Ch 3 HW

US GAAP requires companies to use the effective-interest method to evaluate the carrying value of bonds payable. True False

False

Market interest rate increase would result in the unrealized holding gain for bond issuers. True False

True

Under the straight-line method, interest expense is the difference between the interest payment and the amortization of the bonds. True False

True

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting A. Unrealized Holding Gain/Loss-Income. B. Bonds Payable. C. Gain on Restructuring of Debt. D. Realized Holding Gain.

A. Unrealized Holding Gain/Loss-Income.

AAA issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a premium, this indicates that A. the nominal rate of interest exceeded the market rate. B. no necessary relationship exists between the two rates. C. the market and nominal rates coincided. D. the effective yield or market rate of interest exceeded the stated rate.

A. the nominal rate of interest exceeded the market rate.

A company issues $15,000,000, 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 $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2020? A. $1,170,000 B. $1,176,373 C. $1,176,249 D. $585,000

B. $1,176,373

On July 1, 2019, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2025. The bonds were issued for $9,560,000 to yield 10%, resulting in a bond discount of $440,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2021, Noble's unamortized bond discount should be A. $352,000. B. $322,400. C. $310,000. D. $340,000.

B. $322,400.

At the beginning of 2020, Winston Corporation issued 10% bonds with a face value of $4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $3,705,600 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2020? A. $444,666 B. $446,012 C. $443,334 D. $458,880

B. $446,012

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a A. debit of $10,000 to Premium on Bonds Payable. B. credit of $18,750 to Discount on Bonds Payable. C. credit of $18,750 to Loss on Bond Redemption. D. debit of $28,750 to Gain on Bond Redemption.

B. credit of $18,750 to Discount on Bonds Payable.

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. be less than the stated (nominal) rate of interest. B. exceed 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 amortization been used. D. be less than what it would have been had the effective-interest method of amortization been used.

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

Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2020 at 97 plus accrued interest. The bonds are dated January 1, 2020, and pay interest on June 30 and December 31. What is the total cash received on the issue date? A. $20,450,000 B. $19,100,000 C. $19,700,000 D. $19,400,000

C. $19,700,000

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. The issue price of the bonds is A. $5,308,920. B. $5,997,600. C. $5,300,862. D. $5,337,360.

C. $5,300,862.

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a A. debit to Interest Payable. B. credit to Interest Receivable. C. credit to Interest Expense. D. credit to Unearned Interest.

C. credit to Interest Expense.

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization amount will A. increase only if the bonds were issued at a premium. B. increase only if the bonds were issued at a discount. C. increase if the bonds were issued at either a discount or a premium. D. decrease only if the bonds were issued at a premium.

C. increase if the bonds were issued at either a discount or a premium.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2019. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2021? A. $14,955,466 B. $14,725,374 C. $14,752,672 D. $14,747,642

D. $14,747,642

On January 1, 2021, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102. They were originally issued on January 1, 2009 at 92 with a maturity date of January 1, 2024. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)? A. $0 B. $168,000 C. $140,000 D. $252,000

D. $252,000

On January 1, Martinez Inc. issued $6,000,000, 11% bonds for $6,390,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of: A. $330,000 B. $347,000 C. $370,260 D. $369,000

D. $369,000

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. less 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. greater than if the straight-line method were used.

D. greater than if the straight-line method were used.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to A. the market rate of interest multiplied by the face value of the bonds. B. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. C. the stated rate of interest multiplied by the face value of the bonds. D. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

D. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

If the market rate is greater than the coupon rate, bonds will be sold at a premium. True False

False