Accounting Principles 2 Test 2

Front 1

Held to maturity securities are what?

Back 1

Debt securities (such as bonds) which a company will hold until maturity.

Front 2

Can you deduct interest expense on bonds?

Back 2

Yes, but not dividends.

Front 3

Registered bonds protect against what?

Back 3

Theft, loss. Unregistered bonds are known as bearer bonds.

Front 4

An annuity is a series of payments...

Back 4

at equal time intervals.

Front 5

How does a premium on bonds payable affect interest?

Back 5

A higher premium means a lower interest rate.

Front 6

Where are available for sale gains and losses reported?

Back 6

Equities section of the balance sheet. Marketable securities are reported on the income statement.

Front 7

Investments in held-to-maturity debt securities can be...

Back 7

current or long term assets.

Front 8

Does a lessee have substantially all of the benefits and risk of ownership in an operating lease?

Back 8

No. Benefits are available in a capital lease.

Front 9

Investments in trading securities are...

Back 9

short term investments.

Front 10

Which carries a lower interest rate, Secured or Unsecured loans?

Back 10

Secured.

Front 11

Available for sale securities are either current or long-term assets, depending upon...

Back 11

management's intent.

Front 12

When are term bonds scheduled to mature?

Back 12

At the end of the term.

Front 13

Who has an option to call a callable bond?

Back 13

The issuer.

Front 14

Do companies want a high or low rate of return?

Back 14

High.

Front 15

Trading securities are reported at..

Back 15

Market value.

Front 16

Define Parent and Subsidiary

Back 16

Blah.

Front 17

What is controlling influence?

Back 17

Generally >50% ownership.

Front 18

Define cash equivalents.

Back 18

Investments easily convertable to a known amount of cash. 3 mo. temporary investments.

Front 19

Define Trading Securities

Back 19

blah.

Front 20

When do you use cost method, and when do you use the equity method?

Back 20

Cost when you own, but have no controlling interest. Equity when you have a controlling interest.

Front 21

What does the payment of an installment note include?

Back 21

Payment towards principal and interest.

Front 22

Is the dividend on stock a tax deduction>

Back 22

No.

Front 23

Is the interest on coupon bonds taxable?

Back 23

General answer is yes.

Front 24

Gains and losses on trading securities are reported on the...

Back 24

income statement.

Front 25

Long term investments and available for sale securities are reported at market value on...

Back 25

the balance sheet.

Front 26

No gain or loss is reported when a convertible bond is converted to...

Back 26

company stock.

Front 27

Is an equity investment a creditor relationship?

Back 27

No, it is an ownership relationship.

Front 28

How do you record dividends received under the cost method?

Back 28

Debit cash, credit to Dividend Revenue. Report as income on the income statement.

Front 29

Define significant influence.

Back 29

~20%-50% The test is overruled by other evidence.

Front 30

What is an operating lease?

Back 30

Short term lease, in which lessor retains all of the benefits and liabilities of ownership.

Front 31

What makes up an installment note?

Back 31

Payments to principal and interest over a set period of time.

Front 32

What is a debenture bond?

Back 32

A bond from the issuer that is unsecured.

Front 33

What is a lease?

Back 33

Allows a fixed payment to hold property.

Front 34

Is cash worth more today than the same amount in the future?

Back 34

No.

Front 35

What makes for a gain in a security sale?

Back 35

Selling the security for more than basis.

Front 36

What is a bond?

Back 36

A debt security.

Front 37

Are long-term investments used for operating activities?

Back 37

Have to have current bonds or cash equivalents.

Front 38

When you have significant influence over an investee, this is a...

Back 38

long term investment.

Front 39

Can you foreclose on a mortgaged property, if payments are not made?

Back 39

Usually, yes.

Front 40

Investments in land not used as part of the business operations, are classified as...

Back 40

long term investments.

Front 41

How do you price a bond?

Back 41

100 = 100% of par. 88 = 88% of par.

Front 42

Compound an investment.

Back 42

10000 at 5% for two years: 11,025

Front 43

Compute carrying value of a bond...

Back 43

Present values of future cash flows at discounted rate.

Front 44

What is a consolidated financial statement?

Back 44

All parent corps + subsidiaries w/cash flows.

Front 45

Bonds have multiple lenders while notes have...

Back 45

few lenders.

Front 46

When a bond sells at a premium...

Back 46

market rate -> contract rate.

Front 47

Does issuing bonds affect owner control?

Back 47

No. Not unless the bonds are not paid.

Front 48

Callable bonds give...

Back 48

the issuing company the right to retire bonds before the maturity date.

Front 49

Equity method to record cash dividends...

Back 49

Debit cash, credit long term investment account.

Front 50

Define: Unsecured Bonds

Back 50

Bonds backed only by the issuer's credit rating and promise to pay...Also called debenture bonds.

Front 51

Define: Bearer Bonds

Back 51

Bonds made payable to whoever holds them.

Front 52

Define: Bond Indenture

Back 52

Contract between the bond issuer and the bond holders. Delineates rights.

Front 53

Define: Convertible Bonds

Back 53

Bonds that can be exchanged for a set number of the issuer's shares.

Front 54

Define: Coupon Bonds

Back 54

Bonds with interest coupons attached to their certificates. Coupons detached when they mature, and are redeemed at the bank.

Front 55

Define: Equity Method

Back 55

Accounting method used for long-term investments when the investor has significant influence over the investee.

Front 56

Define: Installment Note

Back 56

Liability requiring a series of periodic payments to the lender.

Front 57

Define: Market Rate

Back 57

Interest rate that borrowers are willing to pay, and lenders are willing to accept for a specific lending agreement, given the borrowers risk level.

Front 58

Define: Serial Bonds

Back 58

Bonds consisting of separate amounts that mature at different dates.

Front 59

Define Unrealized Gain/Loss

Back 59

The Gain/Loss has not been realized yet, because no transaction to do so has taken place (e.g. sale)

Front 60

Define: Return on Assets

Back 60

Ratio reflecting operating efficiency; net income divided by total assets.

Front 61

Define: Available for sale securities

Back 61

Investments in debt and equity securities that are not classified as trading or held to maturity securities.

Front 62

Define: Consolidated financials

Back 62

Financial statements that show all transactions under the parent corporation's control, including subsidiaries.

Front 63

Define: Held to maturity securities

Back 63

Debt securities that the company has the intent and ability to hold until they mature

Front 64

Define: Trading Securities

Back 64

Investments in debt and equity that the company intends to actively trade for profit.

Front 65

Define: Term Bonds

Back 65

Bonds scheduled for payment at a single, specified date.

Front 66

Define: Subsidiary

Back 66

Entity controlled by a parent corporation, in which the parent
owns >50% of the voting stock.