CHAPTER 13 AP

The Silvio Company issues $10,000,000, 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 $9,802,072. Using effective-interest amortization, the interest expense to be recognized in 2020 is $784,166. $390,000 $780,000. $784,249.

$784,249. 9,802,072 * (8%/2) = 392,082.88 10,000,000 * (7.8%/2) = 390,000 9,802,072 - (390,000 - 392,082.88) * .04 = 392166.20 392166.20 + 392,082.88 = 784,249

Penny is interested in investing in corporate bonds, but she is not sure what type would be the best choice for her. She tells you that she is especially interested in buying a relatively low level of risk bond and offers a steady income stream. Which of the following pieces of advice would be most appropriate for you to provide? "I would recommend avoiding term bonds. Because these bonds all mature on a single date, you will not receive any interest payments until that maturity date is reached." "Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral. Also avoice deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option." "I think an income bond is the best choice for you because, with this type of bond, the issuing corporation must pay you a set amount of money every year until the bond reaches maturity." "Any type of debenture bond should be a solid choice. These bonds are backed by collateral, which means your risk of loss is low or even nonexistent."

"Given your desire for a low level of risk and a steady income stream, you will want to avoid debenture bonds that are not secured by collateral. Also avoice deep-discount bonds that do not provide a steady income stream, even if their price makes them seem like an appealing option."

On January 1, 2020, Ryan Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2030 but were callable at 101 any time after December 31, 2023. Interest was payable semiannually on July 1 and January 1. On July 1, 2025, Ryan called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, which of the following is Ryan's gain or loss in 2025 on this early extinguishment of debt? $16,000 gain $60,000 gain $20,000 loss $24,000 gain

$16,000 gain $2,000,000 (2,000*$1,000) $80,000 ($2,080,000 - $2,000,000) (10 years * 2 periods/year = 20 periods), or $80,000/20 =$4,000. 5.5 years, or 11 periods, so $4,000 X 11 = $44,000. $2,080,000 - $44,000 = $2,036,000. $2,000,000 X 1.01 = $2,020,000 $2,036,000 - $2,020,000 = $16,000

On January 1, the Caycee Corporation issued $4,000,000, 9% bonds for $3,756,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Caycee uses the effective-interest method of amortizing bond discount. At the end of the first year, what amount should Caycee report for the unamortized bond discount? $228,400 $219,600 $204,000 $206,440

$228,400 ($3,756,000 × .10) - ($4,000,000 × .09) = $15,600 ($4,000,000 - $3,756,000) - $15,600 = $228,400.

The 12% bonds payable of Tegan Industries had a carrying amount of $3,120,000 on December 31, 2020. The bonds, which had a face value of $3,000,000, were issued at a premium to yield 10%. Tegan 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, Tegan retired the bonds at 104 plus accrued interest. Ignoring taxes, which of the following is the loss on retirement? $120,000 loss $0 loss $24,000 loss $37,200 loss

$24,000 loss $180,000 = ($3,000,000 X 12% x 1/2) $3,120,000 x 10% x ½ = $156,000. $24,000 = ($180,000 - $156,000). $3,120,000 - $24,000 = $3,096,000. $3,000,000 X 1.04 = $3,120,000 $3,120,000 - $3,096,000 = $24,000 loss on retirement.

On June 30, 2020, Canton Industries had an outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2035. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2020, were $210,000 and $60,000, respectively. On June 30, 2020, Canton acquired all of these bonds at 94 and retired them. The net carrying amount that should be used in computing gain or loss on this early extinguishment of debt is $5,790,000. $5,640,000. $5,940,000. $5,730,000.

$5,730,000. $210,000 + $60,000 = $270,000. $6,000,000 - $270,000 = $5,730,000 net carrying amount.

The Rose Company issued $20,000,000 face value of bonds at 96 on January 1, 2020. The bonds are dated January 1, 2020, 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, 2023, $12,000,000 of the bonds are called at 102, plus accrued interest. The gain or loss that will be recognized on the called bonds on September 1, 2023, is $907,000 loss. $720,000 loss. $1,200,000 loss. $544,000 loss.

$544,000 loss. $20,000,000 X 0.96 = $19,200,000. $20,000,000 - $19,200,000 = $800,000 $800,000/ 20 =$40,000 3 years and 8 months, which is 7 2/6 periods, $40,000 X 7 2/6 = $293,333. $19,200,000 + $293,333 = $19,493,333 (the fraction of the bond repurchased): $19,493,333 X 12/20 =$11,696,000 $12,000,000 X 1.02 = $12,240,000 $11,696,000 - $12,240,000 = $544,000 loss on extinguishment.

The 10% bonds payable of Yano Company had a net carrying amount of $950,000 on December 31, 2020. The bonds, which had a face value of $1,000,000, 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, Yano retired the bonds at 102. The interest payment on July 1, 2021, was made as scheduled. Ignoring taxes, the loss that Yano should record on the early retirement of the bonds on July 2, 2021, would be $63,000 loss. $56,000 loss. $70,000 loss. $20,000 loss.

$63,000 loss. $950,000 X 12% x 1/2 = $57,000 $1,000,000 x 10% x 1/2 = $50,000. ($57,000 - $50,000) = 7,000 $950,000 + $7,000 = $957,000. $1,000,000 X 1.02 = $1,020,000. $1,020,000 - $957,000 = $63,000

On January 1, 2016, Morley Electronics issued bonds with a par value of $1,350,000 at 95, due in 10 years. Bond issue costs were $22,000. Bond issue costs and the bond discount were amortized using straight-line methods. On January 1, 2021, Morley called the entire issue at 102. Calculate Morley's loss or gain on redemption. $67,500 loss $44,750 gain $71,750 loss $89,500 gain

$71,750 loss $1,350,000 * 1.02 = $1,377,000. $1,350,000 * 0.05 = $67,500 $67,500 * 5/10 = $33,750. $22,000 * 5/10 = $11,000. $1,350,000 - $33,750 - $11,000 = $1,305,250. $1,377,000 - $1,305,250 = $71,750.

"In-substance defeasance" is a term used to refer to an arrangement whereby which of the following occurs? A company gets another company to cover its payments due on long-term debt A company provides for the future repayment of long-term debt by placing purchased securities in an irrevocable trust A company legally extinguishes debt before its due date A governmental unit issues debt instruments to a corporation

A company provides for the future repayment of long-term debt by placing purchased securities in an irrevocable trust

Pigeon Corporation retires its $300,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $311,235. Which of the following will be included in the entry to record the redemption? A debit of $15,000 to Premium on Bonds Payable A credit of $3,765 to Gain on Bond Redemption A debit of $11,235 to Premium on Bonds Payable A credit of $11,235 to Loss on Bond Redemption

A debit of $11,235 to Premium on Bonds Payable

Discount on bonds payable should be shown on the balance sheet as which of the following? A reduction of stockholders' equity Both an asset and a liability A deduction from bonds payable. An asset

A deduction from bonds payable.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by the purchase of the bonds between interest dates. Which of the following is not true at the time of reacquisition? The premium must be amortized up to the purchase date Any gain or loss is amortized over the remaining life of the bonds Interest must be accrued from the last interest date to the purchase date Any costs of issuing the bonds must be amortized up to the purchase date

Any gain or loss is amortized over the remaining life of the bonds

How does the generally accepted method of accounting for gains or losses from the early extinguishment of debt treat any gain or loss? As an adjustment to the cost basis of the asset obtained by the debt issue As 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 As an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt As a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

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

The Marson Company took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Marson within the last three years. How should the excess of the carrying amount of the old debt over the amount paid to extinguish it be reported? As deferred credit to be amortized over the life of the new debt As a loss, net of income taxes As part of continuing operations As a gain, net of income taxes

As part of continuing operations

Which of the following is not needed to determine the unamortized discount? Face value of the bond. Par value. Bond issue costs. Term in years of the bond.

Bond issue costs.

You have just purchased a corporate bond with a maturity date of January 1, 2025. Despite the stated maturity, you know that the bond may be retired prior to that date. What type of bond did you purchase? Serial bond Callable bond Bearer bond Debenture bond

Callable bond

Which of the following is the correct equation for bond interest expense? Face amount of bonds X effective-interest rate Face amount of bonds X stated interest rate Carrying value of bonds at the beginning of period X stated interest rate Carrying value of bonds at the beginning of period X effective-interest rate

Carrying value of bonds at the beginning of period X effective-interest rate

If bonds are issued between interest dates, which of the following could be included on the entry on the books of the issuing corporation? Credit to Interest Expense Credit to Interest Receivable Debit to Interest Payable Credit to Unearned Interest

Credit to Interest Expense

Boomchickapop Company elects the fair value option for a long-term note payable. In 2014, the company reported an unrealized holding gains which was reported as a component of Other Comprehensive Income. A. True B. False

False Unrealized holding gains and losses are included in net income if a company elects the fair value option.

When a bond sells at a premium, interest expense will be a. equal to the bond interest payment b. greater than the bond interest payment c. less than the bond interest payment d. none of these choices are correct

c

Which of the following represents the amount payable at maturity of bonds? Reacquisition price Face value Issue price Extinguishment

Face value

When do companies generally make bond interest payments? Annually Monthly Semiannually Bimonthly

Semiannually

What is the correlation of the market rate to the stated rate if a bond is sold at 97? Less than the stated rate Equal to the stated rate Greater than the stated rate Equal to the coupon rate

Greater than the stated rate

Which of the following terms refers to a bond that does not pay interest unless the issuing company is profitable? Debenture bond Revenue bond Income bond Collateral trust bond

Income bond

If bonds are issued initially at a premium, and the effective-interest method of amortization is used, which of the following will be true of interest expense in the earlier years? It will be the same as if the straight-line method were used. It will be less than if the straight-line method were used. It will be greater than the amount of the interest payments. It will be greater than if the straight-line method were used.

It will be greater than if the straight-line method were used.

If bonds are initially sold at a discount and the straight-line method of amortization is used, then which of the following will prove to be true about interest expense in the earlier years? It will be less than the stated (nominal) rate of interest. It will be less than what it would have been had the effective-interest method of amortization been used. It will be the same as what it would have been had the effective-interest method of amortization been used. It will exceed what it would have been had the effective-interest method of amortization been used.

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

If bonds are initially sold at a discount and the straight-line method of amortization is used, then which of the following will prove to be true about interest expense in the earlier years? It will be less than what it would have been had the effective-interest method of amortization been used. It will exceed what it would have been had the effective-interest method of amortization been used. It will be less than the stated (nominal) rate of interest. It will be the same as what it would have been had the effective-interest method of amortization been used.

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

Rose Corp. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Which of the following is a step in calculating the issue price of the bonds? Multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table Multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table Multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table

Multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table

A ten-year bond was issued in 2020 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2022, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2022 should have equaled which of the following? The call price less unamortized discount The face amount less unamortized discount The call price The face amount plus unamortized discount

The face amount less unamortized discount

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to which of the following? The stated (nominal) interest rate multiplied by the face value of the bonds The stated interest rate multiplied by the beginning-of-period carrying amount of the bonds The market interest rate multiplied by the beginning-of-period carrying amount of the bonds The market interest rate of interest multiplied by the face value of the bonds

The market interest rate multiplied by the beginning-of-period carrying amount of the bonds

Which of the following is true of the printing costs and legal fees associated with the issuance of bonds? They should be accumulated in a deferred charge account and amortized over the life of the bonds. They should be reported as a deduction from the face amount of bonds payable and amortized over the life of the bonds. They should not be reported as an expense until the period the bonds mature or are retired. They should be expensed when incurred.

They should be reported as a deduction from the face amount of bonds payable and amortized over the life of the bonds.

The face value of the bond, the length of the term of the bond, and the par value are all needed to determine which of the following? Unamortized discount Unamortized issue cost Reacquisition price Face value

Unamortized discount

A debt instrument with no ready market is exchanged for property whose fair market 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 market 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.

a

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.

a

A bond that matures in installments is called a: A. term bond. B. serial bond. C. callable bond. D. bearer bond

b

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that A. the market rate of interest exceeded the stated rate. B. the stated rate of interest exceeded the market rate. C. the market and stated rates coincided. D. no necessary relationship exists between the two rates.

b

A debenture bond is also known as: a. a real estate bond b. a convertible bond c. a secured bond d. an unsecured bond

d

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.

d

The interest rate written in the terms of the bond indenture is known as the A. effective rate. B. market rate. C. yield rate. D. coupon rate, nominal rate, or stated rate.

d

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 A. stated rate. B. nominal rate. C. coupon rate. D. market rate.

d

Under the effective interest method, interest expense: A. always increases each period the bonds are outstanding. B. always decreases each period the bonds are outstanding. C. is the same annual amount as straight-line interest expense. D. is the same total amount as straight-line interest expense over the term of the bonds.

d

Which one of the following statements relating to mortgage notes payable is not correct? A. Mortgage notes payable are the most common form of long-term notes payable. B. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan. C. Mortgage notes payable are payable in full at maturity or in installments. D. Mortgage notes payable are always reported as a long-term liability.

d

_______________ means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. A. Best-efforts underwriting B. Loan underwriting. C. Insurance underwriting. D. Firm underwriting

d

When investors purchase callable bonds, they do so with the knowledge that they may be compelled to redeem the bond earlier than they would like. will have the option to redeem the bond in exchange for stock in the issuing corporation. may be forced to redeem the bond for a particular commodity. will receive their total interest payoff at maturity.

may be compelled to redeem the bond earlier than they would like.

Gains and losses on early extinguishment of debt are reported as ___________________ on the income statement

other gains and losses

The difference between the reacquisition price and the net carrying amount on the books should be __________ when debt is extinguished before its maturity date through a refunding transaction. treated as a prior period adjustment amortized over the remaining original life of the extinguished issue amortized over the life of the new issue recognized currently in income as a loss or gain

recognized currently in income as a loss or gain