Exam 1 (Chapter 14)

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

a credit to Discount on Notes Payable for $90,156. The adjusting entry made at December 31, 2017 debits Interest Expense and credits Discount on Notes Payable for ($901,560 × 0.10) = $90,156

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 Interest Expense for $2,000,000. The entry will credit Bonds Payable for $100,000,000 and Premium on Bonds Payable for $2,000,000.

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 Interest expense for the first 6 month period is ($19,604,145 × 0.04) =$784,166. The new carrying value for the bonds is [$19,604,145 + ($784,166 − $780,000)] = $19,608,311. Interest expense for the second six months is ($19,608,311 × 0.04) = $784,332. Total interest expense for 2017 is ($784,166 + $784,332) = $1,568,498.

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. The discount on bonds payable is recorded at ($5,000,000 − $4,695,000) = $305,000 at issuance. The amortization of discount in 2017 is [$450,000 − ($4,695,000 × 0.10)] =$19,500 leaving a balance of $305,000 − $19,500 = $285,500.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2017 were $200,000 and $50,000, respectively. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt?

$300,000 loss. The bonds' net carrying amount is ($5,000,000 − $200,000 − $50,000) = $4,750,000. The loss on extinguishment is ($5,000,000 × 1.01) − $4,750,000 = $300,000

Ferrone Company issues $10,000,000, 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 $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30 payment

$392,083 Interest expense for the first six months is ($9,802,072 × 0.04) =$392,083.

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2024. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2017 were $210,000 and $60,000, respectively. 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?

$5,730,000. The bonds' net carrying amount used to calculate the gain or loss on extinguishment is ($6,000,000 − $210,000 − $60,000) = $5,730,000

Which of the following is not an example of "off-balance-sheet financing"?

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

All of the following statements are true regarding IFRS treatment of reporting and recognition of long term liabilities except

IFRS allows use of straight-line amortization of discounts and premiums. IFRS requires use of effective interest amortization. Under GAAP, companies are permitted to use the straight-line method of amortization for bond discount or premium, provided that the amount recorded is not materially different than that resulting from effective-interest amortization.

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

be accumulated in a deferred charge account and not affect effective interest amortization. The printing costs and legal fees associated with the issuance of bonds should be recorded as part of the carrying value of the bonds amortized over the life of the bonds.

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

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

callable bond Callable bonds give the issuer the right to call and retire the bonds prior to maturity.

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

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

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years 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, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used.

If a bond sold at 97, the market rate was

greater than the stated rate. 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.

Under the effective interest method, interest expense

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

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

Note disclosures for long-term debt generally include all of the following except

names of specific creditors. Note disclosures for long-term debt generally do not include the names of specific creditors.

A bond that matures in installments is called a:

serial bond. Bonds that mature in installments are referred to as serial bonds.