Debt Financing Quiz

Which debt-related control is most effective in ensuring proper recording of interest expense?

• Requiring approval of the terms of all new borrowing agreements
• Investigating the reasoning for revenue recognition related to attached rights
• Including a task in the month-end closing procedure to record interest expense
• Including in the debt procedure a line item to charge unamortized discounts or premiums to

How can a company prevent manipulation of gain or loss recognition related to debt transactions?

• By requiring justifications for interest rates used to value debt
• By including a line item in the debt procedure to charge unamortized discounts or premiums
• By investigating the reasoning for revenue recognition related to attached rights
• By reporting to the board of directors the repayment status of all debt

Which of the following scenarios would most likely result in a gain on extinguishment of debt?

• Retiring debt with higher interest rates using proceeds from issuing new debt with even higher rates
• Repurchasing debt with less expensive debt when interest rates allow
• Extending the maturity of existing debt to defer payments
• Failing to retire debt sinking funds on scheduled dates

How can a company ensure proper recognition of interest expense on bonds for which interest payments do not correspond to the closing date?

• By issuing new debt with less expensive terms
• By including a task in the month-end closing procedure
• By delaying the recognition of interest expense until the next reporting period
• By seeking approval from bondholders only

What action should be taken if the market value of equity on conversion dates fluctuates significantly?

• Retire the debt immediately to avoid potential losses
• Delay the retirement of debt until the market stabilizes
• Verify the market value of equity to ensure accurate accounting
• Ignore the fluctuation and proceed with debt retirement

When should the market value of equity be verified in the case of debt retirement?

• During month-end closing procedures
• During the retirement of debt with less expensive debt
• On conversion dates when the market value method is used
• During the issuance of debt with attached stock warrants

How should a company account for the cost of a proposed debt extinguishment?

• By issuing new debt with less expensive terms
• By calculating the full extinguishment cost including termination fees
• By delaying the retirement of debt to avoid losses
• By seeking approval from bondholders only

A company is considering retiring its existing debt with less expensive debt. Which policy supports this decision?

• Recognition of unearned revenue policy
• Debt sinking funds policy
• General debt transaction policy
• Debt extinguishment policy

What control is used to detect the deliberate timing of gain and loss recognition related to debt transactions?

• Investigating the reasoning for revenue recognition
• Requiring written and approved justification for the interest rate used
• Requiring approval of all new borrowing agreements
• Including a task in the month-end closing procedure

When should accrued interest expense on all recently converted debt be reviewed and recorded?

• During month-end closing procedures
• Only if bondholders request it
• As part of the formal procedure to convert debt to equity
• During the issuance of debt with attached stock warrants