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Acc 202, Intermediate Accounting Test 1


1. The selling price of a zero-coupon bond at the date of issuance is equal to
A. The face amount of the bond.
B. The present value of the face amount of the bond, discounted using the market interest rate at the issuance date.
C. The present value of the face amount of the bond, discounted using the stated interest rate.
D. The present value of the face amount of the bond, discounted using the nominal interest rate at the issuance date.

2. When bonds are issued at a premium, the long-term liability reported on the balance sheet for the bonds
A. Remains at maturity value throughout the life of the bond
B. Decreases or increases each year, depending upon the current market interest rate.
C. Increases each year during the life of the bond.
D. Decreases each year during the life of the bond.

3. If a company issues long-term debt at a premium on January 2, 1998, and reports the interest expense for 1998 as being equal to the cash interest paid, the effect of this error is
A. Net income for 1998 is overstated.
B. The carrying amount of the debt on the balance sheet as of December 31, 1998 is understated.
C. Net income for 1998 is understated.
D. The stockholders' equity total as of December 31, 1998 is overstated.

4. Bond issue costs should be
A. Expensed when incurred.
B. Capitalized and amortized over the life of the bonds to which they relate.
C. Reported as an addition to bonds payable.
D. Capitalized and amortized over 40 years.

5. Which of the following debt securities are reported at their fair value at the balance sheet date?

Trading Securities Available-for-Sale Securities Held-to-Maturity Securities
A. No No No
B. Yes No No
C. Yes Yes No
D. Yes Yes Yes

6. Which of the following statements regarding an investment in debt securities classified as available-for-sale is true?
A. The unrealized holding gains or losses associated with these securities are reported as a component of net income.
B. Premiums or discounts associated with these securities are usually not amortized.
C. A loss resulting from the nontemporary decline in the fair value of these securities would be reported as a component of other comprehensive income.
D. Premiums or discounts associated with these securities are usually amortized if the securities are held for more than three months.

7. On January 1, 1998, the North Company issued 8 percent bonds with a face value of $1,000,000. At this date, the market interest rate was 10 percent. On July 1, 1998, the South Company acquired $200,000 (face value) of North Company bonds when the market interest rate was 12 percent. The South Company classifies this bond investment as held-to-maturity. On December 31, 1998, 1999, and 2000, the market interest rates were 13 percent, 14 percent, and 13.5 percent, respectively. If the South Company uses the effective interest method, the appropriate interest rate(s) that should be used to calculate interest revenue for the years ending December 31, 1998, 1999, and 2000 would be
A. 8 percent, 8 percent, and 8 percent, respectively.
B. 12 percent, 14 percent, and 13.5 percent, respectively.
C. 12 percent, 12 percent, and 12 percent, respectively.
D. 13 percent, 14 percent, and 13.5 percent, respectively.

8. In a troubled debt restructuring in which the creditor agrees to modify the original terms of the debt agreement, an extraordinary gain on the debt restructuring would be recognized by the debtor if
A. The book value of the debt exceeds the present value of the restructured cash flows.
B. The present value of the restructured cash flows exceeds the book value of the debt.
C. The book value of the debt exceeds the restructured cash flows.
D. The restructured cash flows exceed the book value of the debt.

9. On January 1, 1998, the Marjorie Company acquired Alan Company's zero-coupon bonds with a face value of $100,000 for $73,500 which resulted in an effective interest rate of 8 percent. The maturity date is January 1, 2002. If the bonds are classified as held-to-maturity and their fair value on December 31, 1998 is $78,200, the amount to be recognized as the unrealized holding gain/loss at the end of 1998 is
A. $-0-
B. $1,180 holding loss.
C. $4,700 holding gain.
D. $5,880 holding gain.

10. On January 1, 1998, the Easy Finance Company loaned Mr. Garcia $73,500 cash. Mr. Garcia, in turn, signed a four- ear non-interest, bearing note for $100,000 which resulted in an 8 percent effective interest rate. On December 31, 998, it was determined that Mr. Garcia would only be able o pay $90,000 at the maturity date. The interest rate for igher credit risks is 12 percent at the end of 1998. The mount to be recognized as the uncollectible accounts xpense for Garcia's loan on December 31, 1998 is
A. $-0-.
B. $7,938.
C. $10,000.
D. $15,318.
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