

d.) Sales tax collected from customers

c.) An unused line of credit

Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:

a.) Matching.

b.) Conservatism.

c.) Consistency.

d.) Materiality.

d.) Materiality.

Classifying liabilities as either current or long-term helps creditors assess:

a.) The amount of a firm's liabilities.

b.) The relative risk of a firm's liabilities.

c.) Profitability.

d.) The degree of a firm's liabilities.

b.) The relative risk of a firm's liabilities.

The rate of interest printed on the face of a note payable is called the:

a.) Yield rate.

b.) Stated rate.

c.) Effective rate.

d.) Market rate.

b.) Stated rate.

Universal Travel Incorporated borrowed $500,000 on November 1, 2027, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2028. In connection with this note, Universal Travel Incorporated should report interest payable at December 31, 2027, in the amount of:

Note: Round your final answers to the nearest whole dollar.

a.) $30,000.

b.) $5,000.

c.) $25,000.

d.) $8,000.

b.) $5,000.

Periodic Interest expense is the stated interest rate times the amount of debt outstanding during the period

a.) True

b.) False

False

Bond will sell for a premium when the market rate of interest exceeds their stated rate

a.) True

b.) False

False

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation

a.) True

b.) False

False

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow

a.) True

b.) False

False

The rate of interest that actually is incurred on a bond payable is called the:

a.) Stated Rate

b.) Face rate

c.) Effective Rate

d.) Contract Rate

Effective Rate

Bonds usually sell at their:

a.) Maturity values

b.) Face value

c.) Statistical expected value

d.) Present value

Present value

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:

a. Less the present value of all future interest payments at the rate of interest stated on the bond.

b. Plus the present value of all future interest payments at the rate of interest stated on the bond.

c. Plus the present value of all future interest payments at the market (effective) rate of interest.

d. Less the present value of all future interest payments at the market (effective) rate of interest.

Plus the present value of all future interest payments at the market (effective) rate of interest

An amortization schedule for bonds issued at a premium:

a.) Summarizes the amortization of the premium, a contra-asset account with a credit balance

b.) Is reported in the balance sheet

c.) Is a schedule that reflects the changes in the debt over its term to maturity

d.) All of these answer choices are correct

Is a schedule that reflects the changes in the debt over its term to maturity

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate is 11%. These bonds will sell at a price that is:

a.) More than $500,000

b.) less than $500,000

c.) The answer cannot be determined from the information provided

d.) Equal to $500,000

Less than $500,000

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

a.) Less than the effective interest

b.) Greater than the effective interest

c.) More than if the bonds had been sold at a discount

d.) Equal to the effective interest

Greater than the effective interest

Premium on bonds payable is a contra liability account

a.) True

b.) False

False

The interest rate that determines the amount of interest expense each interest date is referred to as the:

a.) Effective rate

b.) Cash rate

c.) Stated rate

d.) Expense rate

Effective rate

On January 1, 2027, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2027, in the amount of: Note: Round your answer to the nearest dollar amount

a.) $10,000

b.) $10,620

c.) $12,000

d.) $8,850

$10,000

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2027. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. What is the effective annual rate of interest on the bonds

a.) 8%

b.) 3%

c.) 6%

d.) 4%

8%

When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to: Bonds Payable; Bond Premium

a.) Yes; Yes

b.) No; Yes

c.) No; No

d.) Yes; No

Yes; Yes (Option A)