ACCY 304 CH. 14 ADAPTIVE PRACTICE

How does the generally accepted method of accounting for gains or losses from the early extinguishment of debt treat any gain or loss?

As a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

Which of the following is the correct equation for bond interest expense?

Carrying value of bonds at beginning of period X effective-interest rate

The straight-line method amortizes a _________ amount each interest period.

Constant

What is the name for the interest rate written in the terms of a bond indenture?

Coupo rate

Which of the following is the interest rate written in the terms of the bond indenture?

Coupon rate, nominal rate, or stated rate

Which of the following terms refers to a bond that is unsecured as to principal?

Debenture bond

Why does a company need to amortize all premiums or discounts over the bond's life to maturity?

Early redemption is not a certainty.

Which of the following is the rate of interest actually earned by bondholders?

Effective rate

True or False. Bellingham Inc. sold bonds with a face value of $100,000,000 and a stated interest rate of 8% for $92,278,000, to yield 10%. If the company uses the effective interest method of amortization, interest expense for the first six months would be $4,000,000.

False. 10% yield rate x 6/12 x bond carrying amount (100,000,000 x 6/12 x 8% = 4,613,900

Which of the following statements is accurate with regards to corporate bond issues?

In most cases, a corporation's board of directors and stockholders must approve a new bond issue.

Which of the following represents an arrangement where a company plans to pay off a long-term debt in the future by placing purchased securities in an irrevocable trust?

In-substance defeasance

Which of the following terms refers to a bond that does not pay interest unless the issuing company is profitable?

Income bond

Which of the following is true of interest expense under the effective interest method?

It is the same total amount as straight-line interest expense over the term of the bonds.

The selling price of a bond is the sum of the present values of both the principal and the periodic interest payments. Which of the following is used to discount the cash flows and determine present values?

Market rate

Rose Corp. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Which of the following is a step in calculating the issue price of the bonds?

Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table

Which of the following is not an interest rate written in terms of the bond indenture?

Par value rate

Which of the following terms refers to a bond that is issued in the name of its owner?

Registered bond

Which of the following determines discount or premium for the bond?

The difference between the face value and the present value.

The market interest rate multiplied by the beginning-of-period carrying amount of the bonds

They are sold at a discount

Theoretically, which of the following is true about the costs of issuing bonds?

They could be reported as a reduction of the bond liability?

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include

a credit to Premium on Bonds Payable for $2,000,000.

Subtracting the bind interest paid from the bond interest expense will yield the ________ amount

amortization, amortized

The printing costs and legal fees associated with the issuance of bonds should

be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a

callable bond

If a bond's issuer has the right to call and redeem the bond prior to its maturity date, that bond would be classified as a

callable bond

Crandall Industries recently conducted a bond issue. The company backed these bonds with bonds issued by six other large corporations. Given this information, Crandall's newly issued bonds should be classified as ________ bonds.

collateral trust

Gomez Manufacturing is preparing to conduct a bond issue and has decided to go with best-efforts underwriting. This decision suggests that Gomez

feels there is enough investor interest in the bond that the firm will be able to raise at least as much money as it needs.

If a bond sold at 97, the market rate was:

greater than the stated rate.

An investor has just purchased a corporate bond, even though she understands that she may not always receive interest payments on the bond. This suggests that the bond is most likely a(n) ________ bond.

income

Bonds which do not pay interest unless the issuing company is profitable are called

income bonds

Amortization of a discount __________ interest expense

increases

The stated rate and coupon rate are both interest rates written in terms of the bond ________

indenture

Under the effective interest method, interest expense:

is the same total amount as straight-line interest expense over the term of the bonds.

The process of transferring a coupon bond is _________ complicated than the process of transferring a registered bond.

less

Pension liabilities ________ be classified as long-term debt.

should

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that

the stated rate of interest exceeded the market rate.

Tenor Technologies is planning to conduct a bond issue via firm underwriting. This choice of underwriting methods suggests that Tenor

wants to be guaranteed a certain amount from the sale of its bonds

What happens when a company issues a bond on an interest payment date at par?

no interest is accrued

Amortization of a __________ decreases interest expense

premium

When the bond sells at a ________ , the effective yield is lower than the stated rate

premium

The difference between the face value and the ________ value of the bond determines discount or premium for the bond.

present

A bond issued in the name of the owner is a:

registered bond

Bond interest payments are most often made __________ by companies

semiannually

Of the following terms, which refers to a bond that matures in installments?

serial bond

The Leslie Corporation issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6% on January 1, 2021. These were payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are as follows:

$1,398,240

On October 1, 2021 Jubee Corporation issued 5%, 10-year bonds with a face value of $4,000,000 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 which of the following?

$160,000 to Premium on Bonds Payable

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of

$285,500. (5,000,000 - cash proceeds, 4,695,000)= 305,00 at issuance amortized is: (5,000,000 x 9% = 450,000) - (4,695,000 x 10%) = 19,500 305,000-19,500 = 285, 500

What is the name for the document that sets forth the covenants and restrictions protecting both the issuer and the purchasers of a bond?

Bond indenture

Which of the following equations can be used to correctly find the amortization amount?

Bond interest expense - bond interest paid

Which of the following is not needed to determine the unamortized discount?

Bond issue costs

True or False. Marjin Industries sold bonds with a face value of $100,000,000 and a stated interest rate of 8% for $92,780,000, to yield 10%. Interest expense for the first six months would be $4,000,000, if the company uses the effective interest method of amortization.

False

True or False. Multiplying the carrying value of the bonds by the stated rate of interest is equal to the interest expense using the effective interest method.

False

True or False. The effective yield or market rate is the interest rate written in the terms of the bond indenture.

False

True or False. The interest expense decreases when a discount is amortized.

False

True or false. When the effective rate of a bond is lower than the stated rate, the bond sells at a discount.

False

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, which of the following will be true of the amount of cash received by the issuer?

It will be increased by accrued interest from May 1 to June 1.

The Lyon Corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $750,000. To extinguish this debt, the company had to pay a call premium of $250,000. Ignoring income tax considerations, these amounts should be treated for accounting purposes by

charging $1,000,000 to a loss in the year of extinguishment.

A bond indenture contains the following provision: "At any time in the first 10 years after this bond's issuance, the bearer may redeem the bond for 30 shares of preferred stock in the issuing corporation." This provision suggests that the bond should be classified as a ________ bond.

convertible

The interest rate written in the terms of the bond indenture is known as the

coupon rate, nominal rate, or stated rate.

It's called a _____ when a bond sells for less than face value.

discount

The _____ yield is another name for the market rate.

effective

GAAP requires that a company use the ______ - ______ method when annual amounts are materially different.

effective - interest

When an individual pays a debt, this is also referred to as _______ of debt.

extinguishment

When a bond sells at a premium, interest expense will be:

less than the bond interest payment.

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the

market rate

True or False. A bond sells at a discount if the effective rate of the bond is lower than the stated rate.

False

True or False. A collateral trust bond would be classified as a debenture bond.

False

True or False. A fluctuating amount is amortized when using the straight-line method.

False

True or False. Amortization of a discount decreases bond interest expense, whereas amortization of a premium works to increase the bond interest expense.

False

True or False. In most cases, companies make annual bond interest payments, even though the interest rate is usually expressed as a semiannual rate.

False

True or False. Refunding is the process of replacing an existing bond issue with a new one.

True

True or False. The coupon rate is the same as the stated rate.

True

True or False. The interest expense decreases when a premium is amortized.

True

Which of the following provisions would you most expect to see in the indenture for a convertible bond?

"At any time in the next five years, this bond may be redeemed for 30 shares of common stock."

Which of the following corporate bonds would least likely be available for purchase?

A bond with a $1,500 face value

"In-substance defeasance" is a term used to refer to an arrangement whereby which of the following occurs?

A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust

Discount on bonds payable should be shown on the balance sheet as which of the following?

A deduction from bonds payable

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total

1,568,498 19,604,145 x 8% x 6/12) = 784,166 + (894,166 - 780,000) = 19,608,311 int. exp for second six months: (19,608,311 x 8% x 6/12 ) = 784,332 total int exp: (January 1- June 30 int = 784, 166 + July 1 - December 31 interest - 784, 332) = 1,568,498

Bonds will be sold at a premium if the market rate is greater than the coupon rate.

False

The Silvio Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, the interest expense that will be recognized in 2020 is

$784,249.

Cullumber Company issued $2,200,000 of 10%, 10-year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Cullumber Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.6833%.

1/1/17 D: CASH 2,244,000 (2,200,000 x 102) C: PREM. 44,000 (2,200,000 x 2 %) B/P 2,200,000 7/1/17 D: INT. EXP 108,647 PREM. 1,353 C: CASH 110,000 (2,200,000 x 5%) 12/31/17 D: INT. EXP 108,581 PREM. 1,419 C: INT. PAYABLE 110,000 (2,200,000 x 5%)

Eckert Company issues $10,000,000, 6%, 5-year bonds dated July 1, 2017 on July 1, 2017. The bonds pay interest semiannually on December 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5%3.0%5.0%6.0% Present value of a single sum for 5 periods 0.883850.862610.783530.74726 Present value of a single sum for 10 periods 0.781200.744090.613910.55839 Present value of an annuity for 5 periods 4.645834.579714.329484.21236 Present value of an annuity for 10 periods 8.752068.530207.721737.36009

10,437,618 PV Princ. (10,000,000 x PV (n=10, i= .78120) + (10,000,000 x 6% x 6/12 or 300,000) x PV of an annuity for n=10, I= 8.75206)

Which of the following is another name for carrying value?

Book value

If bonds are issued between interest dates, which of the following could be included on the entry on the books of the issuing corporation?

Credit to Interest Expense

Which of the following choices are considered to be long-term liabilities? I. Bonds payable II. Pension liabilities III. Utility bills IV. Mortgages payable

I, II, AND IV

On January 1, 2017, Shamrock Inc. issued $400,000 of 7%, 5-year bonds at par. Interest is payable semiannually on July 1 and January 1.Prepare journal entries to record the following. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.)

ISSUE: 1/1/2017 D: Cash 400,000 C: B/P 400,000 7/1/17 D: INT. EXP. 14,000 C: CASH 14,000 12/31/17 D: INT. EXP. 14,000 C: INT. PAYABLE 14,000

On April 1, 2017, Pharoah Company issued $990,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.

ISSUE: 4/1/17 D: CASH 1,019,700 C: B/P 990,000 INT. EXP. 29,700 7/1/17 D: INT. EXP. 59,400 C: CASH 59,400 12/31/17 D: INT. EXP. 59,400 C: INT. PAYABLE 59,400

The Wildhorse Company issued $520,000 of 6% bonds on January 1, 2017. The bonds are due January 1, 2027, with interest payable each July 1 and January 1. The bonds are issued at face value.Prepare Wildhorse's journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

ISSUE: D: Cash 520,000 C: B/P 520,000 July 1 INTEREST PAY: D: INT. EXP. 15,600 C: CASH 15,600 DEC. 31 ADJ. ENTRY: D: INT. EXP 15,600 C: INT. PAYABLE 15,600

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will do which of the following?

Increase if the bonds were issued at either a discount or a premium

If bonds are initially sold at a discount and the straight-line method of amortization is used, which of the following will be true of interest expense in the earlier years?

It will exceed what it would have been had the effective-interest method of amortization been used

If bonds are initially sold at a discount and the straight-line method of amortization is used, then which of the following will prove to be true about interest expense in the earlier years?

It will exceed what it would have been had the effective-interest method of amortization been used.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to which of the following?

The market interest rate multiplied by the beginning-of-period carrying amount of the bonds

Which of the following is true of the printing costs and legal fees associated with the issuance of bonds?

They should be reported as a deduction from the face amount of bonds payable and amortized over the life of the bonds. They should be recorded as a reduction to the issuance amount of the bond payable and then amortized into expense over the life of the bonds, through an adjustment to the effective interest rate.

True or False. Bonds that are not backed by collateral are called unsecured bonds.

True

True or False. Over the life of the bond issue, bond issue costs are recorded as a reduction to the issuance amount of the bond payable and amortized into expense over the life of the bond, through an adjustment to the effective interest rate.

True

True or False. Payment of debt is also called extinguishment of debt.

True

True or False. With firm underwriting, the investment bank that sells a company's bonds guarantees that the company will receive a specific amount from the sale.

True

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

bond indenture

A bond that matures in installments is called a:

serial bonds

After a firm issues bonds, it will typically owe relatively ________ amounts (units) of money to a relatively ________ number of investors.

small; large