Chapter 14

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. The entry will debit Cash for $102,000,000 and credit Bonds Payable for $100,000,000 and Premium on Bonds Payable for $2,000,000.

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include

$90,156 The adjusting entry made at December 31, 2017 debits Interest Expense and credits Discount on Notes Payable, not Interest Payable, for (Bond carrying amount, $901,560 X Prevailing interest rate, 10%) = $90,156

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

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

Which of the following is not an example of off-balance-sheet financing? Non-consolidated subsidiary Special purpose entity Non-interest bearing note Operating lease

All of the options (Non-consolidated subsidiary, Special purpose entity and Operating lease) except the non-interest bearing note are examples of off-balance-sheet financing.

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

Bonds will sell at a premium when the market rate is lower than the stated rate

Which of the following is not an example of "off-balance-sheet financing"? Non-consolidated subsidiary Special purpose entity Operating leases Capital leases

Capital leases are not an example of "off-balance-sheet financing."

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

False A bond sells at a premium, not a discount, when the effective rate is lower than the stated rate.

Bonds that are not recorded in the name of the bondholder are called unsecured bonds.

False Bonds not recorded in the name of the bondholder are called coupon bonds

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 Using the effective interest method of amortization, interest expense for the first six months would be $4,613,900 (10% Yield rate X 6/12 X Bond carrying amount, $92,278.000). The $4,000,000 amount represents the cash payment for interest associated with the bonds for the first six months ($100,000,000 x 6/12 x 8%).

If a company elects the fair value option for its long-term liabilities, a decrease in the fair value of a bond payable will result in an unrealized holding loss.

False When the fair value of a bond decreases, the cost to settle the debt at that point has decreased, resulting in an unrealized holding gain, not a loss, to the issuing company.

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

If a bond was sold at 97, it sold at a discount (97% of face value), which occurs when the market rate is greater than the stated rate.

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

Income bonds

Under the effective interest method, interest expense:

Interest expense is the same total amount over the term of the bonds in both the effective interest and straight-line methods.

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

Registered bonds

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

Selling a bond at a premium results in interest expense being less than the interest payment because of the amortized premium.

A bond that matures in installments is called a:

Serial Bond

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

The bonds' net carrying amount used to calculate the gain or loss on extinguishment is (Face amount of bonds, $6,000,000 - Bond discount, $210,000) = $5,790,000.

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

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

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

The interest rate written in the terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate.

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

The market rate is used to discount the cash flows in determining the selling price (proceeds) or the present value of a bond.

Which one of the following statements relating to mortgage notes payable is not correct? Mortgage notes payable are the most common form of long-term notes payable. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan. Mortgage notes payable are payable in full at maturity or in installments. Mortgage notes payable are always reported as a long-term liability.

The statement that Mortgage notes payable are always reported as a long-term liability is not correct.

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

These costs should be recorded as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.

The effective interest method calculates bond interest expense by multiplying the carrying value of the bonds by the effective-interest rate.

True

Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement.

True FASB changed the reporting of gains and losses on early extinguishment of debt from extraordinary item treatment to other gains and losses on the income statement.

Boomchickapop Company elects the fair value option for a long-term note payable. In 2017, the company reported an unrealized holding gains which was reported as a component of Other Comprehensive Income.

Unrealized holding gains and losses are included in net income if a company elects the fair value option

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost

Note disclosures for long-term debt generally include all of the following except assets pledged as security. call provisions and conversion privileges. restrictions imposed by the creditor. names of specific creditors.

names of specific creditors.

The numerator in the times interest earned ratio is:

net income plus interest expense and income tax expense.