Wiley Plus Chapter 14 Quiz

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

bond indenture.

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of

$285,500 The discount on bonds payable is recorded at (Face Value of Bonds, $5,000,000 - Cash Proceeds from Bonds or Carrying Amount, $4,695,000) = $305,000 at issuance. The amortization of discount in 2017 is [Cash Interest Payment, $5,000,000 x 9% or $450,000 - (Carrying Amount or Face Value for Bonds, $4,695,000 X 10%)] =$19,500 leaving a balance of: Discount at Issuance, $305,000 - Amortization of Discount, $19,500 = $285,500.

Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30, 2017 payment?

$392,083 Interest expense for the first six months is (Bond carrying amount, $9,802,072 x 6/12 x 8% Yield rate) = $392,083.

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

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

When a note is exchanged for property in a bargained transaction, the stated interest rate is presumed to be fair unless:

-the stated interest rate is unreasonable. -the stated face amount of the note is materially different from the current cash sales price for similar items. -no interest rate is stated.

Which of the following is not a typically classified as a long-term liability?

Unearned Revenue

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

a credit to Discount on Notes Payable for $90,156.

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include

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

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

callable bond.

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

coupon rate, nominal rate, or stated rate.

The interest rate actually earned by bondholders is called the

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

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

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

greater than the stated rate

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the

market rate

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

names of specific creditors.

A long-term note is valued at its

present value

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

registered bond.

A bond that matures in installments is called a:

serial bond.