EX 2 1. A derivative instrument that gives the holder the right but not the obligation to do something is a/an _____ contract. A. future B. swap C. performance D. options 2. Some financial analysts contend that reporting debt at amortized historical cost rather than current market value: A. makes it more difficult to manipulate accounting numbers. B. makes it easier to manipulate accounting numbers. C. has no impact on the accounting numbers. D. makes it impossible to manipulate the accounting numbers. 3. Baker Company issued $200,000 of ten-year bonds to yield 11% when the stated rate of the bonds was 9%. Present value factors are: 9% 11% PVIF of $1, 10 years 0.42241 0.35218 PVIF of Annuity of $1, 10 years 6.41766 5.88923 The entry to record the sale would be: A. DR Cash 176,442 DR Bond premium 23,558 CR Bonds payable 200,000 B. DR Cash 176,442 DR Bond discount 23,558 CR Bonds payable 200,000 C. DR Cash 223,558 CR Bond premium 23,558 CR Bonds payable 200,000 D. DR Cash 223,558 CR Bond discount 23,558 CR Bonds payable 200,000 4. The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below: 10% 9% PV $1 factor 1 year 0.90909 0.91743 PV $1 factor 2 years 0.82645 0.84168 PV $1 factor 3 years 0.75131 0.77218 PV $1 factor 4 years 0.68301 0.70843 PV $1 factor 5 years 0.62092 0.64993 The bond carrying value at the end of Year 1 is: A. $4,500,000. B. $5,000,000. C. $5,126,556. D. $5,161,978. 5. A bond with a maturity value of $700,000 was initially issued for $715,000. The bond has a ten-year life and a stated interest rate of 10%. The total interest expense over the life of the bond is: A. $700,000. B. $715,000. C. $685,000 . D. not determinable without knowing the bonds effective yield. 6. The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below: 10% 9% PV $1 factor 1 year 0.90909 0.91743 PV $1 factor 2 years 0.82645 0.84168 PV $1 factor 3 years 0.75131 0.77218 PV $1 factor 4 years 0.68301 0.70843 PV $1 factor 5 years 0.62092 0.64993 The bonds will sell for: A. $4,805,525. B. $5,000,000. C. $5,050,000. D. $5,194,475. 7. Which one of the following contingencies requires financial statement disclosure? A. A lawsuit that the firms attorneys believe will be dropped. B. A lawsuit that the firms attorneys believe will probably be settled for $75,000. C. A reasonably possible loss on a lawsuit that the firms attorneys cannot estimate the loss. D. A reasonably possible loss on a lawsuit that the firms attorneys believe will be settled for $100,000. 8. Investors need to review transactions involving swaps carefully to ensure that there is an underlying: A. loss. B. gain. C. rationale. D. economic benefit. 9. Which one of the following contingencies must be accrued on the balance sheet? A. The likely loss on a lawsuit that the firms attorneys believe will be dropped B. The probable loss on a lawsuit that the firms attorneys believe will be settled for $50,000 C. The reasonably possible loss on a lawsuit that the firms attorneys believe will be dropped D. The reasonably possible loss on a lawsuit that the firms attorneys believe will be settled for $50,000 10. Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2014. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of bond discount amortization for 2015 is: A. $1,696. B. $2,458. C. $3,080. D. $4,000. 11. The market value of floating-rate debt of $200,000 will: A. rise by $2,000 with a 1% rise in interest rates. B. fall by $2,000 with a 1% fall in interest rates. C. remain unchanged with a change in interest rates. D. will rise in the short run and fall in the long run with a change in interest rates. 12. When market rates of interest decrease, the use of floating-rate debt benefits: A. investors. B. issuing companies. C. all parties. D. no one. 13. Losses must be disclosed if they are: A. remote and estimable. B. reasonably possible and estimable. C. probable and reasonably estimable. D. reasonably possible but not estimable. 14. On January 1, 2014, Ross Corporation issued bonds with a maturity value of $200,000; the bonds stated rate of interest equaled the market interest rate on the issue date. On December 31, 2014, the market value of the bonds was $188,926; on December 31, 2015, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporations financial reporting if Ross elects to measure the bond liability using the fair value option? A. For the year ending December 31, 2014, Ross will report an unrealized holding loss of $11,074 in its income statement. B. For the year ending December 31, 2015, Ross will report an unrealized holding gain of $8,675 in its income statement. C. For the year ending December 31, 2015, Ross will report an unrealized holding loss of $8,675 in its income statement. D. For the year ending December 31, 2015, Ross will report an unrealized holding loss of $2,399 in its income statement. 15. A hedged item can be any of the following EXCEPT a/an: A. anticipated (forecasted) transaction. B. existing asset or liability on the companys books. C. past transaction. D. firm commitment. 16. When the market rate of interest is below the nominal rate, a bond sells at: A. par. B. a premium. C. a discount. D. stated value. 17. A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $17,500. Which of the following statements is correct? A. The loss on the debt extinguishment is $32,500. B. The gain on the debt extinguishment is $2,500. C. The gain on the debt extinguishment is $32,500. D. The gain or loss on the debt extinguishment cant be determined without knowing the dollar amount of the accrued interest. 18. A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an: A. asset. B. liability. C. equity. D. expense. 19. A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct? A. The gain on the debt extinguishment is $5,000. B. The loss on the debt extinguishment is $20,500. C. The gain on the debt extinguishment is $30,500. D. The gain or loss on the debt extinguishment cant be determined without knowing the dollar amount of the accrued interest. 20. On February 1, 2015, Hills Company had 10,000 pounds of inventory costing $1.50 per pound; the market value per pound was $1.95 on this date. Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2015 at $2.25 per pound. Which of the following statements does NOT accurately describe the impact of this futures contract? A. Hills has foregone the benefit of additional profits (the upside potential) if the price per pound exceeds $2.25 during the month of May. B. Hills has eliminated the risk of reduced profits (the downside potential) if the price per pound is less than $2.25 during the month of May. C. Hills gross profit in May will be $3,000 regardless of the actual price per pound in May. D. The value of the futures contract decreases as the market price per pound of inventory increases.