Part I. Choose the correct answer

1. How would the amortization of premium on bonds payable affect each of the following?

a. Decrease carrying value; Increase net income

b. Decrease carrying value; Decrease net income

c. Increase carrying value; Decrease net income

d. Increase carrying value; Increase net income

2. The value of the warrants attached to a debt security (detachable) is accounted as:

a. An appropriation of retained earnings

b. Liability

c. A part of share capital

d. A separate portion of share premium

3. Interest payment dates of a bond issue are March 1 and September 1. The bond was issued on June 1, 2020. Interest expense for the year ended December 31, 2020 would be for?

a. Six months

b. Seven months

c. Ten months

d. Four months

4. When the cash proceeds from a bond issue with detachable stock purchase warrants exceeds the sum of the face value of the bonds and the residual fair value of warrants, the excess should be credited to:

a. Premium on bonds payable

b. Share premium

c. Share warrants outstanding

d. Retained earnings

5. If a bond was sold at 105, the stated rate of interest was:

a. Not related to the market rate

b. Higher than the market rate

c. Equal to the market rate

d. Lower than the market rate

6. For bonds payable, the cash interest paid in each interest period is:

a. Different depending upon the date of sale

b. Dependent on the initial amount of accrued interest

c. The same amount regardless of whether the bonds were sold at a discount or a premium

d. Not the same amount when the stated and yield interest rates are different

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

a. Deferred charge

b. Deferred credit

c. Direct deduction from the face amount of the note

d. Addition to the face amount of the note

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

a. Excess of the fair value of the debt over the fair value of the asset

b. Excess of the carrying amount of the debt over the carrying amount of the asset

c. Excess of the carrying value of the debt over the fair value of the asset

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

9. Under debt restructuring involving substantial modification of terms, the future cash flows under the new terms shall be discounted using

a. Market rate of interest

b. Original effective interest rate

c. Prime interest rate

d. Interest rate under the new terms

10. An entity shall initially measure equity instruments issued to extinguish a financial liability at:

a Fair value of the liability extinguished

b. Par value of the equity instruments issued

c. Fair value of the equity instruments issued

d. Carrying amount of the liability extinguished

11. Convertible bonds are bonds that can be exchanged for shares of capital stock of other corporation other than the issuing company

a. TRUE

b. FALSE

12. Dacion en pago is essentially an asset swap form of debt restructuring

a. TRUE

b. FALSE

13. The change in fair value attributable to the credit risk such as currency and price risk is recognized in other comprehensive income.

a. TRUE

b. FALSE

14. When the retirement price is higher than the carrying value of the bond, a gain is recognized.

a. TRUE

b. FALSE

15. The establishment of a bond sinking fund is required at all times to settle bond liability.

a. TRUE

b. FALSE

Part II. Identification

1. Bonds without collateral security

2. These are bonds which may be redeemed or called in by the issuing corporation prior to their date of maturity.

3. An alternative method of amortization that is used for bonds having a series of maturity dates

4. A bond that gives the bondholder the potential to be a shareholder rather than a creditor.

5. The difference if the issue price is less than the face value of the bond liability