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# AC551 Week 3 Quiz Keller Graduate School of Management

1.(TCO D) A bond discount should be shown on the balance sheet as: an asset. a contra account to bonds payable. a reduction of stockholders' equity. both an asset and a liability. Instructor Explanation: Chapter 14, Page 695. XXX
Points Received: 4 of 4 Comments: 2. Question : (TCO D) "In-substance defeasance" is a term used to refer to an arrangement whereby Student Answer:

a company gets another company to cover its payments due on long-term debt. a governmental unit issues debt instruments to corporations. XXX a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust. a company legally extinguishes debt before its due date.
Instructor Explanation: By Definition, Chapter 14. Points Received: 4 of 4 Comments:

Student

. 3. Question : (TCO D) On January 1, 2010, Ellison Co. issued eight-year bonds with a face value of
\$1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: The present value of the principal is Student Answer: XXXX \$534,000. \$540,000. \$623,000. \$627,000. Instructor Explanation: \$1,000,000 X .534 = \$534,000. Chapter 14
Points Received: 4 of 4 Comments: 4. Question : (TCO D) On January 1, 2010, Crown Company sold property to Leary Company. There was

no established exchange price for the property, and Leary gave Crown a \$2,000,000 zero-interest-bearing note payable in five equal annual installments of \$400,000, with the first payment due December 31, 2010. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was \$1,442,000 at January 1, 2010. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2010 after adjusting entries are made, assuming that the effective-interest method is used?

\$0 Student ANSWER XXXX \$428,220 \$446,400 \$558,000 Instructor Explanation: \$2,000,000 \$1,442,000 (\$1,442,000 X .09) = \$428,220. Chapter 14.