1.

A debenture bond issued by a corporation

a. is unsecured.
b. may be converted into other securities of the corporation for a specified time after
issuance.
c. matures in installments
d. is secured by stocks and bonds of other corporations.
2. What is the term used for bonds that pay no interest unless the issuing company is profitable?
a. Debenture bonds
b. Collateral trust bonds
c. Revenue bonds
d. Income bonds
3. On August 31, Jackson Enterprises issued bonds with a par value of $750,000 and a stated
interest rate of 8%. Interest is payable semiannually on June 30 and December 31. If the
proceeds from the issue amounted to $760,000, the bonds were likely
a. sold at a premium.
b. sold at a higher effective interest rate.
c. sold at a discount.
d. issued at par plus accrued interest.
4. Bowser Clothing sold $350,000 in 10-year bonds at an interest rate of 8 percent. The market
rate for similar bonds is 9 percent. Bowser decides to pay interest annually. Assume that the
PVF-OA10, 8% = 6.71008, PVF-OA10, 9% = 6.41766, PVF10, 8% = 0.46319, and PVF10, 9% =
0.42241. Based on this, Bowser sold the bonds for ________ of par.
a. 100%
b. 95.9%
c. 102.6%
d. 93.6%
5. Hinds Enterprises issued bonds at a premium. They traditionally use the effective interest
method of amortization. Therefore, you would expect the earlier years of the bonds to have an
interest expense that is
a. less than if the straight line method were used.
b. greater than if the straight-line method were used.
c. the same as if the straight-line method were used.
d. greater than the amount of the interest payments.
6. How should a bond premium be reported on a statement of financial position?
a. At the present value of the future reduction in bond interest expense due to the
premium.
b. As a deferred credit.
c. As a direct addition to the face amount of the bond.
d. Along with other premium accounts such as those resulting from share transactions.
7. When considering discounts or premiums applied to a bond issue, which of the following
statements is correct?
a. The difference between the effective rate of interest and the market rate of interest is
the reason discounts and premiums arise.
 b. The terms "discount" and "premium" are the same as loss and gain, respectively, to
both buyer and seller.
c. The interest expense to the seller of bonds issued at a premium will be less than the
total interest payments.
d. When bonds are issued at a discount, the seller has an advantage in that interest
payments are based upon an amount less than face value.
8. How are commissions, legal fees, and printing fees associated with a bond issue accounted for?
a. By adjusting the bonds’ initial carrying value.
b. By adding them to any discount on bonds or subtracting them from any premium on
bonds when the bonds are sold.
c. By charging them to an expense account in the year the bonds are originally dated,
whether or not they are sold in that year.
d. By charging them to an expense account in the year the bonds are actually sold.
9. Bond issue costs, premiums, and discounts associated with bonds that are held to maturity
a. should be used to calculate the gain or loss resulting from the maturity of the bonds.
b. will be fully amortized as their amortization period is designed to coincide with the life
of the bond issue.
c. should be written off directly to a bond retirement account as the bond will be
redeemed.
d. are carried forward and written off in the same manner as that used prior to the
maturity date.
10. The difference between the reacquisition price and the net carrying amount on the books
should be __________ when debt is extinguished before its maturity date through a refunding
transaction.
a. treated as a prior period adjustment
b. recognized currently in income as a loss or gain
c. amortized over the life of the new issue
d. amortized over the remaining original life of the extinguished issue
11. On January 1, 2012, Morley Electronics issued bonds with a par value of $1,350,000 at 95, due in
10 years. The bond discount was amortized using the straight-line method. On January 1, 2017,
Morley called the entire issue at 102. Calculate Morley’s loss or gain on redemption.
a. $89,500 gain
b. $67,500 loss
c. $60,750 loss
d. $44,750 gain
12. The present value of a zero-interest-bearing note given for property, goods, or services should
be measured by
a. the fair value of the property, goods, or services or by an amount that reasonably
approximates the fair value of the note.
b. the book value of the property on the seller’s books the interest rate on similar notes
being offered in the market place for similar property, goods, or services.
c. using a negotiated interest rate between the issuer of the note and the owner of the
property, goods, or services to discount the note.
d. using the prime interest rate to discount the note.
13. When property with an indeterminable fair market value is exchanged for a debt instrument
with no ready market,
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
c. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
d. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
14. Marion Company issued a $350,000, zero-interest-bearing, 5-year note in exchange for land
with a fair market value of $287,000 from Palma Real Estate. If the present value of the note at
an appropriate rate of interest is $287,000, Palma Real Estate should record a
a. note payable in the amount of $287,000.
b. note receivable in the amount of $287,000.
c. note receivable in the amount of $350,000.
d. gain on the sale of land.
15. Brownlee Enterprises calculates the value of their bonds based on the fair value option. If the
market interest rate declines, the value of Brownlee’s bonds is likely to
a. stay the same.
b. be the same as the bond’s face value.
c. increase.
d. decrease.
16. All of the following are valid reasons to form a special-purpose entity EXCEPT
a. the new entity borrows money to finance a project and repays the debt from the
proceeds received from the project.
b. two or more entities form a new entity to construct an operating plant that will be used
by both parties.
c. the special-purpose entity is formed to remove risk from the company’s own financial
statements.
d. the special purpose entity segregates certain specific company assets from others.
17. A company that enters into off-balance sheet financing (Select all that apply.)
a. is in violation of generally accepted accounting principles.
b. may be attempting to conceal the debt from shareholders by having no information
about the debt included in the balance sheet.
c. wishes to confine all information related to the debt to the income statement and the
statement of cash flow.
d. can enhance the quality of its financial position and perhaps permit credit to be
obtained more readily and at less cost.
18. Farrar Cakes disclosed total liabilities of $5,400,000, total assets of $8,000,000, interest expense
of $400,000, income taxes of $600,000, and net income of $1,000,000 in their 2016 Annual
Report. Based on this, Farrar Cakes’ times interest earned ratio is
a. 10.
b. 5.
 c. 2.5.
d. 8.
19. How should long-term debt be reported if it matures within one year and the company has
arranged, before its current year-end, to convert the debt into shares?
a. As noncurrent.
b. As a current liability.
c. As non-current and accompanied with a note explaining the method to be used in its
liquidation.
d. In a special section between liabilities and shareholders' equity.
20. Complex financial instruments make the distinction between debt and equity
a. harder to define.
b. easier to define.
c. less important.
d. irrelevant.
21. Which of the following conditions must be present for a debt refinancing to be treated as a
settlement?
a. The discounted present value of the cash flows under the new terms must be at least
10% greater or less than those under the old terms.
b. The discounted present value of the cash flows under the new terms must be at least
10% less than those under the old terms.
c. The discounted present value of the cash flows under the new terms must be at least
5% less than those under the old terms.
d. The discounted present value of the cash flows under the new terms must be at least
5% greater or less than those under the old terms.
22. Which of the following is a required disclosure with respect to liabilities?
a. payment terms for trade accounts payable
b. who the creditors are and how much is owed to each
c. details of assets pledged as collateral
d. future payments and maturity amounts for each of the next ten years
23. Which of the following is not a required disclosure with respect to liabilities?
a. future payments and maturity amounts for each of the next five years
b. maturity dates and interest rates for each outstanding bond issue
c. payment terms for trade accounts payable
d. details of assets pledged as collateral
24. What problem might the existence of a debt covenant pose to accountants and analysts?
a. The debtor might use overly conservative accounting in order to meet the condition
imposed by the covenant.
b. The creditor might use overly aggressive accounting in order to meet the condition
imposed by the covenant.
c. The creditor might use overly conservative accounting in order to meet the condition
imposed by the covenant.
d. The debtor might use overly aggressive accounting in order to meet the condition
imposed by the covenant.
25. The numerator of the times interest earned ratio is
 a. net income before income tax.
b. net income before interest and income tax.
c. net income before interest.
d. net income before interest, income tax, and depreciation (EBITDA).
26. Which of the following would be considered positive indicators of a company’s financial health?
a. a low debt to total assets ratio and a high interest coverage ratio
b. a high debt to total assets ratio and a high interest coverage ratio
c. a low debt to total assets ratio and a low interest coverage ratio
d. a high debt to total assets ratio and a low interest coverage ratio
27. Which of the following statements is true?
a. Refinanced long-term debt may be reported as long-term rather than current if the
refinancing has been completed before the date of the financial statements, according
to IFRS and ASPE.
b. Refinanced long-term debt may be reported as long-term rather than current if the
refinancing has been completed before the issue of the financial statements, according
to IFRS and ASPE.
c. Refinanced long-term debt may be reported as long-term rather than current if the
refinancing has been completed before the date of the financial statements, according
to IFRS; and before the date of the issue of the financial statements, according to ASPE.
d. Refinanced long-term debt may be reported as long-term rather than current if the
refinancing has been completed before the date of the financial statements, according
to ASPE; and before the date of the issue of the financial statements, according to IFRS.
28. Which of the following statements is correct?
a. Both IFRS and ASPE require the effective interest method to be used to amortize bond
premiums and discounts.
b. ASPE requires the effective interest method to be used to amortize bond premiums and
discounts; IFRS permits either the effective interest method or the straight-line method.
c. IFRS requires the effective interest method to be used to amortize bond premiums and
discounts; ASPE permits either the effective interest method or the straight-line
method.
d. Both IFRS and ASPE permit either the effective interest method or the straight-line
method to be used to amortize bond premiums and discounts.
29. Which of the following would be considered a collateral trust bond?
a. a corporate bond that is backed with inventory of raw goods and/or finished materials
b. a corporate bond that is backed by a claim on real estate
c. a corporate bond that is backed with shares in another corporation
d. a corporate bond that is backed by one or more commodities
30. Gains and losses due to credit risk on fair-valued liabilities are booked to other comprehensive
income under which standard(s)?
a. neither ASPE nor IFRS
b. IFRS only
c. ASPE and IFRS
d. ASPE only
31. Which of the following statements is correct?
 a. Only ASPE provides specific guidance on measuring transactions between related
parties.
b. Neither ASPE nor IFRS provide specific guidance on measuring transactions between
related parties.
c. Both ASPE and IFRS provide specific guidance on measuring transactions between
related parties.
d. Only IFRS provides specific guidance on measuring transactions between related parties.
32. Gains and losses due to credit risk on fair-valued liabilities are booked to other comprehensive
income under IFRS 9.
a. True
b. False
33. Gains and losses due to credit risk on fair-valued liabilities are booked to income
under IFRS 9.
a. Net
b. Other comprehensive
34. Gains and losses due to credit risk on fair-valued liabilities are booked to income
under ASPE.
a. Net
b. Other comprehensive
35. Only provides specific guidance on measuring transactions between related
parties.
a. ASPE
b. IFRS
36. Only provides specific guidance on measuring transactions between related
parties.
a. ASPE
b. IFRS
37. Only ASPE provides specific guidance on measuring transactions between related parties.
a. True
b. False
38. Long-term debt should be reported as current on the statement of financial position if a
company plans to retire the debt from a bond retirement fund which exists at or before the
current year-end.
a. True
b. False
39. Companies that wish to justify not reporting certain obligations on their financial statements
might argue that the recognition criteria in the accounting are imprecise.
a. Conceptual framework
b. Standard
40. Gilley Resources reported the following account balances on their December 31,
2017 adjusted trial balance:
 How much should they report for long-term liabilities?
a. $2,865,000
b. $2,950,000
c. $2,965,000
d. $2,850,000
41. Under which of the following scenarios would a company likely report a
noncurrent liability as a current liability on their statement of financial position?
a. if they plan to call bonds by using money from a bond retirement fund in
the next three months
b. if they plan to pay off a five-year loan with cash in the first half of the next
fiscal period
c. if they plan to convert bonds to shares within the next year
d. if they plan to pay off a loan by issuing bonds in the next month

42. Knoll Resources has the following included in their liabilities:

1. Six-year, $360,000 loan at 4% interest, payable at $60,000/year plus interest,
obtained in 2012
2. 10-year term bond with $1,000,000 par value at 8% interest, issued in 2007
3. 20-year term bond with $2,500,000 par value at 12% interest, issued in 2009
4. 15-year, $6 million loan at 7.5% interest, payable at $400,000/year plus interest,
obtained in 2008
How much of these liabilities, excluding interest will they list under current liabilities at
12/31/16?
a. $1,460,000
b. $899,800
c. $685,000
d. $1,674,800
43. Companies that wish to justify not reporting certain obligations on their financial
statements might argue that
a. the use of judgement allows them to report whatever they choose.
b. an obligation that may never have to be repaid does not, in fact, exist.
c. the recognition criteria in the accounting conceptual framework are
imprecise.
d. including obligations of subsidiaries and associates would confuse
readers.
44. Companies that wish to justify not reporting certain obligations on their financial
statements might argue that the recognition criteria in the accounting
conceptual framework are imprecise.
a. True
b. False
45. An investor is interested in purchasing a bond, but he is not sure how long he
will want to hold it. As a result, the investor wants the process of selling this
bond to be as quick and easy as possible. Which type of bond should this
investor avoid when making his purchase?
a. bearer bond
b. registered bond
c. convertible bond
d. coupon bond
46. Which of the following provisions would you most expect to see in the indenture
for a convertible bond?
a. “Upon maturity, this bond may be redeemed for either cash or five
barrels of crude oil.”
b. “At any time in the next 10 years, the corporation may compel the holder
of this bond to redeem it for cash.”
c. “At any time in the next five years, this bond may be redeemed for 30
common shares.”
d. “All interest payments for this bond will be provided at the time of the
bond’s maturity.”
47. Tenor Technologies is planning to conduct a bond issue via firm underwriting.
This choice of underwriting methods suggests that Tenor
a. plans to sell the bonds directly to one large institution.
b. wants to be guaranteed a certain amount from the sale of its bonds.
c. is comfortable with the possibility of raising less money than expected
should investor interest in the bond fluctuate.
d. does not want to rely upon the services of an investment bank.
48. A large firm has just reduced the amount of debt in its capital structure. Given
this change, individuals who hold any bonds issued by the firm at
increased risk of incurring a loss on the bonds.
 a. Are
b. Are Not
49. A collateral trust bond would be classified as a debenture bond.
a. True
b. False
50. You have just purchased a corporate bond with a maturity date of January 1,
2025. Despite the stated maturity, you know that the bond may be retired prior
to that date. What type of bond did you purchase?
a. serial bond
b. bearer bond
c. debenture bond
d. callable bond
51. Of the following terms, which refers to a bond that matures in installments?
a. Bearer bond
b. Term bond
c. Serial bond
d. Callable bond
52. With firm underwriting, the investment bank that sells a company’s bonds
guarantees that the company will receive a specific amount from the sale.
a. True
b. False
53. If a bond’s issuer has the right to retire the bond prior to its maturity date, that
bond would be classified as a
a. debenture bond.
b. retirable bond.
c. convertible bond.
d. callable bond.
54. Which of the following terms refers to a bond that does not pay interest unless
the issuing company is profitable?
a. Revenue bond
b. Collateral trust bond
c. Income bond
d. Debenture bond
55. If the name of a bond’s owner is not recorded with the issuing corporation, then
that bond would be classified as a
a. bearer bond.
b. term bond.
c. debenture bond.
d. secured bond.
56. Of the following choices, which would NOT be considered a long-term liability?
a. pension liabilities
 b. bonds payable
c. utility bills
d. mortgages payable
57. Which of the following terms refers to a bond that is unsecured as to principal?
a. Callable bond
b. Debenture bond
c. Mortgage bond
d. Indenture bond
58. What is the name for the document that sets forth the covenants and
restrictions protecting both the issuer and the purchasers of a bond?
a. Bond debenture
b. Bond coupon
c. Registered bond
d. Bond indenture
59. Bonds that are not backed by collateral are called unsecured bonds.
a. True
b. False
60. The process of transferring a coupon bond is complicated than the
process of transferring a registered bond.
a. More
b. Less
61. A bond indenture contains the following provision: “At any time in the first 10
years after this bond’s issuance, the bearer may redeem the bond for 30
common shares in the issuing corporation”. This provision suggests that the
bond should be classified as a ________ bond.
a. Bearer
b. Callable
c. Convertible
d. commodity-backed
62. When shopping for corporate bonds on the open market, you would expect the
majority of available bonds to have a face value of
a. $10,000.
b. $100.
c. $1,000.
d. $100,000.
63. Crandall Industries recently conducted a bond issue. The company backed these
bonds with bonds issued by six other large corporations. Given this information,
Crandall’s newly issued bonds should be classified as ________ bonds.
a. Convertible
b. double-backed
c. serial
 d. collateral trust
64. You have just purchased a corporate bond with a maturity date of January 1,
2025. Despite the stated maturity, you know that the bond may be retired prior
to that date. What type of bond did you purchase?
a. The firm must seek approval from all parties who hold any of its long-
term debt.
b. The firm’s existing bondholders must approve the new bond issue.
c. The firm’s shareholders must approve the new bond issue.
d. The firm must seek approval from all parties who hold any of its short-
term debt.
65. Gomez Manufacturing is preparing to conduct a bond issue and has decided to
go with best-efforts underwriting. This decision suggests that Gomez
a. does not want to rely upon the services of an investment bank.
b. does not want to pay a commission on the proceeds of the sale.
c. wants to be guaranteed a certain amount from the sale of its bonds.
d. feels there is enough investor interest in the bond that the firm will be
able to raise at least as much money as it needs.
66. Weston Incorporated needs to raise $25 million for long-term use. The firm
prefers that this amount be split into investing units of at least $500,000 or
more. Given this preference, Weston a good candidate for a bond
issue.
a. Is
b. Is Not
67. Foster Industries has just announced that it will conduct a bond issue in the
coming months. This announcement suggests that Foster needs to borrow a
________ amount of money for the ________ term.
a. large; short
b. large; long
c. small; short
d. small; long
68. The process of transferring a coupon bond is
a. they may be forced to redeem the bonds prior to their stated maturity
date.
b. the interest paid on these bonds comes directly from specified revenue
sources.
c. these bonds will not mature on a single date.
d. they may not always receive interest payments.
69. When investors purchase callable bonds, they do so with the knowledge that
they
a. may be forced to redeem the bond for a particular commodity.
 b. will have the option to redeem the bond in exchange for stock in the
issuing corporation.
c. may be compelled to redeem the bond earlier than they would like.
d. will receive their total interest payoff at maturity.
70. Which of the following terms refers to a bond that is issued in the name of its
owner?
a. Convertible bond
b. Income bond
c. Bearer bond
d. Registered bond
71. In most cases, companies make annual bond interest payments, even though
the interest rate is usually expressed as a semiannual rate.
a. True
b. False
72. Your friend Penny is interested in investing in corporate bonds, but she is not
sure what type of bond is the best choice for her. She tells you that she is
especially interested in buying a bond that has a relatively low level of risk and
offers a steady income stream. Which of the following pieces of advice would be
most appropriate for you to provide?
a. “I would recommend avoiding term bonds. Because these bonds all
mature on a single date, you will not receive any interest payments until
that maturity date is reached.”
b. “Any type of debenture bond should be a solid choice. These bonds are
backed by collateral, which means your risk of loss is low or even
nonexistent.”
c. “Given your desire for a steady income stream, you will want to avoid
deep-discount bonds, even if their price makes them seem like an
appealing option.”
d. “I think an income bond is the best choice for you, because with this type
of bond, the issuing corporation must pay you a set amount of money
every year until the bond reaches maturity.”
73. Over the past year, Piazza Products has seen a moderate drop in sales, which
has led to a 15% decline in the value of the firm’s common shares. Given this
drop in sales and stock price, Piazza’s bondholders are at
a. increased risk of loss, because Piazza will have less sales revenue and
therefore less money available to pay back its obligation to its
bondholders.
b. minimal risk of loss, because the firm has not taken on additional debt in
its capital structure
c. increased risk of loss, because investor interest in Piazza’s bonds has
likely fallen in much the same way as it has fallen for the firm’s shares.
 d. minimal risk of loss, because government regulations prevent firms from
defaulting on their obligation to their bondholders.
74. After a firm issues bonds, it will typically owe relatively ________ amounts of
money to a relatively ________ number of investors.
a. small; large
b. small; small
c. large; large
d. large; small
75. An investor has just purchased a corporate bond, even though she understands
that she may not always receive interest payments on the bond. This suggests
that the bond is most likely a(n) bond.
a. Income
b. Revenue
76. Which of the following corporate bonds would least likely be available for
purchase?
a. a bond with a $10,000 face value
b. a bond with a $100 face value
c. a bond with a $1,000 face value
d. a bond with a $1,500 face value
77. In which of the following scenarios would a firm most likely decide to conduct a
bond issue?
a. The firm’s shareholders are unwilling to authorize the firm to take on
more long-term debt.
b. The firm needs to borrow an amount that is too large for a single bank to
supply.
c. The firm needs to borrow an amount that is less than $1 million.
d. The firm predicts a one-year drop in income and wants extra funds on
hand to cover the anticipated shortfall.
78. Which of the following statements is accurate with regard to corporate bond
issues?
a. A bond’s indenture rarely states the amount authorized to be issued.
b. Typically, corporate bonds have various covenants that protect the
lenders but not the borrowers.
c. When a corporation issues bonds, it increases its level of short-term debt.
d. In most cases, a corporation’s board of directors and shareholders must
approve a new bond issue.
79. Your friend Juan tells you that he has run across what he believes to be a
fantastic investment opportunity. Specifically, he has learned that XYZ
Corporation is planning a deep-discount debenture bond issue in the coming
months. The low price of this bond appeals to Juan, especially in light of the
bond’s high face value and above-average interest rate. Juan asks your advice on
 whether he should purchase one of these bonds. Which of the following
represents your best response?
a. “The low price of this bond reflects the fact that XYZ may call in the bond
at any time. Before buying the bond, consider how comfortable you are
with the possibility that you may have to surrender the bond before its
maturity date.”
b. “Although the low price is tempting, you should think about possible
changes in the price of the commodity linked to this bond. If the price of
the commodity falls between now and the bond’s maturity date, you may
lose money on your investment.”
c. “Your decision depends on whether you want this bond to provide an
income stream prior to its maturity date. If you are interested in receiving
regular cash flows, this bond is not your best choice.”
d. “This seems like a smart choice to me, too. Given that the loan is secured
by collateral, you are sure to realize some level of return on your
investment, even if XYZ suffers financial losses between now and the
bond’s maturity date.” 
80. Monroe Manufacturing was recently the subject of a leveraged buyout led by the
firm’s upper management. As a result of the buyout, the amount of debt in
Monroe’s capital structure rose by 25%. Prior to the buyout, Monroe’s bonds had
a solid rating and its shares were considered a safe investment. How would
Monroe’s existing investors most likely be affected by the firm’s leveraged
buyout?
a. Only the firm’s bondholders would be at increased risk of loss.
b. Both the firm’s shareholders and its bondholders would be at increased
risk of loss.
c. Neither the firm’s bondholders nor its shareholders would be at
increased risk of loss.
d. Only the firm’s shareholders would be at increased risk of loss.
81. If the name of a bond’s owner is not recorded with the issuing corporation, then
that bond would be classified as a
a. bearer bond.
b. debenture bond.
c. term bond.
d. secured bond.
82. What is the name for the document that sets forth the covenants and
restrictions protecting both the issuer and the purchasers of a bond?
a. Registered bond
b. Bond debenture
c. Bond coupon
d. Bond indenture
83. Which of the following terms refers to a bond that does not pay interest unless
the issuing company is profitable?
a. Income bond
b. Revenue bond
c. Collateral trust bond
d. Debenture bond
84. If a bond’s issuer has the right to retire the bond prior to its maturity date, that
bond would be classified as a
a. debenture bond.
b. convertible bond.
c. retirable bond.
d. callable bond.
85. Which of the following terms refers to a bond that is unsecured as to principal?
a. Debenture bond
b. Indenture bond
c. Callable bond
d. Mortgage bond
86. Of the following terms, which refers to a bond that matures in installments?
a. Bearer bond
b. Callable bond
c. Serial bond
d. Term bond
87. Pension liabilities be classified as long-term debt.
a. Should
b. Should Not
88. A large firm has just reduced the amount of debt in its capital structure. Given
this change, individuals who hold any bonds issued by the firm at
increased risk of incurring a loss on the bonds.
a. Are
b. Are Not
89. With firm underwriting, the investment bank that sells a company’s bonds
guarantees that the company will receive a specific amount from the sale.
a. True
b. False
90.