Accounting Chapter 14 test bank

Bond interest expense reported on the December 31, 2012 income statement of Macklin Corporation would be a. $23,000 b. $25,000 c. $27,000 d. $46,000

[($2,000,000 × .05) × 3/12] - [($80,000 ÷ 10) × 3/12] = $23,000.

The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on December 31, 2012. The bonds, which had a face value of $2,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2013, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is a. $0. b. $16,000. c. $24,800. d. $80,000.

$2,080,000 - [($2,000,000 × .06) - ($2,080,000 × .05)] = $2,064,000 (CV of bonds) ($2,000,000 × 1.04) - $2,064,000 = $16,000.

On January 1, Patterson Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of a. $164,700. b. $171,300. c. $154,830. d. $153,000.

$2,817,000 × .10) - ($3,000,000 × .09) = $11,700 ($3,000,000 - $2,817,000) - $11,700 = $171,300.

On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $580,000, an original cost of $960,000, and accumulated depreciation of $460,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2013, reduces the face amount of the note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of each year. Nolte should recognize a gain or loss on the transfer of the equipment of a. $0. b. $80,000 gain. c. $120,000 gain. d. $380,000 los Nolte should recognize a gain on the partial settlement and restructure of the debt of a. $0. b. $30,000. c. $110,000. d. $150,000. Nolte should record interest expense for 2013 of a. $0. b. $30,000. c. $60,000. d. $90,000.

$580,000 - ($960,000 - $460,000) = $80,000. ($1,200,000 + $120,000) - [$580,000 + $500,000 + ($500,000 × .06 × 3)] = $150,000. 0. The effective-interest rate is 0%.

The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on December 31, 2012. The bonds, which had a face value of $800,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2013, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2013? Ignore taxes. a. $16,000. b. $50,400. c. $44,800. d. $56,000.

$760,000 + [($760,000 × .06) - ($800,000 × .05)] = $765,600 (CV of bonds) $765,600 - ($800,000 × 1.02) = $50,400.

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013? a. $9,835,116 b. $9,970,312 c. $9,816,916 d. $9,831,762

$9,831,762 $9,802,072 + ($197,928 × 3/20) = $9,831,762.

On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note (face amount, $120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest for a loan of this type is 10%. The present value of $120,000 at 10% for three years is $90,156. What amount of interest income should Ms. Price recognize in 2012? a. $9,016. b. $12,000. c. $36,000. d. $27,048.

$90,156 × .10 = $9,016.

On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of $2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a credit of a. $50,000 to Interest Payable. b. $80,000 to Discount on Bonds Payable. c. $1,920,000 to Bonds Payable. d. $80,000 to Premium on Bonds Payable.

($2,000,000 × 1.04) - $2,000,000 = $80,000 premium.

On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance? a. $3,045,000 b. $3,000,000 c. $2,970,000 d. $2,895,000

($3,000,000 × .99) + ($3,000,000 × .10 × 3/12) = $3,045,000.

At Corporation: December 31, 2012 the following balances existed on the books of Foxworth Bonds Payable $3,000,000 Discount on Bonds Payable 240,000 Interest Payable 75,000 Unamortized Bond Issue Costs 180,000 If the bonds are retired on January 1, 2013, at 102, what will Foxworth report as a loss on redemption? a. $555,000 b. $480,000 c. $405,000 d. $300,000

($3,000,000 × 1.02) - ($3,000,000 - $240,000 - $180,000) = $480,000.

On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of $9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at par plus a call premium of $105,000. What amount should Emig report in its 2013 income statement as loss on extinguishment of debt (ignore taxes)? a. $0 b. $105,000 c. $240,000 d. $345,000

($4,500,000 + $105,000) - [($9,000,000 - $480,000) × 1/2] = $345,000.

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will a. exceed what it would have been had the effective-interest method of amortization been used. b. be less than what it would have been had the effective-interest method of amortization been used. c. be the same as what it would have been had the effective-interest method of amortiza- tion been used. d. be less than the stated (nominal) rate of interest.

A

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of the interest payments. c the same as if the straight-line method were used. d. less than if the straight-line method were used.

A

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the a. carrying amount of the pre-restructure debt is less than the total future cash flows. b. carrying amount of the pre-restructure debt is greater than the total future cash flows. c. present value of the pre-restructure debt is less than the present value of the future cash flows. d. present value of the pre-restructure debt is greater than the present value of the future cash flows.

B

In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize a. no gain or loss on the restructuring. b. a gain on the restructuring. c. a loss on the restructuring. d. none of these.

B

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

B

The term used for bonds that are unsecured as to principal is a. junk bonds. b. debenture bonds. c. indebenture bonds. d. callable bonds.

B

Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue date? a. $19,400,000 b. $20,450,000 c. $19,700,000 d. $19,100,000

C

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Gain/Loss-Income. d. None of these.

C

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a. a loss should be recognized by the debtor. b. a gain should be recognized by the debtor. c. a new effective-interest rate must be computed. d. no interest expense or revenue should be recognized in the future.

C

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a. compute a new effective-interest rate. b. not recognize a loss. c. calculate its loss using the historical effective rate of the loan. d. calculate its loss using the current effective rate of the loan.

C

The printing costs and legal fees associated with the issuance of bonds should a. be expensed when incurred. b. be reported as a deduction from the face amount of bonds payable. c. be accumulated in a deferred charge account and amortized over the life of the bonds. d. not be reported as an expense until the period the bonds mature or are retired.

C

A troubled debt restructuring will generally result in a. loss by the debtor and a gain by the creditor. b. loss by both the debtor and the creditor. c. gain by both the debtor and the creditor. d. gain by the debtor and a loss by the creditor.

D

Long-term debt that matures within one year and is to be converted into stock should be reported a. as a current liability. b. in a special section between liabilities and stockholders' equity. c. as noncurrent. d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

D

The rate of interest actually earned by bondholders is called the a. stated rate. b. yield rate. c. effective rate. d. effective, yield, or market rate.

D

Theoretically, the costs of issuing bonds could be a. expensed when incurred. b. reported as a reduction of the bond liability. c. debited to a deferred charge account and amortized over the life of the bonds. d. any of these.

D

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note. d. any of these.

D

When a note payable is issued for property, goods, or services, the present value of the note is measured by a. the fair value of the property, goods, or services. b. the fair value of the note. c. using an imputed interest rate to discount all future payments on the note. d. any of these

D

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will a. increase if the bonds were issued at a discount. b. decrease if the bonds were issued at a premium. c. increase if the bonds were issued at a premium. d. increase if the bonds were issued at either a discount or a premium.

D

Which of the following is an example of "off-balance-sheet financing"? 1. Non-consolidated subsidiary. 2. Special purpose entity. 3. Operating leases. a. 1 b. 2 c. 3 d. All of these are examples of "off-balance-sheet financing."

D

Times Interest Earned

Income before income taxes and interest expense/int expense

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013? a. $14,752,673 b. $14,955,466 c. $14,725,375 d. $14,747,642

d. $14,747,642 $14,703,109 + ($296,891 × 3/20) = $14,747,642.