At the Beginning of 2006, Finney Company Received a Three-Year

question 43

Multiple Choice

At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note.The market rate for equivalent notes was 8% at that time.Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006.What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively?

• A)Overstate, overstate, understate, zero
• B)Overstate, understate, understate, understate
• C)Overstate, overstate, overstate, overstate
• D)None of these

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Definitions:

Coupon

A voucher entitling the holder to a discount for a particular product or service.

Zero-Coupon Bond

A bond that is issued at a discount and repaid at face value at maturity, without periodic interest payments.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, typically expressed in years.

Coupon

The interest rate on a bond that the issuer promises to pay to the holder until maturity.