Chapter 14 practice quiz

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 Interest Payable for $60,000. a credit to Discount on Notes Payable for $90,156. a debit to Interest Expense for $29,850. a debit to Interest Expense for $120,000

a credit to Discount on Notes Payable for $90,156. The adjusting entry made at December 31, 2017 debits Interest Expense and credits Discount on Notes Payable for (Bond carrying amount, $901,560 X Prevailing interest rate, 10%) = $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 Bonds Payable for $102,000,000. a debit to Cash for $100,000,000. a credit to Premium on Bonds Payable for $2,000,000. a credit to Interest Expense for $2,000,000.

a credit to Premium on Bonds Payable for $2,000,000.

Pontchartrain Company issues $20,000,000, 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 $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total $1,600,000. $1,529,115. $1,560,000. $1,568,498.

$1,568,498 Interest expense for the first 6 month period from January 1 - June 30 is (Carrying amount of bonds, $19,604,145 X 8% X 6/12) = $784,166. The new carrying value for the bonds is [Carrying amount of bonds (original), $19,604,145 + (Interest expense, $784,166 - $780,000 or ($20,000,000 x 7.8% x 6/12), Cash Interest Paid)] = $19,608,311. Interest expense for the second six months is ($19,608,311 X .8% X 6/12) = $784,332. Total interest expense for 2017 is (January 1 - June 30 Interest, $784,166 + July 1 - December 31 Interest, $784,332) = $1,568,498.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? $505,000 gain $250,000 loss $300,000 loss $200,000 gain

$250,000 loss The bonds' net carrying amount is (Face amount of bonds, $5,000,000 - Unamortized bond discount, $200,000) = Carrying amount of bonds, $4,800,000. The loss on extinguishment is: Retirement amount, ($5,000,000 X 1.01) - Carrying amount of bonds, $4,800,000 = $250,000

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? $400,000 $390,000 $784,164 $392,083

$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? $5,940,000. $5,790,000. $5,640,000. $5,730,000.

$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.

Which of the following is not an example of "off-balance-sheet financing"? Operating leases Special purpose entity Non-consolidated subsidiary Capital leases

Capital leases Capital leases are not an example of "off-balance-sheet financing."

The effective interest method calculates bond interest expense by multiplying the carrying value of the bonds at the beginning of the period by the stated rate of interest. True False

False

When assets such as buildings and equipment are transferred in a troubled debt restructuring, the creditor should record a gain or loss for the difference between the fair value and the debtor's book value. True False

False

When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. True False

False

Boomchickapop Company elects the fair value option for a long-term note payable. In 2017, the company reported an unrealized holding gains which was reported as a component of Other Comprehensive Income. True False

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

Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. True False

False Firm underwriting, not best-efforts underwriting, means that the investment bank guarantees the proceeds of the bond issue will be a certain amount.

The loss recorded by the creditor in a troubled debt restructuring is based on the expected future cash flows discounted at the current effective interest rate. True False

False The loss recorded by the creditor in a troubled debt restructuring is based on the expected future cash flows discounted at the historical, not the current, effective interest rate.

When a note is exchanged for property in a bargained transaction, the stated interest rate is presumed to be fair unless: all of these answer choices are correct. no interest rate is stated. 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.

all of these answer choices are correct

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the registered bond. bond coupon. bond indenture. bond debenture.

bond indenture

A bond for which the issuer has the right to call and retire the bonds prior to maturity is a convertible bond. callable bond. debenture bond. retirable bond.

callable bond

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet and income statement. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. is in violation of generally accepted accounting principles. wishes to confine all information related to the debt to the income statement and the statement of cash flow.

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost

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

less than the bond interest payment. Selling a bond at a premium results in interest expense being less than the interest payment because of the amortized premium.

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 coupon rate. stated rate. market rate. nominal rate.

market rate

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

serial bond Bonds that mature in installments are referred to as serial bonds

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 no necessary relationship exists between the two rates. the market rate of interest exceeded the stated rate. the stated rate of interest exceeded the market rate. the market and stated rates coincided.

the stated rate of interest exceeded the market rate