CHAPTER 5 - MCQ REVIEWER a.

Increase and Decrease

b. Increase and Increase
1. Most corporate bonds are c. Decrease and Decrease
a. Mortgage bonds d. Decrease and Increase
b. Debenture bonds
c. Secured bonds 15. How would the amortization of discount on bonds payable affect the
d. Collateral bonds carrying amount of the bonds payable and net income, respectively?
a. Increase and Decrease
2. The method used to pay interest depends on whether the bonds are b. Increase and Increase
a. Registered or coupon c. Decrease and Decrease
b. Mortgaged or unmortgaged d. Decrease and Increase
c. Indebentured or debentured
d. Callable or redeemable 16. Unamortized discount on bonds payable should be reported as
a. Direct deduction from the face amount of the bond
3. Zero-coupon bonds b. Direct deduction from the present value of the bond
a. Offer a return in the form of a deep discount off the face amount c. Deferred charge
b. Result in zero interest expense for the issuer d. Part of the bond issue cost
c. Result in zero interest revenue for the investor
d. Are reported as shareholders' equity by the issuer 17. 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
4. To evaluate the risk and quality of an individual bond issue, investors rely issuer will be
heavily on a. Decreased by accrued interest from June 1 to November 1
a. Bond ratings provided by investment houses b. Decreased by accrued interest from May 1 to June 1
b. Newspaper articles c. Increased by accrued interest from June 1 to November 1
c. Bond interest payments d. Increased by accrued interest from May 1 to June 1
d. The audit report
18. The issuer of bonds payable sold at face amount with interest payable
5. Bonds payable should be reported as noncurrent at February 1 and August 1 should report
a. Face amount less any unamortized discount or plus any unamortized a. Liability for accrued interest
premium. b. An addition to bonds payable
b. Current market price c. Increase in deferred charge
c. Face amount less any unamortized premium or plus any unamortized d. Contingent liability
discount
d. Face amount less accrued interest since the last interest payment date 19. A bond payable issued on June 1 has interest payment dates of April 1
and October 1. Bond interest expense for the current year ended December
6. In the amortization of discount on bonds payable 31 is for a period of
a. The interest expense is less with each successive interest payment a. Three months c. Six months
b. The total effective interest is equal to the amount of the discount plus the b. Four months d. Seven months
total cash interest paid
c. The carrying amount of the bonds payable declines eventually to face amount 20. A bond payable was issued at a discount with a call provision. When
d. The reduction in the discount is less with each successive interest payment the bond issuer exercised the call provision on an interest date, the amount
of bond liability derecognized should have equaled the
7. Bonds payable not designated at fair value through profit loss shall be a. Call price
measured initially at b. Call price less unamortized discount
a. Fair value c. Face amount less unamortized discount
b. Fair value plus bond issue cost d. Face amount plus unamortized discount
c. Fair value minus bond issue cost
d. Face amount 21. When bonds are sold between interest dates, any accrued interest is
credited to
8. The amortized cost of bonds payable means a. Interest payable c. Interest receivable
a. Face amount plus premium on bonds payable b. Interest revenue d. Bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost 22. Which statement is true about accrued interest on bonds payable sold
d. Face amount plus premium on bonds payable or minus discount on bonds between interest dates?
payable a. The accrued interest is computed at the effective rate.
b. The accrued interest will be paid to the seller when the bonds mature.
9. Which statement is true about the fair value option for measuring bonds c. The accrued interest is extra income to the buyer.
payable? d. All of the statements are not true.
a. The effective interest method of amortization must be used to calculate
interest expense. 23. Which statement is true about a premium on bonds payable?
b. Discount or premium is disclosed in the notes to the financial statements. a. The premium or bonds payable is a contra shareholders' equity account.
c. The fair value of the bond and the principal obligation value must be b. The premium on bonds payable is an account that appears only on the
disclosed. books of the investor.
d. If the fair value option is elected, it must be applied to all bonds. c. The premium on bonds payable increases when amortization entries are
made until maturity date.
10. An entity has bonds outstanding in which the market rate of interest has d. The premium on bonds payable decreases when amortization entries are
risen. The entity elected the fair value option. What will the entity report for the made until the balance reaches zero at maturity date.
year?
a. Interest expense and a gain 24. The amortization of discount on bonds payable
b. Interest expense and a loss a. Decreases the face amount of bonds payable.
c. A gain and no interest expense b. Decreases the amount of interest expense.
d. A loss and no interest expense c. Decreases the carrying amount of bonds payable.
d. Increases the carrying amount of bonds payable.
11. Bonds that mature on a single date are called
a. Term bonds c. Callable bonds 25. The carrying amount of a bond liability is
b. Serial bonds d. Convertible bonds 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
12. Bonds issued with scheduled maturities at various dates are called discount.
a. Convertible bonds c. Serial bonds c. Face amount of the bond plus related discount or minus related premium.
b. Terms bonds d. Callable bonds d. Maturity value of the bond plus related discount or minus related
premium.
13. Debentures are
a. Unsecured bonds c. Ordinary bonds 26. The proceeds from the issue of the bonds payable
b. Secured bonds d. Serial bonds a. Will always be equal to the face amount.
b. Will always be less than the face amount.
14. How would the amortization of premium on bonds payable affect the c. Will always be more than the face amount.
carrying amount of the bonds payable and net income, respectively?
d. May be equal, more or less than the face amount depending on market
interest rate. 9. Bonds usually sell at
a. Maturity amount c. Present value
27. An extinguishment of bonds payable originally issued at a premium is made b. Face amount d. Statistical expected value
by purchase of the bonds between interest dates. Which statement is true at the
time of extinguishment? 10. Which statement is true about bonds payable?
a. Any costs of issuing the bonds payable must be amortized up to the purchase a. The specific provisions of a bond issue are described in a document
date. called bond indenture.
b. The premium on bonds payable must be amortized up to the purchase date. b. Periodic interest expense is the stated interest rate times the face amount
c. Interest must be accrued from the last interest date to the purchase date. of bond outstanding.
d. All of these statements are true. c. Bonds sell for a premium when the market rate of interest exceeds stated
rate.
28. When bonds are retired prior to maturity with proceeds from a new bond d. The initial issue price of bonds payable represents the sum of all future
issue, any gain or loss from the early extinguishment should be cash outflows.
a. Amortized over the remaining original life of the retired bond issue.
b. Amortized over the life of the new bond issue. 11. When bonds are sold at a premium and the effective interest method is
c. Recognized in retained earnings. used, at each subsequent interest payment date, the cash paid is
d. Recognized in income from continuing operations. a. Less than the effective interest
b. Equal to the effective interest
29. An entity neglected to amortize the discount on outstanding bonds payable. c. Greater than the effective interest
What is the effect of the failure to record discount amortization on interest d. More than if the bonds had been sold at a discount
expense and bond carrying amount, respectively?
a. Understated and understated 12. When bonds are sold at a discount and the effective interest method is
b. Understated and overstated used, at each subsequent interest payment date, the cash paid is
c. Overstated and overstated a. More than the effective interest
d. Overstated and understated b. Less than the effective interest
c. Equal to the effective interest
30. An entity neglected to amortize the premium on outstanding bonds payable. d. More than if the bonds had been sold at a premium
What is the effect of the failure to record premium amortization on interest
expense and bond carrying amount, respectively? 13. When bonds are sold at a discount and the effective interest method is
a. Understated and understated used, at each interest payment date, the interest expense
b. Understated and overstated a. Increases
c. Overstated and overstated b. Decreases
d. Overstated and understated c. Remains the same
d. Is equal to the change in carrying amount
CHAPTER 6 - MCQ REVIEWER
14. When bonds are sold at a premium and the effective interest method is
1. What is the interest rate written on the face of the bond? used, at each interest payment date, the interest expense
a. Coupon rate a. Remains constant
b. Nominal rate b. Is equal to the change in carrying amount
c. Stated rate c. Increases
d. Coupon rate, nominal rate or stated rate d. Decreases

2. What is the rate of interest actually incurred? 15. The effective interest expense is
a. Market rate a. The effective rate times the carrying amount of the bond payable at the
b. Yield rate beginning of interest period.
c. Effective rate b. The stated rate times the face amount of the bond.
d. Market, yield or effective rate c. The effective rate times the face amount of the bond.
d. The stated interest rate times the carrying amount of the bond payable at
3. When the effective interest method is used, the periodic amortization would the beginning of interest period.
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium. 16. What is the effective interest rate of a bond measured at amortized
c. Increase if the bonds were issued at a premium. cost?
d. Increase if the bonds were issued at either a discount or a premium. a. The stated rate of the bond.
b. The interest rate currently charged by the entity or by others for similar
4. The discount on bond payable is charged to interest expense bond.
a. Equally over the life of the bond c. The interest rate that exactly discounts estimated future cash payments
b. Only in the year the bond is issued through the expected life of the bond to the net carrying amount of the
c. Using the effective interest method bond.
d. Only in the year the bond matures d. The basic risk-free interest rate that is derived from observable
government bond prices.
5. Bond issue cost
a. Is included in the measurement of the bonds payable measured at amortized 17. For a bond issue which sells for less than face amount, the market rate
cost. of interest is
b. Is amortized using the interest method over the life of the bonds payable. a. Dependent on rate stated on the bond
c. Increases effectively the market rate of interest. b. Equal to rate stated on the bond
d. All of these describe bond issue cost. c. Less than rate stated on the bond
d. Higher than rate stated on the bond
6. Under the effective interest method of amortization, the interest expense is
equal to 18. What is the market rate of interest for a bond issue which sells for more
a. The stated rate of interest multiplied by the face amount of the bonds payable. than face amount?
b. The market rate of interest multiplied by the face amount of the bonds a. Less than rate stated on the bond
payable. b. Equal to rate stated on the bond
c. The stated rate of interest multiplied by the beginning carrying amount of the c. Higher than rate stated on the bond
bonds payable. d. Independent of rate stated on the bond
d. The market rate of interest multiplied by the beginning carrying amount of
the bonds payable. 19. If bonds are issued at a premium, this indicates that
a. The yield rate exceeds the nominal rate
7. When interest expense for the current year is more than interest paid, the b. The nominal rate exceeds the yield rate
bonds were issued at c. The yield and nominal rates coincide
a. A discount c. Face amount d. No necessary relationship exists between the two rates
b. A premium d. Cannot be determined
20. Which statement is true for bonds payable maturing on a single date
8. When interest expense for the current year is less than interest paid, the bonds when the effective interest method of amortizing discount on bonds
were issued at payable is used?
a. A discount c. Face amount a. Interest expense as a percentage of the bond carrying amount varies from
b. A premium d. Cannot be determined period to period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate
21. In theory, the proceeds from the issuance of bonds payable shall be equal to
a. The face amount of the bonds payable.
b. The present value of the principal due at the end of the life of the bonds
payable plus the present value of the interest payments made during the life of
the bonds payable.
c. The face amount of the bonds payable plus the present value of the interest
payments made during the life of the bonds payable.
d. The sum of the face amount of the bonds payable and the periodic interest
payments.
22. The market price of bonds payable issued at a discount is the present value
of the principal amount at the market rate of interest
a. Less the present value of all future interest payments at the market rate of
interest.
b. Less the present value of all future interest payments at the rate of interest
stated on the bonds.
c. Plus the present value of all future interest payments at the market rate of
interest.
d. Plus the present value of all future interest payments at the rate of interest
stated on the bonds.
23. Under international accounting standard, the valuation method used for
bonds payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance
24. How should an entity calculate the net proceeds from issuance of bonds
payable?
a. Discount the bonds payable at the stated rate of interest.
b. Discount the bonds payable at the market rate of interest.
c. Discount the bonds payable at the stated rate of interest and deduct bond
issuance cost.
d. Discount the bonds payable at the market rate of interest and deduct bond
issuance cost.
25. An entity issued bonds payable with a stated rate of interest that is less than
the effective interest rate. The bonds were issued on one of the interest payment
dates. What should the entity. report on the first interest payment date?
a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to
bondholders.
c. A debit to discount on bond payable.
d. A debit to premium on bond payable.
CHAPTER 7 - MCQ REVIEWER
1. What is the principal accounting for a compound financial instrument?
a. The issuer shall classify a compound instrument as either liability or equity.
b. The issuer shall classify the liability and equity components of a compound
instrument separately as liability or equity instrument.
c. The issuer shall classify a compound instrument as a liability in its entirety,
until converted into equity.
d. The issuer shall classify a compound instrument as a liability in its entirety.
2. How are the proceeds from issuing a compound instrument allocated between
the liability and equity?
a. The liability component is measured at fair value and the remainder of the
proceeds is allocated to the equity component.
b. The proceeds are allocated to the liability and equity based on fair value.
c. The proceeds are allocated to the liability and equity based on carrying
amount.
d. The proceeds are not allocated because the compound instrument is
accounted for either as liability or equity.
3. The proceeds from an issue of bonds payable with share warrants should not
be allocated between the liability and equity components when
a. The fair value of the share warrants is not readily available.
b. The exercise of the share warrants within the next reporting period seems
remote.
c. The share warrants issued are nondetachable.
d. The proceeds should be allocated between liability and equity under all of
these circumstances.
4. When the cash proceeds from bonds psyable issued with share warrants
exceed the fair value of the bonds payable without the warrants, the excess
should be credited to
a. Share premium - ordinary
b. Retained earnings
c. Liability account
d. Share premium - share warrants
5. When bonds are issued with share warrants, the equity component is
equal to
a. Zero
b. The excess of the proceeds over the face amount of the bonds payable.
c. The market value of the share warrants.
d. The excess of the proceeds over the fair value of the bonds payable
without the share warrants.
6. A bond convertible by the holder into a fixed number of ordinary shares
of the issuer is
a. A compound financial instrument
b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
7. Convertible bonds
a. Have priority over other indebtedness.
b. Are usually secured by a mortgage.
c. Pay interest only in the event net income is sufficient to cover the
interest.
d. May be exchanged for equity shares.
8. What is the main reason for issuing convertible bond?
a. The ease with which convertible bond is sold even if the entity has a
poor credit rating.
b. The fact that share capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond always sells at a premium.
9. The major difference between convertible bonds payable and bonds
payable issued with share warrants is that upon exercise of the share
warrants
a. The shares are held by the issuer for a certain period before issuance to
the warrant holder.
b. The holder has to pay a certain amount to obtain the shares.
c. The shares involved are restricted.
d. No share premium can be part of the transaction.
10. Convertible bonds
a. Are separated into the liability component and the expense component.
b. Allow an entity to issue debt financing at lower rate.
c. Are separated into liability and equity components based on fair value.
d. All of the choices are correct.
11. What is the accounting for issued convertible bond?
a. The instrument should be recorded solely as bond.
b. The instrument should be recorded as either bond or equity but not both.
c. The instrument should be recorded solely as equity.
d. The instrument should be recorded as part bond and part equity.
12. Issued convertible bonds are
a. Separated into liability and equity components with the liability
component recorded at fair value and the residual assigned to the equity
component
b. Always recorded using the fair value option
c. Recorded at face amount for the liability
d. Recorded at the par value of shares
13. The carrying amount of bonds converted was greater than the par value
of the ordinary shares issued. Which correctly states an effect of the
conversion?
a. Shareholders' equity increased
b. Share premium decreased
c. Retained earnings increased
d. A loss is recognized
14. The conversion of bonds payable into ordinary shares is commonly
recorded by
a. Incremental method
b. Proportional method
c. Fair value method
d. Book value or carrying amount method
15. When convertible bond is not converted but paid at maturity
a. A gain or loss is recorded for the difference between the carrying amount
of the bond and the present value
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized.