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Intermediate Accounting Chapter 14, Exams of Advanced Education

Abilene Christian University (ACU)Advanced Education

Intermediate Accounting Chapter 14

Typology: Exams

2025/2026

Available from 02/16/2026

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Intermediate Accounting Chapter 14
What does Long-Term consists of? - correct answer It consists of a probable future
sacrifice of economic benefits arising from present obligations that are not payable
within a year or the operating cycle of the company, whichever is longer.
What is a bond and where does it arise from? - correct answer It arises from a
contract known as a bond indenture and it represents a promise to pay (1) a sum of
money at a designated maturity date, plus (2) periodic interest at a specified rate
on the maturity amount (face value).
What's the main purpose of bonds? - correct answer To borrow for the long term
when the amount of capital needed is too large for one lender to supply.
What are two types of bonds? - correct answer Secured and unsecured bonds.
What are secured bonds? - correct answer Secured bonds are backed by a pledge of
some sort of collateral. Mortgage bonds are secured by a claim on real estate.
Collateral trust bonds are secured by stocks and bonds of other corporations.
What does the stated interest rate mean? - correct answer The interest rate written
in the terms of the bond indenture (and often printed on the bond certificate) is
known as the stated, coupon, or nominal rate. The stated rate is expressed as a
percentage of the face value of the bonds (also called the par value, principal
amount, or maturity value).
What is the face value of a bond? - correct answer It's the nominal value or dollar
value o f security stated by the issuer. For stocks, it is the original cost of the stock
shown on the certificate. For bonds, it is the amount paid to the holder at maturity,
generally $1,000. It is also known as the "par value" or simply "par."
What is the effective yield or market rate? - correct answer The rate of interest
actually earned by the bondholders. If bonds sell at a discount, the effective yield
exceeds the stated rate. Conversely, if bonds sell at a premium, the effective yield
is lower then the stated rate.
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Intermediate Accounting Chapter 14

What does Long-Term consists of? - correct answer It consists of a probable future sacrifice of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. What is a bond and where does it arise from? - correct answer It arises from a contract known as a bond indenture and it represents a promise to pay (1) a sum of money at a designated maturity date, plus (2) periodic interest at a specified rate on the maturity amount (face value). What's the main purpose of bonds? - correct answer To borrow for the long term when the amount of capital needed is too large for one lender to supply. What are two types of bonds? - correct answer Secured and unsecured bonds. What are secured bonds? - correct answer Secured bonds are backed by a pledge of some sort of collateral. Mortgage bonds are secured by a claim on real estate. Collateral trust bonds are secured by stocks and bonds of other corporations. What does the stated interest rate mean? - correct answer The interest rate written in the terms of the bond indenture (and often printed on the bond certificate) is known as the stated, coupon, or nominal rate. The stated rate is expressed as a percentage of the face value of the bonds (also called the par value, principal amount, or maturity value). What is the face value of a bond? - correct answer It's the nominal value or dollar value o f security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity, generally $1,000. It is also known as the "par value" or simply "par." What is the effective yield or market rate? - correct answer The rate of interest actually earned by the bondholders. If bonds sell at a discount, the effective yield exceeds the stated rate. Conversely, if bonds sell at a premium, the effective yield is lower then the stated rate.

What's another word known for interest? - correct answer Coupon What is a discount? - correct answer If the bonds sell for less then face value, they sell at a discount. It also means that investors demand a rate of interest higher then the stated rate. Usually this occurs because the investors can earn a greater rate on alternative investments of equal risks. What is a premium? - correct answer If the bonds sell for more than face value, they sell at a premium. How the present value of a bond gets calculated? - correct answer The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal. The rate used to compute the present value of these cash flows is the interest rate that provides and acceptable return on a investment commensurate with the issuer's risk characteristics. What is the straight line depreciation method? - correct answer It's the default method used to gradually reduce the carrying amount of a fixed asset over its useful life amortized at a constant amount each interest period...Divide the estimated useful life (in years) into 1 to arrive at the straight-line depreciation rate. Multiply the depreciation rate by the asset cost (less salvage value). " Bonds issued between interest payment dates. - correct answer When companies issue bonds on other then the interest payment dates, buyers of the bonds will pay the seller the interest accrued from the last interest payment date to the date of issue. The purchasers of the bonds, in effect, pay the bond issuer in advance for that portion of the full six-months interest payment to which they are not entitled because they have not held the bonds for that period. Then, on the next semiannual interest payment date, purchasers will receive the full six months' interest payment. What is the Effective-Interest Method? - correct answer The preferred procedure for amortization of a discount or premium is the effective-interest method (also called present value amortization). Under the effective-interest method, companies:

  1. Compute bond interest expense first by multiplying the carrying value (book value) of the bonds at the beginning of the period by the effective-interest rate.

redemption before maturity, including any call premium and expense of reacquisition, is called the reacquisition price. Extinguishment of Debt - correct answer On any specified date, the net carrying amount of the bonds is the amount payable at maturity, adjusted for unamortized premium or discount. Any excess of the net carrying amount over the reacquisition price is a gain from extinguishment. The excess of the reacquisition price over the net carrying amount is a loss from extinguishment. A the time of reacquisition, the unamortized premium or discount, and any costs of issue applicable to the bonds, must be amortized up to the reacquisition date. What is refunding? - correct answer It is often advantageous for the issuer to acquire the entire outstanding bond issue and replace it with a new bond issue bearing a lower rate of interest. The replacement of an existing issuance of a bond with a new one is called refunding. What is a Zero-Interest-Bearing Note? - correct answer If a company issues a zero- interest-bearing (non-interest-bearing) note solely for cash, it measures the note's present value by the cash received. The implicit interest rate is the rate that equates the cash received with the amounts to be paid in the future. The issuing company records the difference between the face amount and the present value (cash received) as a discount and amortizes that amount to interest expense over the life of the note. Note: In the amortization schedule it record the cash paid as $ 0 for all periods, it only records the interest expense and discount or premium amortized amount right next to the Carrying amount of the note. What is the fair value Option? - correct answer Noncurrent liabilities, such as bonds and notes payable, are generally measured at amortized cost (face value of the payable, adjusted for any payments and amortization of any premium or discount). However, companies have the option to record fair value in there accounts for most financial assets and liabilities, including bonds and notes payable. Therefor, the fair value option is the alternative for a business to record its financial instruments at their fair values. GAAP allows this treatment for the following items: A financial asset or financial liability. A firm commitment that only involves financial instruments. A loan commitment.

About the fair value option. - correct answer The FASB believes that fair value measurements for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost. It considers fair value to be more relevant because it reflects the current cash equivalent value of financial instruments. What is an unrealized holding gain or loss? - correct answer If companies choose the fair value option, noncurrent liabilities, such as bonds and notes payable, are reported at fair value. In addition, companies report unrealized holding gains and losses as part of net income or in other comprehensive income depending on circumstances. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized. As a result, the company reports the liability at fair value each reporting date. What are two ways to analyze Long-Term Debts? - correct answer Long-term creditors and stockholders are interested in a company's long-run solvency, particularly its ability to pay interest as it comes due and to repay the face value of the debt maturity. Debt to Assets and Times Interest earned are two ratios that provide information about debt-paying ability and long-run solvency. What is the Debt to Assets Ratio? - correct answer The debt to assets ratio measures the percentage of the total assets provide by creditors. To compute it, divide total debt (both current and long-term liabilities) by total assets. Example: Total Liabilities Debt to Assets Ratio = -------------------- Total Assets

  • The higher the percentage of total liabilities to total assets, the greater the risk that the company may be unable to meet its maturing obligations. What is the Times Interest Earned Ratio? - correct answer The times interest earned ratio indicates the company's ability to meet interest payments as they come due. It is computed by dividing the sum of net income, interest expense, and income tax expense by interest expense.