Chapter 14 intermediate acct.

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2021 income statement?

$3,830,535. This is the issue price of $255,369,000 × 6% effective rate × 3 mos. ÷ 12 mos.

On April 1, 2021, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

$300,000. Proceeds from bonds is allocated between the bonds and the stock warrants on the basis of their fair values.300 bonds × 25 stock warrants per bond = 7,500 stock warrants.7,500 × $2 per stock warrant = $15,000 fair value of stock warrants.$300,000 × 1.05 = $315,000 proceeds from bonds with detachable stock warrants.$315,000 − $15,000 = $300,000 allocation to bonds only.

TMC issued $50 million of its 12% bonds on April 1, 2021 at 96, reflecting a market rate of interest of 14%, plus accrued interest. The bonds are dated January 1, 2021, and mature on December 31, 2040. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance?

$49.5 million. $50 million × 0.96 = $48 million. 12% × $50 million × 3/12 (January through March) = $1.50 million accrued interest at stated rate $48 million + $1.50 million = $49.50 million

On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2021, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

$72,800 gain. Paid at redemption: $1,000,000 × 102% = 1,020,000 Book value: $1,000,000 + $92,800 = 1,092,800 Gain on bond retirement 1,092,800 - 1,020,000 = 72,800

On January 1, 2021, Anne Teak Furniture issued $100,000 of 8% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 10 years. The annual market rate for bonds of similar risk and maturity is 10%. What was the issue price of the bonds?

$87,538. $4,000¥ × 12.46221* =$49,849 $100,000 × 0.37689** = 37,689 49,849 + 37,689 = 87,538 Semiannual: 8%/2 = 4%. 10%/2 = 5%¥ 4% × $100,000 = $4,000.* PV of ordinary annuity of $1: n = 20; i = 5%**PV of $1: n = 20; i = 5%

Kelly Industries issued 11% bonds, dated January 1, with a face value of $100,000 on January 1, 2021. The bonds mature in 2031 (10 years). Interest is paid semiannually on June 30 and December 31. For bonds of similar risk and maturity the market yield is 12%. What was the issue price of the bonds?

$94,265. Semiannual: 11%/2 = 5.5%. 12%/2 = 6%. $5,500¥ × 11.46992* =$63,085 $100,000 × 0.31180** = 31,180 63,085 + 31,180 = 94,265 ¥ 5.5% × $100,000 = $5,500. * PV of ordinary annuity of $1: n = 20; i = 6% **PV of $1: n = 20; i = 6%

Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

Added to bonds payable.

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:

Be for four months.

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

Decreases.

Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

Deducted from bonds payable.

The interest rate that is printed on the bond certificate is referred to as any of the following except:

Effective rate.

The rate of interest that actually is incurred on a bond payable is called the:

Effective rate.

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense:

Increases.

When an equipment dealer receives a long-term note in exchange for equipment, and the stated rate of interest is indicative of the market rate of interest at the time of the transaction, the present value of the future cash flows received on the notes:

Is credited to sales revenue at the exchange date.

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense:

Remains the same.

In each succeeding payment on an installment note:

The amount of principal paid increases.

Interest expense is:

The effective interest rate times the amount of the debt outstanding during the interest period.

The debt to equity ratio indicates:

The extent of "trading on the equity" or financial leverage.

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred:

The increase in the effective interest rate caused by the debt issue costs is reflected in the interest expense.

The times interest earned ratio indicates:

The margin of safety provided to creditors.

MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2020 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2021, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:

a $667 loss. second lowest

In a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:

more than in the fourth year.

On September 1, 2021, Red Co., issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2021, and mature on May 30, 2031. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would include accrued interest of:

$1,200,000. $1,200,000: ($48,000,000 × 10% × 3/12).

On September 1, 2021, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 11%. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:

$1,608,000. $1,600,000 × 0.98 = $1,568,000 10% × $1,600,000 × 3/12 = $40,000 accrued interest at stated rate $1,568,000 + $40,000 = $1,608,000

Cramer Company sold five-year, 8% bonds on October 1, 2021. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2021, income statement (assume straight-line amortization)?

$1,900. Cash interest $100,000 × 8% × 3/12 = $2,000 Premium amortization: $2,000 × 1/5 × 3/12 = 100 Interest expense 2000 + 100 = 1,900

On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.Legion should pay cash interest for the six months ended June 30, 2021, in the amount of:

$10,000. 10% × ½ × $200,000 = $10,000.

On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.Legion should report bond interest expense for the six months ended June 30, 2021, in the amount of:

$10,620. 6% × $177,000 = $10,620

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 400,000 beg. outstanding bal: 11,487,747 payment 3 outstanding bal: 11,316,611 payment 3 int: 341,261 What is the book value of the bonds as of December 31, 2022?

$11,256,109. Semiannual effective rate = $344,632 / $11,487,747 = 3% Amortization Payment 4 = $400,000 − ($11,316,611 × 3%) =$60,502 Book value = $11,316,611 − $60,502 = $11,256,109

Green Industries purchased a machine from Cyan Corporation on October 1, 2021. In payment for the $144,000 purchase, Green issued a one-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. Monthly installment payments are closest to:

$12,794. 144,000 / 11.25508 = 12,794 pv of annuity n= 12 i=1%

On March 1, 2021, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2031. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2021, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

$120,000. Since no market value is given for the bonds, the amount attributable to the warrants (shareholders' equity) is $4 each × 30 warrants per bond = $120 × 1,000 bonds = $120,000.

On January 1, 2016, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2021 on this early extinguishment of debt was:

$16,000 gain. smallest

Earl Lee Riser Alarm Co. issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. beginning outstanding balance: 9,080 effective interest: 409 cash: 400 What would be the total interest expense recognized for the bond issue over its full term?

$16,920. ($400 × 2 × 20) + ($10,000 − $9,080) = $16,920

On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2021, balance sheet?

$18,000. $600,000 × 12% × 3/12 = $18,000

Sand Explorers issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using present value tables, calculate the issue price of the bonds.

$186,410. $200,000 × 0.45639* = 91,278 $7,000¥ × 13.59033** = 95,132 91,278 + 95,132 = 186,410 ¥$200,000 × 7% × ½ year = $7,000*PV of $1, i = 4%, n = 20**PVA of $1, i = 4%, n = 20

Mountain Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using a financial calculator or Excel, calculate the issue price of the bonds.

$186,410. FV ($200,000); PMT ($7,000); I (4%); N (20 periods) = PV ($186,410). PMT = $200,000 × 7% × ½ year = $7,000. I = 8% ÷ 2 semiannual periods = 4%. N = 10 years × 2 periods each year = 20 periods.

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity: LPC calls the bonds at 103 immediately after the interest payment on 12/31/2022 and retires them. What gain or loss, if any, would LPC record on this date?

$2,283 loss The cash paid by LPC was 103% of $200,000 maturity (face) value, or $206,000. The liability removed is $203,717. The difference is the loss on the bond retirement, $2,283.

Scottie Adams Bird Supplies issued 10% bonds, dated January 1, with a face amount of $240,000 on January 1, 2021. The bonds mature in 2031 (10 years). For bonds of similar risk and maturity the market yield is 12%. Interest is paid semiannually on June 30 and December 31. What is the price of the bonds at January 1, 2021? Some relevant and irrelevant present value factors: * PV of annuity due of $1: n = 20; i = 6% is 12.15812* PV of ordinary annuity of $1: n = 20; i = 6% is 11.46992**PV of $1: n = 20; i = 6% is 0.31180

$212,471. Semiannual: 10%/2 = 5%. 12%/2 = 6%. $12,000¥ × 11.46992* =$137,639 $240,000 × 0.31180** = 74,832 137,639 + 74,212,471 ¥ 5% × $240,000 * PV of ordinary annuity of $1: n = 20; i = 6% **PV of $1: n = 20; i = 6%

Hillside Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using a financial calculator or Excel, calculate the issue price of the bonds.

$214,877. FV ($200,000); PMT ($7,000); I (3%); N (20 periods) = PV ($214,877). PMT = $200,000 × 7% × ½ year = $7,000. I = 6% ÷ 2 semiannual periods = 3%. N = 10 years × 2 periods each year = 20 periods.

Mind Explorers issues bonds with a stated interest rate of 7%, face value of $200,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using present value tables, calculate the issue price of the bonds.

$214,878. $200,000 × 0.55368* = 110,736 $7,000¥ × 14.87747** = 104,142 110,736 + 104,142 = 214,878 ¥$200,000 × 7% × ½ year = $7,000 *PV of $1, i = 3%, n = 20 **PVA of $1, i = 3%, n = 20

On January 1, 2024, an investor paid $249,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2024 (assume annual interest payments and amortization)?

$24,900. $249,000 × 10% = $24,900

On January 1, 2024, an investor paid $249,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2025 (assume annual interest payments and amortization)?

$24,990. [$249,000 + ($249,000 × 10%) − ($300,000 × 8%)] × 10% = $24,990

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand?

$256,200,000. This is the beginning liability of $255,369,000 + Interest accrued for three months (1.5% of issue price) − Interest payable of $3,000,000 ($300,000,000 × 4% × 3/12).

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022, rounded up to the nearest thousand?

$257,030,000. This is the beginning liability of $255,369,000 + Interest accrued for six months (3% of issue price) − Cash paid of $6,000,000.

On June 30, 2021, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2026. Interest is payable semiannually every June 30 and December 31. On June 30, 2021, after amortization was recorded for the period, the unamortized bond premium was $60,000. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2021, what amount should K Co. recognize as gain on redemption of bonds before income taxes?

$260,000. Book value of bonds at June 30, 2021, is $10,060,000 ($10,000,000 + $60,000). Subtract redemption price: 98% × $10,000,000 = $9,800,000. Gain = $260,000.

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

$330,000. Printing costs: $20,000 Legal fees: 100,000 CPA fees: 10,000 Underwriting fees: 200,000 Total bond issue costs: 20,000 +100,000 + 10,000 + 200,000 = 330,000

On September 1, 2021, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

$354,667. $350,000 + ($350,000 × 8% × 2/12) = $354,667

On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million. The bonds were priced to yield 9.4%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2021?

$4,500. 4.7% × $3.5 million = $164,500 4% × $4 million = $160,000 $164,500 − $160,000 = $4,500

On June 30, 2024, L. N. Bean issued $10 million of its 8% bonds for $8 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2024?

$400,000 10% × ½ × $8 million = $400,000

Seaside issues a bond that has a stated interest rate of 10%, face amount of $50,000, and is due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?

$46,320. $2,500 × 7.36009* =$18,400 $50,000 × 0.55839** = 27,920 18,400 - 27,920 = 46,320 * PV an ordinary annuity of $1: n = 10; i = 6%**PV of $1: n = 10; i = 6%

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using a financial calculator or Excel, calculate the issue price of the bonds.

$464,469. FV ($500,000); PMT ($15,000); I (3.5%); N (20 periods) = PV ($464,469). PMT = $500,000 × 6% × ½ year = $15,000. I = 7%/2 semiannual periods = 3.5%. N = 10 years × 2 periods each year = 20 periods.

Air Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using present value tables, calculate the issue price of the bonds.

$464,471. $500,000 × 0.50257* =$251,285 $15,000¥ × 14.21240** = 213,186 251,285 + 213,186 = 464,471 ¥$500,000 × 6% × ½ year = $15,000 *PV of $1, i = 3.5%, n = 20 **PVA of $1, i = 3.5%, n = 20

Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2020 for $106,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2021, the issuer retired $10,000 of the bonds at 110. As a result of the retirement, Nickel will report a:

$467 gain. lowest

Magenta Company purchased a machine from Pink Corporation on October 31, 2021. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2021, is:

$5,533. cash payment: 25,588 25,588 - 2,880 = 22,708 nov: 1% * 288,000 dec: 1% * (288,000 - 22,708) 2,880 + 2,653 = 5,533

Roman Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using present value tables, calculate the issue price of the bonds.

$538,972. $500,000 × 0.61027* = 305,135 $15,000¥ × 15.58916** = 233,837 305,135 + 233,837 = 538,972 ¥$500,000 × 6% × ½ year = $15,000 *PV of $1, i = 2.5%, n = 20 **PVA of $1, i = 2.5%, n = 20

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using a financial calculator or Excel, what is the issue price of the bonds?

$538,973. FV ($500,000); PMT ($15,000); I (2.5%); N (20 periods) = PV ($538,973). PMT = $500,000 × 6% × ½ year = $15,000. I = 5% ÷ 2 semiannual periods = 2.5%. N = 10 years × 2 periods each year = 20 periods.

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 400,000 beg. outstanding bal: 11,487,747 payment 3 outstanding bal: 11,316,611 payment 3 int: 341,261 What would be the total interest expense recognized for the bond issue over its full term?

$6,512,253. ($400,000 × 2 × 10) − ($11,487,747 − $10,000,000) = $6,512,253 10,000 * 1000 = 10,000,000

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%. How much cash interest does Auerbach pay on March 31, 2022?

$6.0 million. This is $300 million × 4% × 6/12.

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 400,000 beg. outstanding bal: 11,487,747 payment 3 outstanding bal: 11,316,611 payment 3 int: 341,261 What is the interest expense on the bonds for the year 2022?

$680,759. Semiannual effective rate = $344,632 ÷ $11,487,747 = 3% Interest expense = $341,261 + ($11,316,611 × 3%) = $680,759

On January 1, 2021, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a book value of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14% and interest payable semi-annually on July 1 and January 1. Tiny Tim called the bonds (retired them) on July 1, 2021. What is the amount of the loss on early extinguishment?

$7,241. 3rd one

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 300,000 payment 1 effective int.: 345,639 beg. outstanding balance: 8,640,967 payment 3 outstanding balance: 8,783,433 What would be the total interest cost of the bonds over their full term?

$7,359,033. ($300,000 × 2 × 10) + ($10,000,000 − $8,640,967) = $7,359,033 10,000 * 1000 = 10,000,000

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 300,000 payment 1 effective int.: 345,639 beg. outstanding balance: 8,640,967 payment 3 outstanding balance: 8,783,433 What is the interest expense on the bonds for the year ended December 31, 2022?

$700,700 Semiannual effective rate = $345,639 ÷ $8,640,967 = 4% Interest expense = $349,363 + ($8,783,433 × 4%) = $700,700

On June 30, 2021, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2022. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2021, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2021, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par:

$8 million. Bonds payable ($80 million × ½) = 40 Discount on bonds payable ($4 million × ½) = 2 Common stock (6 million × ½ × $10) = 30 PIC (to balance) 8 40 - 2 - 30 = 8

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 300,000 payment 1 effective int.: 345,639 beg. outstanding balance: 8,640,967 payment 3 outstanding balance: 8,783,433 What is the book value of the bonds as of December 31, 2022?

$8,834,770. Semiannual effective rate = $345,639 ÷ $8,640,967 = 4% Amortization Payment 4 = ($8,783,433 x 4%) − $300,000 = $51,337 Book value = $8,783,433 + $51,337 = $8,834,770

During 2021, Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2019, payable to Third Bank. Interest was last paid on December 31, 2020. On December 31, 2021, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2021 income statement?

$80,000. $300,000 + 10% ($300,000) − $250,000 = $80,000

Ferris Wheeler Co. issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. beginning outstanding balance: 9,080 effective interest: 409 cash: 400 payment 3 outstanding balance: 9,107 What is the interest expense on the bonds for the year ended December 31, 2022?

$819. Semiannual effective rate = $409 ÷ $9,080 = .045 Interest expense = $409 + ($9,107 × 4.5%) = $819

Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $40,000. If the effective annual rate of interest is 10%, what is the issue price of the bonds? Some relevant and irrelevant present value factors: * PV of ordinary annuity of $1: n = 20; i = 10% is 8.51356**PV of $1: n = 20; i = 10% is 0.14864* PV of ordinary annuity of $1: n = 40; i = 5% is 17.15909**PV of $1: n = 40; i = 5% is 0.14205

$828,414. $40,000 × 17.15909* =$686,364 $1,000,000 × 0.14205** = 142,050 686,364 + 142,050 = 828,414 * PV of ordinary annuity of $1: n = 40; i = 5%**PV of $1: n = 40; i = 5%

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond?

$828. 40 × 17.15909* = 686 1,000 × 0.14205** = 142 686 - 142 = 828 *PVA of $1: n = 40; i = 5% **PV of $1: n = 40; i = 5%

On January 1, 2021, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for 2021 is:

$87,000. 80,000 + 7,000 = 87,000 discount and debt issue costs: 70,000 / 10 = 7,000 cash = 8% * 1,000,000 face amount: 1,000,000

Gene Poole Co. issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. beginning outstanding balance: 9,080 effective interest: 409 cash: 400 payment 3 outstanding balance: 9,107 What is the book value of the bonds on December 31, 2022?

$9,117. Semiannual effective rate = $409 ÷ $9,080 = 0.045 Interest expense = $409 + ($9,107 × 4.5%) = $819 Cash Payment 4 = ($9,107 × 4.5%) − $400 = $10 Book value = $9,107 + $10 = $9,117

Brown Co. issued $100 million of its 11% bonds on April 1, 2021 at 90 ($90 million) plus accrued interest. The bonds are dated January 1, 2021 and have an effective interest rate of 12%. Interest is payable semiannually on June 30 and December 31. What amount did Brown receive from the bond issuance?

$92.75 million. $100 million × 0.90 = $90 million issue price. 11% × $100 million × 3/12 = $2.75 million accrued interest at stated rate. $90 million + $2.75 million = $92.75 million proceeds at issue date.

On January 1, 2021, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. What is the carrying value of the bonds reported in the December 31, 2021, balance sheet?

$937,000. cash: 980,000 - 50,000 = 930,000 discount and debt issue costs: ([$1,000,000 − 980,000] + $50,000) = 70,000 70,000 / 10 carrying value, jan. 1: 930,000 discount and debt issue costs amortization: 7,000 carying value, dec. 31: 930,000 + 7,000 = 937,000

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity: What is the annual effective interest rate on the bonds?

6% This is interest expense × 2, divided by the previous outstanding liability balance.

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 300,000 What is the stated annual rate of interest on the bonds?

6%. ($300,000 ÷ $10,000,000) × 2 = 6% 10,000 * 1000 = 10,000,000

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 400,000 beg. outstanding bal: 11,487,747 What is the effective annual rate of interest on the bonds?

6%. ($344,632 ÷ $11,487,747) × 2 = 6%

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity: What is the annual stated interest rate on the bonds?

7% This is the annual cash interest paid ($14,000), divided by the maturity (face) value of $200,000.

On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31. For how many months will there be interest expense for the year ended September, 30, 2021?

8 months. Interest expense will be from the issue date January 31, 2021 through the balance sheet date September 30, 2021 = 8 months.

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 300,000 payment 1 effective int.: 345,639 beg. outstanding balance: 8,640,967 What is the effective annual rate of interest on the bonds?

8%. ($345,639 ÷ $8,640,967) × 2 = 8%

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. cash: 400,000 beg. outstanding bal: 11,487,747 What is the stated annual rate of interest on the bonds?

8%. ($400,000 ÷ $10,000,000) × 2 = 8% 10,000 * 1000 = 10,000,000

DeKay Dental Supplies issued $10,000 of 20-year bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. beginning outstanding balance: 9,080 effective interest: 409 cash: 400 What is the stated annual rate of interest on the bonds?

8.0%. $400 ÷ $10,000 = 0.04 semi-annual rate0.04 × 2 = 0.08 annual rate

Shaq Corporation issued $10,000 of 20-year bonds on January 1, 2024. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. beginning outstanding balance: 9,080 effective interest: 409 cash: 400 What is the effective annual rate of interest on the bonds?

9.0%. $409 ÷ $9,080 = 0.045 semi-annual rate 0.045 × 2 = 0.09 annual rate

Mann Co. is preparing an Excel spreadsheet for its 5-year, 6%, $400,000 installment notes. The notes were issued on January 1 for $421,236. Installment payments are payable each December 31. A portion of the spreadsheet appears as follows: What formula should Mann use in cell E8 to calculate the outstanding balance (book value) of the notes after the second interest payment?

=E7 - D8 explanation: The outstanding balance declines by the excess of the installment payment over the interest expense. So, the outstanding balance (book value) of the notes at the end of the second period will be equal to their outstanding balance (book value) at the beginning of the period (E7) minus that reduction (D8).

Ohlson Co. is preparing an Excel spreadsheet for its 20-year, 4.5%, $500,000 bonds payable. The bonds were issued on January 1 to yield 5% annually. Interest is paid semi-annually. A portion of the spreadsheet appears as follows: What formula should Ohlson use in cell C8 to calculate interest expense for the first interest payment? a. =B8 - D8 b. =E7*B3 c. =E7*B3/2 d. =E7*C2/2 B8: cash payment period 1; D8: change in discount period 1 E7: outstanding balance period 0 B3: face amount C2: 0.05 (effective rate)

=E7*C2/2 explanation: Semiannual interest expense is one-half the effective rate (C2/2) times the outstanding balance (E7).

The unamortized balance of discount on bonds payable is reported in the balance sheet as:

A contra-liability.

On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2021, cash proceeds from the issuance of the convertible bonds should be reported as:

A liability for the entire proceeds.

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2021. The bonds sold for $739,816 and mature in 2040 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2021, the fair value of the bonds was $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce's net income for the year will include:

An unrealized gain from change in the fair value of debt of $10,617. (higher number of the two)

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2022. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2022, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:

An unrealized gain from change in the fair value of debt of $5,412. (highest #)

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.Auerbach issued the bonds:

At a discount.

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity: LPC issued the bonds:

At a premium.

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

Bond Y sells for more than bond X. explanation: Bond Y is issued at a premium. Bond X is issued at face value.

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

Bond ratings provided by financial investment services such as Moody's.

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?[

Both bonds sell for the same amount.

Warren Peace Bookstore issues a note with no stated interest rate in exchange for a building. In accounting for the transaction:

Both the note and building are recorded at the fair value of the note or the fair value of the building, whichever is more clearly determinable. (longest)

On January 1, 2021, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should:

Credit premium on bonds payable $100,000.

Most corporate bonds are:

Debenture bonds.

The interest rate that determines the amount of interest expense each interest date is referred to as the:

Effective rate.

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:

Face amount price less any unamortized discount or plus any unamortized premium.

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

Greater than the effective interest.

When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:

Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

AMC issues a note with no stated interest rate in exchange for a machine. In accounting for the transaction:

If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest.

When a company issues bonds between interest dates the entry to record the issuance of the bonds will:

Include a credit to interest payable.

When a company issues bonds between interest dates, the entry to record the issuance of the bonds will:

Include a credit to interest payable.

Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

Interest expense and a gain.

Markel Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed. Markel elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

Interest expense and no gain or loss.

An amortization schedule for bonds issued at a premium:

Is a schedule that reflects the changes in the debt over its term to maturity.

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is: potential answer: more than, less than, equal to 500,000 , or cant be determined

Less than $500,000.

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

Less than the effective interest.

For a bond issue that sells for more than the bond face amount, the effective interest rate is:

Less than the rate stated on the face of the bond.

A bond is issued with a face amount of $500,000 and a stated interest rate of 10%. The current market rate of interest is 8%. These bonds will sell at a price that is: potential answer: more than, less than, equal to 500,000 , or cant be determined

More than $500,000.

Zero-coupon bonds:

Offer a return in the form of a deep discount off the face value. (longest)

For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a: discount premium a. no no b. no yes c. yes yes d. yes no

Option A

When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to: bonds payable bond premium a. yes yes b. no yes c. no no d. yes no

Option A

On January 1, 2021, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2026, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize: Book value method Market value method a. no gain or loss no gain or loss b. no gain or loss loss c. loss no gain or loss d. loss loss

Option B

Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n): Return on Assets Debt to Equity a. increase increase b. decrease decrease c. increase decrease d. decrease increase

Option C

Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's: Return on Assets Debt to Equity Ratio a. yes yes b. no no c. yes no d. no yes

Option C

How would the outstanding balance (book value) of bonds payable be affected by the amortization of each of the following? premium discount a. no effect no effect b. no effect increase c. increase decrease d. decrease increase

Option D

Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond outstanding balance (book value), respectively?

Overstated, overstated.

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:

Plus the present value of all future interest payments at the market (effective) rate of interest.

Bonds usually sell at their:

Present value.

The rate of return on assets indicates:

Profitability without regard to how resources are financed.

Straight-line amortization of bond discount or premium:

Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

The method used to pay interest depends on whether the bonds are:

Registered or coupon.

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense:

Remains the same.

Bonds are issued on June 1, 2021 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2021, is for a period of:

Seven months.

On March 31, 2021, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

Shareholders' equity is increased.

When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

Six months.

A $500,000 bond issue sold at 98. Therefore, the bonds:

Sold at a discount because the stated rate of interest was lower than the effective rate.

The interest rate that determines the amount of cash interest paid each interest date is referred to as the:

Stated rate.

The rate of return on shareholders' equity indicates:

The effectiveness of employing resources provided by owners.

Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:

The interest expense is less with each successive interest payment.

When bonds are retired prior to their maturity date:

The issuing company probably will report an ordinary gain or loss.

Mango Corporation issues new long-term bond offerings several times a year. The company follows a policy of using straight-line amortization for all of those issues. Which of the following is an accurate statement regarding the company's policy?

The policy is inappropriate because using the straight-line method is acceptable only when doing so produces results that are not materially different from the effective interest method. (longest)

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

The present value of the face amount plus the present value of the stream of interest payments.

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:

The present value of the note payments discounted at the market rate.

When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?

The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values. (longest)

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should record:

The proceeds of the bond issue entirely as debt.

On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true?

The second year's interest expense would have been less.

Bonds were issued at a discount. In the bond amortization schedule:

The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. (longest)

When issuing bonds or notes, Papaya Company incurs costs, such as legal and accounting fees, printing costs, and registration and underwriting fees. Papaya records these costs by combining them with any discount (or subtracting them from any premium) on the debt. Which of the following is an accurate statement regarding the company's policy?

This approach has the appeal of reflecting the effect that debt issue costs have on the effective interest rate because deducting debt issue costs lowers the carrying amount of the debt, which effectively increases the interest rate on that debt. (longest)

Which of the following indicates the margin of safety provided to creditors?

Times interest earned ratio.

Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98. Harrell applies U.S. GAAP. Recording the issuance of the bonds would cause an increase in Harrell's:

liabilities of $101,000,000. Cash (given) = 101,000,000 Convertible bonds payable = 100,000,000 Premium on bonds payable: 101,000,000 - 100,000,000 = 1,000,000 (answer)