BACC311 Ch 13 Review questions

68. Use the above information. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2020 balance sheet? a. $14,709,481 b. $15,000,000 c. $14,718,844 d. $14,706,232

a. $14,709,481

75. On January 1, 2020, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2020 is a. $200,000. b. $214,836. c. $215,400. d. $240,000.

b. $214,836.

The face value of bonds is also called each of the following except a. maturity value. b. stated value. c. par value. d. principal.

b. stated value

S49. 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 the 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.

c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost.

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.

c. face value x stated rate

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.

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

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

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

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

a. $252,000

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

a. $322,400.

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 what it would have been had the effective-interest method of amortization been used. c. be the same as what it would have been had the effective-interest method of amortiza-tion been used. d. be less than the stated (nominal) rate of interest.

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

107. On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2031. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Solis's adjusted unamortized bond premium should be a. $1,080,000. b. $1,006,400. c. $972,000. d. $812,000.

b. $1,006,400.

91. The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2020. The bonds, which had a face value of $3,000,000, were issued at a discount to yield 12%. 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, Nixon retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2021? Ignore taxes. a. $60,000. b. $189,000. c. $168,000. d. $210,000.

b. $189,000.

82. On January 1, Patterson 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. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000.

b. $285,500.

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

b. $369,000

87. At December 31, 2020 the following balances existed on the books of Foxworth Corporation: Bonds Payable $6,000,000 Discount on Bonds Payable 840,000 Interest Payable 150,000 If the bonds are retired on January 1, 2021, at 102, what will Foxworth report as a loss on redemption? a. $1,110,000 b. $960,000 c. $810,000 d. $600,000

b. $960,000

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

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

31. 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.

b. the nominal rate of interest exceeded the market rate

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

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2020? a. $585,000 b. $1,170,000 c. $1,176,373 d. $1,176,249

c. $1,176,373

. Everhart Company issues $25,000,000, 6%, 5-year bonds dated January 1, 2020 on January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 a. $25,000,000 b. $26,082,470 c. $26,094,045 d. $26,086,540

c. $26,094,045

109. On January 1, 2021, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2021? a. $221,330 b. $250,000 c. $265,589 d. $300,000

c. $265,589

63. Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2020 on January 1, 2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 a. $5,000,000 b. $5,216,494 c. $5,218,809 d. $5,217,309

c. $5,218,809

113. On June 30, 2021, Omara Co. had outstanding 8%, $8,000,000 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 $360,000. On June 30, 2021, Omara 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? a. $7,920,000. b. $7,720,000. c. $7,640,000. d. $7,520,000.

c. $7,640,000.

70. Use the above information. What is interest expense for 2021, using straight-line amortization? a. $1,540,208 b. $1,170,000 c. $1,176,894 d. $1,184,845

d. $1,184,845

69. Use the above information. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2022? a. $14,752,672 b. $14,955,466 c. $14,725,374 d. $14,747,642

d. $14,747,642

112. On January 1, 2016, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000. 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, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2021 on this early extinguishment of debt was a. $90,000 gain. b. $36,000 gain. c. $30,000 loss. d. $24,000 gain.

d. $24,000 gain.

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29. 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 10% from the present value of 1 table. b. 20 periods and 5% from the present value of 1 table. c. 10 periods and 8% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

d. 20 periods and 4% from the present value of 1 table.

40. An early extinguishment of bonds 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.

d. All of these answers are correct.

30. Use the above information. One step in calculating the issue price of the bonds is to a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. d. None of these answers is correct.

d. None of these answers is correct.

41. 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 should be recognized in the period of redemption.

d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

7. 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.

d. an adjunct account

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.

d. coupon rate, nominal rate, or stated rate.

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.

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