Intermediate Accounting II - Exam 1 Study Bank (Chapter 14)
At December 31, 2020 the following balances existed on the books of Crane Company: Bonds Payable: $6,040,000 Discount on Bonds Payable: $836,000 Interest Payable: $159,000 If the bonds are retired on January 1, 2021, at 103, what will Crane report as a loss on redemption? a. $1,176,200 b. $1,017,200 c. $858,200 d. $604,000
$1,017,200
On January 1, 2021, Concord Corporation issued its 9% bonds in the face amount of $7,930,000, which mature on January 1, 2031. The bonds were issued for $9,043,945 to yield 7%, resulting in bond premium of $1,113,945. Concord uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Concord's adjusted unamortized bond premium should be a. $1,113,945 b. $1,033,321 c. $1,013,690 d. $838,921
$1,033,321
At December 31, 2020 the following balances existed on the books of Vaughn Manufacturing: Bonds Payable: $6,990,000 Discount on Bonds Payable: $984,000 Interest Payable: $172,000 If the bonds are retired on January 1, 2021, at 103, what will Vaughn report as a loss on redemption? a. $699,000 b. $944,000 c. $1,193,700 d. $1,365,700
$1,193,700
A company issues $25,300,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,715,195. What is interest expense for 2021, using straight-line amortization? a. $1,447,159 b. $1,467,400 c. $1,483,389 d. $1,496,640
$1,496,640
In recent year, Swifty Corporation had net income of $762,000, interest expense of $153,000, and a times interest earned ratio of 12. What was Swifty Corporation's income before taxes for the year? a. $1,483,000 b. $1,836,000 c. $1,683,000 d. none of these answers are correct
$1,683,000
The December 31, 2020, balance sheet of Marigold Corp. includes the following items: 8% bonds payable due December 31, 2019: $5,800,000 Unamortized premium on bonds payable: $156,600 The bonds were issued on December 31, 2019, at 103, with interest payable on July 1 and December 31 of each year. Marigold uses straight-line amortization. On March 1, 2021, Marigold retired $2,320,000 of these bonds at 97 plus accrued interest. What should Marigold record as a gain on retirement of these bonds? Ignore taxes. a. $137,911 b. $68,311 c. $131,080 d. $104,400
$131,080
On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report? a. $6,000 b. $8,000 c. $12,000 d. $14,000
$14,000
A company issues $15,500,000, 9.8%, 20-year bonds to yield 10% on January 1, 2019. Interest is paid on June 30 and December 31. The proceeds from the bonds are $15,234,034. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2021? a. $15,278,959 b. $15,481,753 c. $15,251,661 d. $15,273,929
$15,273,929
Bonita Industries issues $6,080,000 face value of bonds at 95 on January 1, 2019. The bonds are dated January 1, 2019, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2022, $3,648,000 of the bonds are called at 101 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2022? a. $364,800 loss b. $152,000 loss c. $204,800 loss d. $260,300 loss
$152,000 loss
A company issues $16,500,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $16,118,606. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet? a. $16,128,874 b. $16,500,000 c. $16,138,236 d. $16,123,664
$16,128,874
On October 1, 2020 Sheridan Company issued 4%, 10-year bonds with a face value of $6,050,000 at 103. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on straight-line basis. The entry to record the issuance of the bonds would include a credit of a. $121,000 to Interest Payable b. $181,500 to Discount on Bonds Payable c. $5,868,500 to Bonds Payable d. $181,500 to Premium on Bonds Payable
$181,500 to Premium on Bonds Payable
On January 2, 2020, a calendar-year corporation sold 6% bonds with a face value of $2,590,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,380,000 to yield 8%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2020? a. $155,400 b. $190,400 c. $191,100 d. $207,200
$191,100
A company issues $25,750,000, 9.8%, 20-year bonds to yield 10% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $25,308,162. Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $1,261,750 b. $2,523,500 c. $2,530,999 d. $2,530,792
$2,530,999
On January 1, 2020, Concord Corporation sold 9% bonds with a face value of $2,700,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,924,600 to yield 7%. Using effective-interest method of amortization, interest expense for 2020 is a. $189,000 b. $204,052 c. $204,672 d. $243,000
$204,052
On January 1, 2020, Ann Price loaned $193,768 to Joe Kiger. A zero-interest-bearing note (face amount, $265,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 11%. The present value of $265,000 at 11% for three years is $193,768. What amount of interest income should Ms. Price recognize in 2020? a. $21,314 b. $29,150 c. $87,450 d. $68,800
$21,314
The 8% bonds payable of Bonita Industries had a net carrying amount of $2,860,000 on December 31, 2020. The bonds, which had a face value of $3,010,000, were issued at a discount to yield 10%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2021, several years before their maturity, Bonita retired the bonds at 103. The interest payment on July 1, 2021 was made as scheduled. What is the loss that Bonita should record on the early retirement of the bonds on July 2, 2021? Ignore taxes. a. $90,300 b. $217,700 c. $196,700 d. $238,700
$217,700
On January 1, 2021, Vaughn Manufacturing sold $4,950,00 of its 8% bonds for $4,382,220 to yield 10%. Interest is payable semiannually on January 1 and July 1. What amount should Vaughn report as interest expense for the six months ended June 30, 2021? a. $175,295 b. $198,000 c. $219,111 d. $247,500
$219,111
A company issues $24,900,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,324,441. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet? a. $24,339,936 b. $24,900,000 c. $24,355,539 d. $24,332,072
$24,339,936
A company issues $25,150,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,568,662. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2021? a. $24,664,250 b. $25,002,240 c. $24,621,750 d. $24,655,863
$24,655,863
Coronado Company issues $26,000,000, 5%, 5-year bonds date January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 4%. What are the proceeds from the bond issue? a. $26,000,000 b. $27,156,209 c. $27,167,784 d. $27,160,279
$27,167,784
On January 1, Sheridan Company issued $4,400,000, 9% bonds for $4,095,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Sheridan uses the effective-interest method of amortizing bond discount. At the end of the first year, Sheridan should report unamortized discount of a. $280,500 b. $291,500 c. $264,050 d. $261,000
$291,500
On January 1, 2017, Vaughn Manufacturing issued eight-year bonds with a face value of $5,950,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: PV of 1 for 8 pds. at 10% = 0.467 PV of 1 for 8 pds. at 12% = 0.404 PV of 1 for 16 pds. at 5% = 0.458 PV of 1 for 16 pds. at 6% = 0.394 PV of annuity for 8 pds. at 10% = 5.335 PV of annuity for 8 pds. at 12% = 4.968 PV of annuity for 16 pds. at 5% = 10.838 PV of annuity for 16 pds. at 6% = 10.106 The present value of the interest is a. $2,955,960 b. $3,006,535 c. $3,174,325 d. $3,224,305
$3,006,535
On January 1, 2020, Marigold Corp. issued eight-year bonds with a face value of $6,060,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: PV of 1 for 8 pds. at 6% = 0.627 PV of 1 for 8 pds. at 8% = 0.540 PV of 1 for 16 pds. at 3% = 0.623 PV of 1 for 16 pds. at 4% = 0.534 PV of annuity for 8 pds. at 6% = 6.210 PV of annuity for 8 pds. at 8% = 5.747 PV of annuity for 16 pds. at 3% = 12.561 PV of annuity for 16 pds. at 4% = 11.652 The present value of the principal is a. $3,236,040 b. $3,272,400 c. $2,775,380 d. $3,799,620
$3,236,040
The adjusted trial balance for Crane Company at the end of the current year, 2021, contained the following accounts: 5-year Bonds Payable 8%: $2,900,000 Interest Payable: $48,000 Premium on Bonds Payable: $98,000 Notes Payable (3 mo): $38,000 Notes Payable (5 yr): $163,000 Mortgage Payable (13,000 due currently): $198,000 Salaries and Wages Payable: $16,000 Income Taxes Payable (due 3/15 of 2022): $23,000 The total long-term liabilities reported on the balance sheet are a. $3,261,000 b. $3,248,000 c. $3,359,000 d. $3,346,000
$3,346,000
Bonita Industries issues $30,900,000 of 10-year, 7% bonds on March 1, 2020 at 96 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 the issue date? a. $29,664,000 b. $30,925,750 c. $30,024,500 d. $29,124,500
$30,024,500
On January 1, 2021, Crane company redeemed its 15-year bonds of $7,040,000 par value for 103. They were originally issued on January 1, 2009 at 92 with a maturity date of January 1, 2024. Crane amortizes discounts and premiums using the straight-line method. What amount of loss should Crane recognize on the redemption of these bonds (ignore taxes)? a. $323,840 b. $239,840 c. $211,200 d. $0
$323,840
On January 1, 2016, Bramble Corp. issued 4200 of its 10%, $1,000 bonds for $4,368,000. 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, Bramble called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Bramble's gain or loss in 2021 on this early extinguishment of debt was a. $126,000 gain b. $50,400 gain c. $42,000 loss d. $33,600 gain
$33,600 gain
On January 1, 2019, Coronado Industries issued its 10% bonds in the face amount of $10,070,000, which mature on July 1, 2025. The bonds were issued for $10,247,332 to yield 11%, resulting in bond premium of $452,668. Coronado uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2021, Coronado's unamortized bond discount should be a. $331,962 b. $349,562 c. $361,562 d. $319,562
$331,962
At the beginning of 2020, Coronado Industries issued 8% bonds with a face value of $3,600,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $3,335,040 to yield 10%. Coronado uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2020? a. $331,964 b. $333,296 c. $334,642 d. $347,510
$334,642
On January 1, 2021, Vaughn Manufacturing sold property to Cullumber Company which originally cost Vaughn $2,830,000. There was no established exchange price for this property. Cullumber gave Vaughn $4,110,000 zero-interest-bearing note payable in three equal annual installments of $1,370,000 with the first payment due December 31, 2021. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $4,110,000 note payable in three equal annual installment of $1,370,000 at a 10% rate of interest is $3,407,190. What is the amount of interest income that should be recognized by Vaughn in 2021, using the effective-interest method? a. $0 b. $137,000 c. $340,719 d. $411,000
$340,719
The 10% bonds payable of Swifty Corporation had a carrying amount of $4,200,000 on December 31, 2020. The bonds, which had a face value of $4,040,000, were issued at a premium to yield 8%. Swifty uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2021, several years before their maturity, Swifty retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is a. $0 b. $35,600 c. $53,200 d. $161,600
$35,600
On January 1, Crane Company issued $6,400,000, 12% bonds for $6,816,000. The market rate of interest for these bonds is 11%. Interest is payable annually on December 31. Crane uses the effective-interest method of amortizing bond premium. At the end of the first year, Crane should report unamortized bond premium of a. $399,020 b. $397,760 c. $375,760 d. $384,000
$397,760
On July 1, 2020, Swifty Corporation issued 4500 of its 12%, $1,000 bonds at 98 plus accrued interest. The bonds are dated April 1, 2021 and mature on April 1, 2031. Interest is payable semiannually on April 1 on October 1. What amount did Swifty receive from the bond issuance? a. $4,545,000 b. $4,500,000 c. $4,441,000 d. $4,310,000
$4,545,000
At the beginning of 2020, Swifty Corporation issued 8% bonds with a face value of $5,100,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $4,706,200 to yield 10%. Swifty uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2020? a. $491,488 b. $472,186 c. $470,168 d. $468,168
$472,186
On January 1, 2020, Sunland Company issued eight-year bonds with a face value of $6,500,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: PV of 1 for 8 pds. at 6% = 0.627 PV of 1 for 8 pds. at 8% = 0.540 PV of 1 for 16 pds. at 3% = 0.623 PV of 1 for 16 pds. at 4% = 0.534 PV of annuity for 8 pds. at 6% = 6.210 PV of annuity for 8 pds. at 8% = 5.747 PV of annuity for 16 pds. at 3% = 12.561 PV of annuity for 16 pds. at 4% = 11.652 The issue price of the bonds is a. $5,743,140 b. $5,751,330 c. $5,782,140 d. $6,497,400
$5,743,140
On October 1, 2020 Marigold Corp. issued 4%, 10-year bonds with a face value of $6,060,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2020 income statement of Marigold Corp. would be a. $54,540 b. $60,600 c. $66,660 d. $109,080
$54,540
On June 30, 2021, Sunland Company had outstanding 9%, $7,970,000 face amount, 15-year bonds maturing on June 30, 2031. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2021 was $362,000. On June 30, 2021, Sunland acquired all of these bonds at 93 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? a. $7,888,000 b. $7,687,700 c. $7,608,000 d. $7,412,100
$7,608,000
On its December 31, 2020 balance sheet, Sheffield Corp. reported bonds payable of $6,140,000. The bonds had been issued at par. On January 2, 2021, Sheffield retired $3,070,000 of the outstanding bonds at par plus a call premium of $71,000. What amount should Sheffield report in its 2021 income statement as loss on extinguishment of debt (ignore taxes)? a. $0 b. $30,500 c. $35,500 d. $71,000
$71,000
On January 1, 2021, Sunland Company sold property to Blossom Company. There was no established exchange price for this property, and Blossom gave Sunland a $4,700,000 zero-interest-bearing note payable in 5 equal installments of $940,000, with the first payment due December 31, 2021. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,656,318 at January 1, 2021. What should be the balance of the Discount on Notes Payable account on the books of Blossom at December 31, 2021 after adjusting entires are made, assuming that the effective-interest method is used? a. $0 b. $714,613 c. $744,952 d. $1,043,682
$714,613
Vaughn Manufacturing issues $26,000,000 face value of bonds at 97 on January 1, 2019. The bonds are dated January 1, 2019, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2022, $15,600,000 of the bonds are called at 103 plus accrued interest. What loss would be recognized on the called bonds on September 1, 2022? a. $1,560,000 loss b. $764,400 loss c. $984,440 loss d. $1,218,150 loss
$764,400 loss
On October 1, 2020 Crane Company issued 5%, 10-year bonds with a face value of $8,040,000 at 103. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on December 31, 2020 income statement of Crane Company would be a. $106,530 b. $188,940 c. $94,470 d. $100,500
$94,470
A company issues $16,500,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $16,118,606. What is interest expense for 2021, using straight-line amortization? a. $1,331,433 b. $957,000 c. $968,119 d. $976,070
$976,070
A company issues $16,700,000, 5.8%, 20-year bonds to yield 6% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $16,313,983. Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $484,300 b. $968,600 c. $978,992 d. $978,868
$978,992
Crane Company issued $95,000 of ten-year, 8% bonds that pay interest semiannually. The bonds are sold to yield 6%. One step in calculating the issue price of the bonds is to multiply the face value by the table value for a. 10 periods and 8% from the present value of 1 table b. 20 periods and 4% from the present value of 1 table c. 10 periods and 6% from the present value of 1 table d. 20 periods and 3% from the present value of 1 table
20 periods and 3% from the present value of 1 table
Crane Company's 2021 financial statements contain the following selected data: Income taxes: $37,000 Interest expense: $22,000 Net income: $55,400 Crane's times interest earned for 2021 is a. 2.5 times b. 3.5 times c. 4.2 times d. 5.2 times
5.2 times
In the recent year Crane Company had net income of $210,000, interest expense of $50,000, and tax expense of $85,000. What was Crane Company's times interest earned for the year? a. 6.9 b. 5.9 c. 5.2 d. 4.2
6.9
A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1,560,000. To extinguish this debt, the company had to pay a call premium of $450,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? a. Amortize $2,010,000 over four years b. Charge $2,010,000 to a loss in the year of extinguishment c. Charge $450,000 to a loss in the year of extinguishment and amortize $1,560,000 over four years d. Either amortizes $1,110,000 over four years or charge $1,110,000 to a loss immediately, whichever management selects
Charge $2,010,000 to a loss in the year of extinguishment
If a company chooses the fair value option, a decrease in the fair value of its bonds because of the credit rating dropping is recorded by crediting a. Bonds Payable b. Gain on Restructuring of Debt c. Unrealized Holding Gain or Loss - Equity d. Unrealized Holding Gain or Loss - Income
Unrealized Holding Gain or Loss - Equity
"In-substance defeasance" is a term used to refer to an arrangement whereby a. a company gets another company to cover its payment due on long-term debt b. a governmental unit issues debt instruments to corporations c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust d. a company legally extinguishes debt before its due date
a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust
The generally accepted method of accounting for gains or losses from the early extinguishment of debt is to compute them as a. an adjustment to the cost basis of the asset obtained by the debt issue b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption
a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption
The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt d. a difference between the reacquisition price and the net carrying amount of the debt which would be recognized in the period of redemption
a difference between the reacquisition price and the net carrying amount of the debt which would be recognized in the period of redemption
On January 1, 2015, Bramble Corp. issued $19,080,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Bramble at 105. Bramble has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2021, when the fair value of the bonds was 95, Bramble repurchased $4,240,000 of the bonds in the open market at 95. Bramble has recorded interest and amortization for 2021. Ignoring income taxes and assuming that the gain is material, Bramble should report this reacquisition as a. a loss of $250,160 b. a gain of $250,160 c. a loss of $298,160 d. a gain of $298,160
a gain of $250,160
An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchased of the bonds between interest dates. At the time of reacquisition, a. any costs of issuing the bonds must be amortized up to the purchase date b. the premium must be amortized up to the purchase date c. interest must be accrued from the last interest date to the purchase date d. all of these answer choices are correct
all of these answer choices are correct
An early extinguishment of bond payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition a. any costs of issuing the bonds must be amortized up to the purchase date b. the premium must be amortized up to the purchase date c. interest must be accrued from the last interest date to the purchase date d. all of these answers are correct
all of these answers are correct
Premium on bonds payable is a. a contra account b. reported as a reduction of the bond liability c. debited to a deferred charge account and amortized over the life of the bonds d. an adjunct account
an adjunct account
A project financing arrangement refers to: a. an arrangement where a company creates a special-purpose entity to perform a special project b. an arrangement where a company borrows from its subsidiary to finance a project c. an arrangement where a company promises future repayment by placing purchased assets in an irrevocable trust d. an arrangement where a company finances a project from a sinking fund established for bond repayments
an arrangement where a company creates a special-purpose entity to perform a special project
When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated b. the stated interest rate is unreasonable c. the stated face amount of the note is materially different from the current cash sales price for similar items or from the current fair value of the note d. any of these answers are correct
any of these answers are correct
Long-term debt that matures within one year and is to be converted into stock should be reported a. as a current liability b. in a special section between liabilities and stockholders' equity c. as noncurrent d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation
as noncurrent and accompanied with a note explaining the method to be used in its liquidation
Bonds for which the owners' names are not registered with the issuing corporation are called a. bearer bonds b. term bonds c. debenture bonds d. secured bonds
bearer bonds
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a. bond indenture b. bond debenture c. registered bond d. bond coupon
bond indenture
All of the following statement related to bonds are correct regarding bonds except: a. bonds arise from a contract known as a bond indenture b. bonds represent a promise to pay a sum of money plus periodic interest c. bonds usually pay interest annually d. bonds typically have a $1,000 face value
bonds usually pay interest annually
When a business enterprise enters into what is referred to as off-balance-sheet financing, the company a. is attempting to conceal the debt from shareholder by having no information about the debt included in the balance sheet and income statement b. wishes to confine all information related to the debt and to the income statement and the statement of cash flow c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost d. is in violation of generally accepted accounting principles
can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost
When a company enters into what is referred to as off-balance-sheet financing, the company a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet b. wishes to confine all information related to the debt to the income statement and statement of cash flow c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost d. is in violation of generally accepted accounting principles
can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost
The interest rate written in the terms of the bond indenture is known as the a. coupon rate b. nominal rate c. stated rate d. coupon rate, nominal rate, or stated rate
coupon rate, nominal rate, or stated rate
Swifty Corporation retires its $320,000 face value bonds at 101 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $308,000. The entry to record the redemption will include a a. credit of $12,000 to Loss on Bond Redemption b. credit of $12,000 to Discount on Bonds Payable c. debit of $15,200 to Gain on Bond Redemption d. debit of $3,200 to Premium on Bonds Payable
credit of $12,000 to Discount on Bonds Payable
On October 1, 2020 Sunland Company issued 6%, 10-year bonds with a face value of $7,970,000 at 105. 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 a. credit of $239,100 to Interest Payable b. credit of $398,500 to Premium on Bonds Payable c. credit of $7,571,500 to Bonds Payable d. debit of $398,500 to Discount on Bonds Payable
credit of $398,500 to Premium on Bonds Payable
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 Receivalbe c. credit to Interest Expense d. credit to Unearned Interest
credit to Interest Expense
The term used for bonds that are unsecured as to principal is a. mortgage bonds b. debenture bonds c. indebenture bonds d. callable bonds
debenture bonds
Marigold Corp. retires its $340,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $352,733. The entry to record the redemption will include a a. credit of $12,733 to Loss on Bond Redemption b. debit of $12,733 to Premium on Bonds Payable c. credit of $4,267 to Gain on Bond Redemption d. debit of $17,000 to Premium on Bonds Payable
debit of $12,733 to Premium on Bonds Payable
An example of an item which is not a liability is a. dividend payable in stock b. advances from customers on contracts c. accrued estimated warranty costs d. the portion of long-term debt due within one year
dividend payable in stock
The rate of interest actually earned by bondholders is called the a. stated rate b. coupon rate c. nominal rate d. effective rate
effective rate
The interest rate actually earned by bondholders is called the a. stated rate b. coupon rate c. effective yield d. nominal rate
effective yield
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. exceed what it would have been had the effective-interest method of amortization been used b. be less than 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 the stated (nominal) rate of interest
exceed what it would have been had the effective-interest method of amortization been used
A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2021, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2021 should have equaled the a. call price b. call price less unamortized discount c. face amount less unamortized discount d. face amount plus unamortized discount
face amount less unamortized discount
Bond interest paid is equal to the a. carrying value of the bonds multiplied by the effective-interest rate b. carrying value of the bonds multiplied by the stated interest rate c. face amount of the bonds multiplied by the stated interest rate d. face amount of the bonds multiplied by the effective-interest rate
face amount of the bonds multiplied by the stated interest rate
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. greater 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. less than if the straight-line method were used
greater than if the straight-line method were used
Bonds that pay no interest unless the issuing company is profitable are called a. collateral trust bonds b. debenture bonds c. revenue bonds d. income bonds
income bonds
How would the amortization of discount on bonds payable affect each of the following? a. increase carrying value, decrease net income b. increase carrying value, increase net income c. decrease carrying value, decrease net income d. decrease carrying value, increase net income
increase carrying value, decrease net income
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 discount b. decrease only if the bonds were issued at a premium c. increase only if the bonds were issued at a premium d. increase if the bonds were issued at either a discount or a premium
increase if the bonds were issued at either a discount or a premium
When the interest payment dates of a bond are May 1 and November 1, and a bond issues is sold on June 1, the amount of cash received by the issuer will be a. decreased by accrued interest from June 1 to November 1 b. decreased by accrued interest from May 1 to June 1 c. increased by accrued interest from June 1 to November 1 d. increased by accrued interest from May 1 to June 1
increased by accrued interest from May 1 to June 1
Note disclosures for long-term debt generally include all of the following except a. assets pledged as security b. call provisions and conversion privileges c. restrictions imposed by the creditor d. names of specific creditors
names of specific creditors
The times interest earned is computed by dividing a. net income by interest expense b. income before taxes by interest expense c. net income plus income tax expense and interest expense by interest expense d. net income and interest expense by interest expense
net income plus income tax expense and interest expense by interest expense
Bond issuance costs are: a. recorded as an interest expense b. recorded as an asset c. netted against the carrying amount of the bonds d. added to the issue amount of the bond payable
netted against the carrying amount of the bonds
Crane Company issued $95,000 of ten-year, 8% bonds that pay interest semiannually. The bonds are sold to yield 6%. One step in calculating the issue price of the bonds is to multiply the face value by the table value for a. multiply $7600 by the table value for 10 periods and 8% from the present value of an annuity table b. multiply $7600 by the table value for 20 periods and 4% from the present value of an annuity table c. multiply $7600 by the table value for 20 periods and 3% from the present value of an annuity table d. none of these answers is correct
none of these answers is correct
Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a a. gain, net of income taxes b. loss, net of income taxes c. part of continuing operations d. deferred credit to be amortized over the life of the new debt
part of continuing operations
A long-term note is valued at its a. face value b. market value c. maturity value d. present value
present value
When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond? a. price b. par c. yield d. interest
price
The face value of bonds is also called each of the following except a. maturity value b. stated value c. par value d. principal
stated value
Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements? a. the present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years b. the present value of scheduled interest payments on long-term debt during each of the next five years c. the amount of scheduled interest payments on long-term debt during each of the next five years d. the amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years
the amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years
A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? a. the balance of mortgage payable at a given balance sheet date will be reported as a long-term liability b. the balance of mortgage payable will remain a constant amount over the 10-year period. c. the amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period d. the amount of interest expense will remain constant over the 10-year period
the amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period
Which of the following arguments is presented by the FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse? a. the shareholders' loss is the debtholders' gain b. the income of the company will increase as the amount of interest payment will reduce c. the decrease in market rate will increase the value of equity shares d. the debtholders' loss is the shareholders' gain
the debtholders' loss is the shareholders' gain
Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds b. the market rate of interest multiplied by the face value of the bonds c. the stated 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
the market rate multiplied by the beginning-of-period carrying amount of the bonds
Reich, Inc. 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 effective yield or market rate of interest exceeded the stated (nominal) rate b. the nominal rate of interest exceeded the market rate c. the market and nominal rates coincided d. no necessary relationship exists between the two rates
the nominal rate of interest exceeded the market rate
A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place a. the present value of the debt instrument must be approximated using an imputed interest rate b. it should not be recorded on the books of either party until the fair value of the property becomes evident c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property
the present value of the debt instrument must be approximated using an imputed interest rate
The bonds sell between interest payment dates, the purchaser will pay the seller: a. the price of the bonds only b. the price of the bonds less the accrued interest c. the price of the bonds plus the accrued interest d. none of these answers are correct
the price of the bonds plus the accrued interest
The debt to assets ratio is computed by dividing a. current liabilities by total assets b. long-term liabilities by total assets c. total liabilities by total assets d. total assets by total liabilities
total liabilities by total assets
Which of the following is not a typically classified as a long-term liability? a. unearned revenue b. bonds payable c. lease liability d. mortgage payable
unearned revenue
A debenture bond is (an) a. callable bond b. secured bond c. term bond d. unsecured bond
unsecured bond
Both discount on bonds payable and premium on bonds payable are: a. adjunct accounts b. contra accounts c. nominal accounts d. valuation accounts
valuation accounts
