Question

For each of the following, state whether True or False:

If you repurchase stock at an amount less than its original issue price, you can record a gain.

If you repurchase stock and then reissue it at a higher price, you can record a gain.

Interest expense is computed using the effective rate of interest, not the stated rate.

Cash interest paid is computed using the stated rate of interest, not the effective rate.

Non-interest-bearing notes payable have no interest expense.

Answer 1

• If you repurchase stock at an amount less than its original issue price, you can record a gain.
  FALSE.
  Repurchased stock are treasury stock and they are recorded AT COST at which they are purchased. No gain/loss is recognised.
• If you repurchase stock and then reissue it at a higher price, you can record a gain.
  FALSE.
  The higher price (in excess of cost at which they are acquired) is recorded as Paid in Capital from treasury Stock. No gain or loss is recognised.
• Interest expense is computed using the effective rate of interest, not the stated rate.
  TRUE.
  Interest Expense = Carrying amount or Book Value x Effective Interest rate.
• Cash interest paid is computed using the stated rate of interest, not the effective rate.
  TRUE.
  Cash Interest = Face Value x Stated rate of interest.
• Non-interest-bearing notes payable have no interest expense
  FALSE.
  The interest is ‘imputed’ and recognised by discounting the non interest bearing note.