Instruction: Select the best answer from the choices provided.
Source: Various test banks
1. The gain or loss from extinguishment of a financial liability by issuing equity instruments is presented as
a. Other income or other expense
b. Separate line item in the income statement
c. Component of other comprehensive income
d. Component of finance cost
2. An entity borrowed cash from a bank and issued to the bank a short-term noninterest bearing note payable. The bank
discounted the note at 10% and remitted the proceeds to the entity. The effective interest rate paid by the entity in this
transaction would be
a. Equal to the stated discount rate of 10%
b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%
3. At issuance date, the present value of a promissory note is equal to the face amount if the note
a. Bears a stated rate of interest which is realistic.
b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes.
4. Which statement concerning discount on note payable is incorrect?
a. Discount on note payable may be debited when entity discounts its own note with the bank.
b. The discount on note payable is a deduction from the face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of the liability over the life of the
note.
5. Which of the following is a characteristic of a current liability but not a noncurrent liability?
a. Unavoidable obligation
b. Present obligation to transfer an economic resource
c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer
d. The obligating event has already occurred
6. At year-end, an entity has 120-day note payable outstanding. The entity has followed the policy of replacing the note rather
than repaying it over the last three years. The entity's treasurer says that this policy is expected to continue indefinitely, and
the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the
year-end statement of financial position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
7. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
8.Long-term debt that matures within one year and is to be converted into stock should be reported
a. as a current liability.
b. in a special section between liabilities and stockholders’ equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.
9. In an asset swap, the gain on extinguishment is
a. Excess of fair value of asset over carrying amount
b. Excess of carrying amount of the debt amount over the fair value of the asset
c. Excess of fair value of asset over the carrying amount
d. Excess of carrying amount of the debt over the of debt carrying amount of the asset
10. For a debt restructuring involving substantial modification of terms, it is appropriate for a debtor to recognize a gain when
the carrying amount of the debt
a. Exceeds the total future cash payments.
b. Is less than the total future cash payments.
c. Exceeds the present value of the future cash payments.
d. Is less than present value of future cash payments.
11. For substantial modification of terms, which would be compared to the carrying amount of the debt to determine if the debtor
should report a gain on extinguishment?
a. The total future cash payments
b. The present value of the new debt at the original interest rate
c. The present value of the new debt at the market interest rate
d. The face amount of the new debt
12. Under a debt restructuring involving substantial modification of terms, the present value of the new debt shall be determined
using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate
13. There is nonsubstantial modification of terms if the gain or loss on modification is
a. At least 10% of the old liability
b. Less than 10% of the old liability
c. At least 10% of the new liability
d. Less than 10% of the new liability
14. An entity shall initially measure equity instruments issued to extinguish a financial liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
15. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments issued to extinguish a
financial liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued
16. If both the fair value of the equity instruments issued and the fair value of the financial liability extinguished cannot be
measured reliably, the equity instruments issued shall be measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Carrying amount of the equity instruments issued
d. Value ass assigned by the Board of Directors
17. The difference between the carrying amount of liability extinguished and the fair value of the equity instruments issued shall
be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. Share premium
