NOTES PAYABLE

QUESTION 53-8 Multiple choice (AICPA Adapted)

1. When an entity issued a note solely in exchange for cash, the present value of the note at
issuance is equal to

a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate

2. If the present value of a note issued in exchange for a property is less than face amount, the
difference should be

a. Included in the cost of the asset

b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

3. An entity borrowed cash from a bank and issued to the bank a short-term noninterest bearing
note payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The
effective interest rate paid by the entity in this transaction would be

a. Equal to the stated discount rate of 10%

b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

4. At issuance date, the present value of a promissory note is equal to the face amount if the note

a. Bears a stated rate of interest which is realistic.

b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for
similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for
similar notes.

5. Which statement concerning discount on note payable incorrect?

a. Discount on note payable may be debited when entity discounts its own note with the bank.
b. The discount on note payable is a deduction from the face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of the liability
over the life of the note.
6. When a note payable with no ready market is exchanged for property whose fair value is
currently indeterminable
a. The present value of the note payable must be approximated using an imputed interest rate.
b. The note payable should not be recorded until the fair value of the property becomes evident.
c. The entity receiving the property should estimate a value for the property.
d. Both entities involved in the transaction should negotiate a value to be assigned to the property.

7. When a note payable is issued for property, the present value of the note is measured by
a. The fair value of the property
b. The fair value of the note payable
c. Using an imputed interest rate to discount all future payments on the note payable
d. All of these are considered in measuring the present value of the note payable

8. When a note payable is exchanged for property, the stated interest rate is presumed to be fair
when
a. No interest rate is stated.
b. The stated interest rate is unreasonable.
c. The face amount of the note is materially different from the cash sale price for similar property.
d. The stated interest rate is equal to the market rate.

9. The discount resulting from the determination of the present value of a note payable should be
reported as

a. Deferred credit
b. Direct deduction from the face amount of the note
c. Deferred charge
d. Addition to the face amount of the note

10. Which statement is correct when an entity issued a note payable with no stated interest rate in
exchange for a depreciable asset?
a. The asset should be depreciated over the term of the note payable.
b. If fair value is unavailable, the note payable should be recorded at present value discounted at the
market rate of interest.
c. Both the note and the asset are recorded at the face amount of the note payable.
d. The note payable is recorded at face amount even if the fair value of the asset is readily
available.

DEBT RESTRUCTURING

QUESTION 53-9 Multiple choice (IFRS)

1. In a debt restructuring considered an asset swap, the gain on extinguishment is equal to

a. Excess of fair value of asset over carrying amount
b. Excess of carrying amount of the debt over the fair value of the asset
c. Excess of fair value of asset over the carrying amount of the debt
d. Excess of carrying amount of the debt over the carrying amount of the asset

2. For a debt restructuring involving substantial modification of terms, it is appropriate for a debtor
to recognize a gain when the carrying amount of the debt

a. Exceeds the total future cash payments.

b. Is less than the total future cash payments.
c. Exceeds the present value of the future cash payments.
d. Is less than present value of future cash payments.

3. For a debt restructuring involving a substantial modification of terms, which of the following
specified by the new terms would be compared to the carrying amount of the debt to determine if
the debtor should report a gain on extinguishment?

a. The total future cash payments

b. The present value of the new debt at the original interest rate
c. The present value of the new debt at the modified interest rate
d. The amount of future cash payments

4. Under a debt restructuring involving substantial modification of terms, the future cash flows
under the new terms shall be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate

QUESTION 53-10 Multiple choice (IFRIC 19)

1. An entity shall initially measure equity instruments issued to extinguish a financial liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished

2. If the fair value of the equity instruments issued cannot be reliably measured, the equity
instruments issued to extinguish a financial liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued

3. If both the fair value of the equity instruments issued and the fair value of the financial liability
extinguished cannot be measured reliably, the equity instruments issued shall be measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Carrying amount of the equity instruments issued
d. Value assigned by the Board of Directors

4. The difference between the carrying amount of the financial liability extinguished and the fair
value of equity instruments issued shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. General reserve

5. The gain or loss from extinguishment of a financial liability by issuing equity instruments is
presented as
a. Other income or other expense
b. Separate line item in the income statement
c. Component of other comprehensive income
d. Component of finance cost

BOND INVESTMENTS

QUESTION 33-12 Multiple choice (IAA)

1. Trading bond investments are reported at

a. Amortized cost
b. Face amount
c. Fair value
d. Maturity

2. Which statement is correct in regard to trading bond investments?

a. Trading bond investments are held with the intention of selling them in a short period of time.
b. Unrealized gains and losses are reported as part of
net income.
c. Any discount or premium is not amortized.
d. All of these statements are correct.

3. Accrued interest on bonds that are purchased between interest dates

a. Is ignored by both the seller and the buyer.

b. Increases the amount a buyer must pay.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount a buyer must pay.

4. The interest income for the year would be higher if the bond was purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium

5. The interest income for the year would be lower if a bond is purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium

QUESTION 33-13 Multiple choice (IAA)

1. The actual interest earned by the bondholder is
a. Effective rate
b. Yield rate
c. Market rate
d. Effective rate, yield rate or market rate

2. The interest rate written on the face of bond is known as

a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
3. To compute the price to pay for a bond, what present value concept is used?
a. The present value of 1
b. The present value of an ordinary annuity of 1
c. The present value of 1 and present value of an ordinary annuity of 1
d. The future value of 1

4. Bonds usually sell at a discount when investors are willing to invest in bonds
a. At the stated interest rate.
b. At rate lower than the stated interest rate.
c. At rate higher than the stated interest rate.
d. Because a capital gain is expected.

5. Bonds usually sell at a premium

a. When market rate is greater than stated rate.

b. When stated rate is greater than market rate.
c. When the price of the bonds is greater than maturity amount.
d. In none of these cases.

6. The effective interest rate on bond is lower than the stated rate when bond sells
a. At maturity value
b. Above face amount
c. Below face amount
d. At face amount

7. The effective interest rate on bond is higher than the stated rate when bond sells
a. At face amount
b. Above face amount
c. Below face amount
d. At maturity value

8. The interest method of amortizing discount provides for

a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income

9. The interest method of amortizing premium provides for

a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and decreasing interest income
d. Decreasing amortization and increasing interest income

10. When the interest payment dates of a bond are May 1 and November 1, and a bond is
purchased on June 1, the amount of cash paid by the investor would be
a. Decreased by accrued interest from June 1 to November 1.
b. Decreased by accrued interest from May 1 to June l
c. Increased by accrued interest from June 1 to November 1.
d. Increased by accrued interest from May 1 to June l

QUESTION 33-14 Multiple choice (IFRS)

1. Which statement is true about the interest method?
a. The interest method does not use a constant rate.
b. Amortization of discount decreases each period.
c. Amortization of premium decreases each period.
d. The interest method applies the effective interest rate to the beginning carrying amount.

2. The fair value option

a. Must be applied to all debt instruments.
b. May be selected as a valuation method at any time.
c. Reports all gains and losses in income.
d. All of the choices are correct.

3. The fair value option allows an entity to

a. Record income when the fair value increases.
b. Measure bond investments at fair value in some years.
c. Report most financial instruments at fair value.
d. All of these statements are correct.

4. A bond investment that satisfies the amortized cost measurement may be designated
a. Irrevocably at fair value through profit or loss
b. Revocably at fair value through profit or loss
c. Irrevocably at fair value through OCI
d. Irrevocably at amortized cost

5. Under what condition can an entity classify financial asset that meets the amortized cost criteria
at FVPL?
a. Where the instrument is held to maturity
b. Where the business model approach is adopted
c. Where the financial asset passes the contractual cash
d. If doing so eliminates or reduces an accounting mismatch

BONDS PAYABLE

Problem 5-26 Multiple choice (IAA)

1. Most corporate bonds are
a. Mortgage bonds
b. Debenture bonds
c. Secured bonds
d. Collateral bonds

2. The method used to pay interest depends on whether the bonds are
a. Registered or coupon
b. Mortgaged or unmortgaged
c. Indebentured or debentured
d. Callable or redeemable

3. Zero-coupon bonds
a. Offer a return in the form of a deep discount off the face amount
b. Result in zero interest expense for the issuer
c. Result in zero interest revenue for the investor
d. Are reported as shareholders' equity by the issuer

4. To evaluate the risk and quality of an individual bond issue, investors rely heavily on
a. Bond ratings provided by investment houses
b. Newspaper articles
c. Bond interest payments
d. The audit report

5. Bonds payable should be reported as noncurrent at

a. Face amount less any unamortized discount or plus any unamortized premium
b. Current market price
c. Face amount less any unamortized premium or plus any unamortized discount
d. Face amount less accrued interest since the last interest payment date

6. The discount on bonds payable is reported as

a. A prepaid expense
b. An expense account
c. A current liability
d. A contra liability

7. In the amortization schedule for discount on bonds payable

a. The interest expense is less with each successive interest payment
b. The total effective interest over the term to maturity is equal to the amount of the discount plus
the total cash interest paid
c. The carrying amount of the bond payable declines eventually to face amount
d. The reduction in the discount is less with each successive interest payment
8. An amortization schedule for bonds issued at a premium
a. Summarizes the amortization of the premium on bonds payable, a contra-asset account
b. Is reported in the statement of financial position
c. Is a schedule that reflects the changes in the bonds payable over the term to maturity
d. All of these are correct

9. When bonds are retired prior to maturity date

a. GAAP has been violated
b. The issuer probably will report an ordinary gain or loss
c. The issuer probably will report an extraordinary gain or loss
d. The issuer will not report a gain or loss

10. An entity has bonds outstanding during a year in which the market rate of interest has risen.
The entity elected the fair value option. What will the entity report for the year?
a. Interest expense and a gain
b. Interest expense and a loss
c. A gain and no interest expense
d. A loss and no interest expense

Problem 5-27 Multiple choice (AICPA Adapted)

1. Bonds that mature on a single date are called
a. Term bonds
b. Serial bonds
c. Callable bonds
d. Convertible bonds

2. Bonds issued with scheduled maturities at various dates are called

a. Convertible bonds
b. Terms bonds
c. Serial bonds
d. Callable bonds

3. Debentures are
a. Unsecured bonds
b. Secured bonds
c. Ordinary bonds
d. Serial bonds

4. How would the amortization of premium on bonds payable affect the carrying amount of bond
and net income, respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
5. How would the amortization of discount on bonds payable affect the carrying amount of bond
and net income' respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase

6. Unamortized bond discount should be reported as

a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the bond issue cost

7. 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 I to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May I to June 1

8. The issuer of a bond sold at face amount with interest payable February 1 and August 1 should
report
a. Liability for accrued interest
b. An addition to bonds payable
c. Increase in deferred charge
d. Contingent liability

9. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest
expense for the current year ended December 31 is for period of
a. Three months
b. Four months
c. Six months
d. Seven months

10. A bond was issued at a discount with a call provision.

When the bond issuer exercised the call provision on an
interest date, the amount of bond liability derecognized
should have equaled the
a. Call price
b. Call price less discount
c. Face amount less unamortized discount
d. Face amount plus unamortized discount

QUESTION 50-3 Multiple choice (PFRS 9)

1. Bonds payable not designated at fair value through
a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount

2. After initial recognition, bonds payable shall be measured at

a. Amortized cost using the effective interest method
b. Fair value through profit or loss by irrevocable designation.
c. Amortized cost using the effective interest method or fair value through other comprehensive
income.
d. Amortized cost using the effective interest method or fair value through profit or loss by
irrevocable designation.

3. The amortized cost of bonds payable means

a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable or minus discount on bonds payable

4. Which statement is true about the fair value option for measuring bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.

QUESTION 50-6 Multiple Choice (IAA)

1. When bonds are sold between interest dates, any accrued
a. Interest payable
b. Interest revenue
c. Interest receivable
d. Bonds payable

2. Which statement is true about accrued interest on bonds sold between interest dates?
a. The accrued interest is computed at the effective rate.
b. The accrued interest will be paid to the seller when the
c. The accrued interest is extra income to the buyer.
d. All of the statements are not true.

3. Which statement is true about a premium on bonds payable?

a. The premium or bonds payable is a contra shareholders' equity account.
b. The premium on bonds payable is an account that appears only on the books of the investor.
c. The premium on bonds payable increases when amortization entries are made until maturity
date.
d. The premium on bonds payable decreases when amortization entries are made until the balance
reaches zero at maturity date.

4. The amortization of discount on bonds payable

a. Decreases the face amount of bonds payable.
b. Decreases the amount of interest expense.
c. Decreases the carrying amount of bonds payable.
d. Increases the carrying amount of bonds payable.

5. The carrying amount of a bond liability is

a. Call price of the bond plus bond discount or minus bond premium.
b. Face amount of the bond plus related premium or minus related discount.
c. Face amount of the bond plus related discount or minus related premium.
d. Maturity value of the bond plus related discount or minus related premium.

6. The proceeds from the issue of the bonds payable

a. Will always be equal to the face amount.
b. Will always be less than the face amount.
c. Will always be more than the face amount.
d. May be equal, more or less than the face amount depending on market interest rate.

7. An extinguishment of bonds payable originally issued at a premium is made by purchase of the

bonds between interest dates. Which statement is true at the time of extinguishment?
a. Any costs of issuing the bonds payable must be amortized up to the purchase date.
b. The premium on bonds payable 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 statements are true.

8. When bonds are retired prior to maturity with proceeds

from a new bond issue, any gain or loss from the early
extinguishment should be
a. Amortized over the remaining original life of the retired bond issue.
b. Amortized over the life of the new bond issue.
c. Recognized in retained earnings
d. Recognized in income from continuing operations

9. An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of
the failure to record discount amortization on interest expense and bond carrying
amount, respectively?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated
10. An entity neglected to amortize the premium on outstanding bonds payable. What is the effect
of the failure to record premium amortization on interest expense and bond carrying amount,
respectively?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated