Intermediate Accounting Chapter 14: Bonds and Long-Term Notes

Required Information #5

A gain or loss on early extinguishment of debt should be recorded for the difference between the reacquisition price and the book value of the debt. Convertible bonds are accounted for as straight debt, but the value of the equity feature is recorded separately for bonds issued with detachable warrants.

Required Information #1

A liability requires the future payment of cash in specified amounts at specified dates. As time passes, interest accrues on debt at the effective interest rate times the amount of the debt outstanding during the period. This same principle applies regardless of the specific form of the liability.

Bonds will sell at:

A premium if the stated rate exceeds the market rate. (A premium if the stated rate exceeds the market rate. If the stated rate exceeds the market rate, investors will bid up the price of the bonds (creating a premium) until the effective rate on the bond equals the market rate.)

The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.

Periodic interest is incurred

Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?

Peter should recognize 3 months of interest.

The price of a corporate bond is the present value of its face amount at the market or effective rate of interest:

Plus the present value of all future interest payments at the market or effective rate of interest. (The price of a bond is equal to the present value of all future cash outflows, principal and interest, using the market or effective rate.)

Match the description with the correct term.

Premium: A bond that sells for more than its face amount Discount: A bond that sells for less than its face amount

Which of the following are true regarding zero-coupon bonds? (Select all that apply.)

Zero-coupon bonds do not pay interest.

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ___ bonds.

convertible

Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the

debt to equity ratio.

Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the ___ ___ method.

effective interest

Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster

elected the fair value option

Assets that are used to satisfy troubled debt are valued at

fair value

The interest rate on notes payable typically is equal to the ____ rate.

market

Bonds that do not include a call provision

may be repurchased on the open market

The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to

mislead investors.

Schulz Company borrows cash from a bank and signs a promissory note. The bank should record

notes receivable

In the statement of cash flows, interest received on long-term notes receivable should be reported as inflows from a(n)

operating activity.

Zero-coupon bonds typically issue at a deep discount because they

pay no interest

If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price

plus accrued interest.

A bond that sells for more than its face amount is sold at a ___.

premium

Generally, liabilities are valued at their

present value

A company that recognizes a long-term notes payable has signed the legal document referred to as a ___ note.

promissory

The primary purpose of the call feature associated with bonds is to

protect the issuer against declining interest rates.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to

repay a certain amount at a specific date.

If a company elects to report bonds under the fair value option, changes in fair value result in

reported gain or loss

An early extinguishment of debt refers to long-term liability such as bonds that are

retired prior to maturity

Holiday Brands issued $35 million of 8%, 30-year bonds for $32.5 million. What is the amount of interest that Holiday will pay semiannually to bondholders? (Enter your answers in whole dollars.)

$1,400,000 (35,000,000 x 4% (8%/2) = 1,400,000)

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $180,181, priced to yield 10%. Using the straight-line method, what is the amount of interest expense that Willette will report for the six months ended June 30, Year 1? (Round each calculation to the nearest whole dollar.)

$10,191 ($240,000 x (6%/2) = $7,200 ($240,000 - $180,181) / (10 x 2 payments a year) = $59,819 / 20 = $2,991 $7,200 + $2,991 = $10,191

On January 1, Year 1, Melas Corporation purchased a machine from Wade, Inc. by issuing a 4%, $360,000, three-year note that requires interest to be paid semiannually. The machine could have been purchased at a cash price of $340,497. Interest of $7,200 was payable semiannually on June 30 and December 31. The annual market rate of interest was determined to be 6%. What is the amount of interest that Melas will report for the six months ended June 30, Year 1? (Round your answer to the nearest whole number.)

$10,215 ($340,497 x 3%)

Kelly Company issued $100,000 of 5%, 10-year bonds at 102 to a single investor. Each of the $1,000 bonds was convertible into 100 shares of no par common stock. The bonds were later converted when the remaining unamortized premium was $1,000. What is the amount that Kelly will credit to Common Stock when recording the conversion of the bonds?

$101,000 ($100,000 x 102) / 100 = 102,000 $102,000 - 1,000 (remaining unamortized premium) = 101,000

On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars).

$115,589 (100,000 x 0.61027) + (3,500 x 15.58916)

On April 1, Magenta Company sells $500,000 face amount, 10% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is 9%. When the bonds are issued, how much interest will be included in the issue price?

$12,500 (The price includes accrued interest of 500,000 x 10% x 3/12)

On January 1, Year 1, Chaco Company sold $300,000 of 10% twenty-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $359,378, priced to yield 8%. What is the amount of effective interest expense that Chaco will record for the six months ended June 30, Year 1? (Round amounts to the nearest whole number.)

$14,375 (4% (8%x2) x 359,378)

A company issued 12%, 20-year bonds with a face amount of $100 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Enter your answers in whole dollars.)

$169,344,620 ($100,000,000 x 6% = 6,000,000 $100,000,000 x .30656 (PV table for 3% at 40) = 30,656,000 $6,000,000 x 23.11477 (PV of an Ordinary Annuity table for 3% at 40) = 138,688,620 $30,656,000 + 138,688,620 = 169,344,620)

On January 1, a company issued 3%, 10-year bonds with a face amount of $80 million for $73,459,316 to yield 4%. Interest is paid semiannually. What was the interest expense at the effective interest rate on the December 31 annual income statement? (Enter your answers in whole dollars. Round your intermediate calculations to the nearest dollar amount.)

$2,943,756 ($80,000,000 x 1.5% = 1,200,000 (cash interest paid) $73,459,316 x 2% = 1,469,186 (bond interest expense for June 30) $1,469,186 - 1,200,000 = 269,186 (discount amount June 30) $73,459,316 + 269,186 = 73,728,502 $73,728,502 x 2% = 1,474,570 (bond interest expense for December 31) 1,474,570 - 1,200,000 = 274,570 (discount amount for December 31) 73,728,502 + 274,570 = 7,647,372 (total carrying value) *for this question you only need bond interest expenses: $1,474,570 + 1,469,186 = 2,943,756)

On January 1, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. On the date of issue, Meister should recognize a liability of

$200,000.

On January 1, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of

$200,000.

On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).

$217,966 (200,000 x 0.82035) + (6,000 x 8.98259)

On January 1, Year 1, Turner Company borrowed $58,000 from Lessing Inc. and signed a three-year installment note to be paid in three equal payments at the end of each year. The present value of an annuity of $1 for 3 periods at 7% is 2.62432. What is the amount of the installment payment? (Round your answer to the nearest whole number.)

$22,101 ($58,000 / 2.62432)

On January 1, Year 1, Maverick Company sold bonds that pay interest semiannually on June 30 and December 31. Maverick has a fiscal year-end of February 28. The amortization schedule for these bonds shows a cash payment of interest of $7,200 and effective interest of $9,009 relating to the interest payment that will be made on June 30, Year 1. What is the amount of interest expense that should be accrued by Maverick in an adjusting entry dated February 28, Year 1?

$3,003 ($9,009 x 2/6)

Barrington Corporation paid $26,000 to have bond certificates printed and engraved, $100,000 in legal fees, and $8,000 to a CPA for registration information. Barrington sold the bonds to an underwriter. The spread between the price the underwriter paid and the resale price was $230,000. What is the amount of debt issue costs?

$364,000 ($26,000 + 100,000 + 8,000 + 230,000)

Boyd Corp. issued $1,500,000 of 9% nonconvertible bonds at 107, due in 10 years. Each $1,000 bond was issued with 45 detachable stock warrants, each of which entitled the holder to purchase, for $70, one share of Boyd's $40 par common stock. The market price of each warrant was $7. How much of the proceeds should be allocated to the warrants issued?

$472,500 (1,500,000 / 1,000) x 45 = 67,500 $67,500 x 7 = 472,500

On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are sold, Early will receive cash in amount of

$520,000 (These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. (500,000 x 12% x 4/12) + 500,000)

A company issued 8%, 20-year bonds with a face amount of $72 million. The market yield for bonds of similar risk and maturity is 9%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Enter your answer in whole dollars.)

$65,375,510 ($72,000,000 x 4% (8%/2) = 2,880,000 $72,000,000 x .17193 (PV table for 4.5% at 40) = 12,378,960 $2,880,000 x 18.40158 (PV of an Ordinary Annuity table for 4.5% at 40) = 52,996,550 $12,378,960 + 52,996,550 = 65,375,510)

On April 1, Munchin Company sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:

$812,000 (These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. $800,000 + ($800,000 x 0.06 x 3/12))

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $180,181, priced to yield 10%. What is the amount of effective interest expense that should be recorded for the six months ended June 30, Year 1? (Round your answer to the nearest whole number.)

$9,009 (5% (10%/2) x $180,181)

Number of Warrants Issued

(Face Value of Bonds Issued / Face Value per Bond) x Number of Warrants per Bond

Times Interest Earned Ratio

(Net Income + Interest + Taxes) / Shareholders' equity *Indicates margin of safety provided to creditors *The higher the ratio, the higher the margin of safety

Which of the following statements about financial statement disclosures appropriate to long-term debt are true? (Select all that apply.)

-Both interest expense and interest revenue are reported among operating activities on the statement of cash flows. -The fair value of financial instruments must be disclosed either in the body of the financial statements or in disclosure notes.

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.)

-Purchasing bonds on the open market. -Including a call feature when the bonds are issued.

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.)

-The warrants can be exercised separately from the bonds. -The warrants can be sold by the bondholder to another investor.

Which of the following are correct regarding bonds? (Select all that apply.)

-They obligate the issuing company to repay the bonds at a specific date. -They obligate the issuing company to pay a specific amount.

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.)

-To use a medium of exchange in mergers and acquisitions. -To enable smaller or debt-heavy companies to gain access to the bond market. -To sell the bonds at a higher price.

Periodic payments on installment notes typically include

-a portion that reflects interest at the effective interest rate. -a portion that reduces the outstanding loan balance.

Which of the following purchases frequently involve installment notes payable? (Select all that apply.)

-automobiles -buildings

On March 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.)

-bonds payable for $500,000. -interest payable for $20,000.

On January 1, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. All the bonds are privately placed with one investor. On the date of issue, the investor should record what journal entry? (Select all that apply.)

-credit cash $200,000 -debit investment in bonds $200,000.

Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.)

-financing activity outflow of $6,200. -operating activity outflow of $9,000.

Bond issue costs

-increase the effective interest rate of borrowing. -reduce the cash proceeds from the issuance of debt.

Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n)

-operating activity inflow of $9,000. -investing activity inflow of $6,200.

Installment notes typically involve the purchase of assets and (Select all that apply.)

-require installment payments over time. -periodic payments include principal and interest.

On January 1, 2021, Nantucket Ferry borrowed $16,000,000 cash from BankOne and issued a five-year, $16,000,000, 6% note. Interest was payable annually on December 31. Prepare the journal entries for both firms to record interest at December 31, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Record the entry for Nantucket Ferry for the interest payment. (d) Interest Expense 960,000 (c) Cash 960,000 2. Record the entry for BankOne for the receipt of interest. (d) Cash 960,000 (c) Interest Revenue 960,000

Match the term and the definition. 1. Bonds for which the holder is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied. 2. Bonds that allow the issuing company to buy back outstanding bonds from the bondholders before their scheduled maturity date. 3. Bonds that are backed only by the "full faith and credit" of the issuing corporation. 4. Bonds that are retired as a consequence of bondholders choosing to convert them into shares of stock. 5. Bonds that must be redeemed on a prespecified year-by-year basis specified debt issues are satisfied.

1. Subordinated debentures 2. Callable bonds 3. Debenture bonds 4. Convertible bonds 5. Sinking fund debentures

On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment, Cash Payment, Effective Interest, Increase in Balance, Outstanding Balance 6,221,759 1 356,000 373,306 17,306 6,239,065 2 356,000 374,344 18,344 6,257,409 3 356,000 375,445 19,445 6,276,854 4 356,000 376,611 20,611 6,297,465 5 356,000 377,848 21,848 6,319,313 6 356,000 379,159 23,159 6,342,472 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 356,000 505,452 149,452 8,573,656 39 356,000 514,419 158,419 8,732,075 40 356,000 523,925 167,925 8,900,000 Required: 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective interest expense recorded over the term to maturity?

1.$8,900,000 (outstanding balance at maturity) 2.$6,221,759 (initial balance at issuance date) 3.20 years (40 semiannual periods) 4.At the effective interest rate (By the alternative straight-line approach, interest would be the same amount each period.) 5.[($356,000 ÷ $8,900,000) × 2] = 8% 6.[($373,306 ÷ $6,221,759) × 2] = 12% 7.($356,000 × 40) = $14,240,000 8.($14,240,000* + [$8,900,000 - 6,221,759]) = $16,918,241

The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is

1.32 ($100 + $150)/($120 + $50 + $20)

On January 1, 2021, Instaform, Inc., issued 12% bonds with a face amount of $70 million, dated January 1. The bonds mature in 2040 (20 years). The market yield for bonds of similar risk and maturity is 14%. Interest is paid semiannually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required:1-a. Determine the price of the bonds at January 1, 2021.1-b. Prepare the journal entry to record their issuance by Instaform.2-a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2021.2-b. Assume the market rate was 11%. Prepare the journal entry to record their issuance by Instaform.3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt.

1a. Determine the price of the bonds at January 1, 2021. (Enter your answer in whole dollars.) Price of the bonds: $60,667,782 ($70,000,000 x 6% (12%/2) = 4,200,000 70,000,000 x .06678 (PV table of 7% at 40) = 4,674,600 4,200,000 x 13.33171 (PVA table of 7% at 40) = 55,993,182 4,674,600 + 55,993,182 = 60,667,782) 1b. Prepare the journal entry to record their issuance by Instaform. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) (d) Cash 60,667,782 (d) Discount on bonds payable 9,332,218 (c) Bonds payable 70,000 2a. Assume the market rate was 11%. Determine the price of the bonds at January 1, 2021. (Enter your answer in whole dollars.) Price of the bonds: $75,615,904 (Same process as 1a but use 5.5% (11%/2) for both the PV and PVA tables) 2b. Assume the market rate was 11%. Prepare the journal entry to record their issuance by Instaform. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) (d) Cash 75,615,904 (c) Bonds payable 70,000,000 (c) Premium on bonds payable 5,615,904 3. Assume Broadcourt Electronics purchased the entire issue in a private placement of the bonds. Using the data in requirement 2, prepare the journal entry to record the purchase by Broadcourt. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) (d) Investment in bonds 70,000,000 (d) Premium on investment in bonds 5,615,904 (c) Cash 75,615,904

A discount on bonds should be reported in the balance sheet:

As a reduction of the face amount of the bond. (A discount on bonds is a contra liability account and therefore deducted from the face amount when presented on the balance sheet.)

A gain or loss on early extinguishment of debt

Book value of debt - Reacquisition price *debt retired > book value, debtor records a gain *debt retired < book value, debtor records a loss

Required Information #6

Companies are not required to, but have the option to, value some or all of their liabilities at fair value. If the option is elected, an increase (or decrease) in fair value from one balance sheet to the next is reported as a loss (or gain) as other comprehensive income to the extent it's related to credit risk. Otherwise, it's reported in net income. It's a one-time election for each liability when the liability is created.

Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct?

Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct?

Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

Outstanding Balance x Effective

Effective Interest

Required Information #2

Forces of supply and demand cause a bond to be priced to yield the market rate, calculated as the present value of all the cash flows required, where the discount rate is the market rate. Interest expense is calculated as the effective market rate of interest multiplied by the outstanding balance (during the interest period). A company is permitted to allocate a discount or a premium equally to each period over the term to maturity if doing so produces results that are not materially different from the interest method.

Touché, Inc. issued 9%, $1,300,000 bonds for $1,600,000. Touché reacquired these bonds for $1,365,000 when their book value was $1,436,500. What was the gain or loss on the early extinguishment of this debt?

Gain of $71,500 ($1,365,000 - 1,436,500)

When a bond issue sells for less than its face value, the market rate of interest is:

Higher than the stated rate of interest. (Higher than the stated rate of interest. The discount created will be amortized to generate additional interest expense (recognized over the life of the bond). This is added to the interest expense created by the periodic interest payments (computed at the stated rate of interest) to increase the total interest expense to that of the market rate of interest.)

Required Information #3

In concept, notes are accounted for in precisely the same way as bonds. When a note is issued with an unrealistic interest rate, the effective market rate is used both to determine the amount recorded in the transaction and to record periodic interest thereafter.

Required Information #4

In the balance sheet, disclosure should include, for all long-term borrowings, the aggregate amounts maturing and sinking fund requirements (if any) for each of the next five years. Supplemental disclosures are needed for (a) off-balance-sheet credit or market risk, (b) concentrations of credit risk, and (c) the fair value of financial instruments.

Each Monthly Installment

Interest + Principal Reduction

Effective Market Rate of Interest x Outstanding Balance

Interest Expense

On January 1, Parma, Inc. borrowed $100,000 cash from First National and issued a two-year promissory note in that amount. Interest of $5,000 was payable semiannually on June 30 and December 31. Which account will be debited when Parma records the entry relating to each of the four interest payments?

Interest Expense

Face Amount x Stated Rate

Interest Payment

Which of the following is correct regarding the effective interest method?

Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.

BVA Corporation exchanged a $96,000, noninterest-bearing, 3-year note for land with a fair value of $60,000. The $36,000 difference represents:

Interest expense to be recorded over three years. (Interest expense to be recorded over three years. The note and the land are both recorded at the fair value of $60,000. Thus a discount of $36,000 is created, which is amortized to interest expense over the three year life of the note.)

Return on Equity

Net income / Shareholders' equity *Indicates effectiveness of employing resources provided by owners

Return on Assets

Net income / Total Assets *indicated profitability without regard to how resources are financed

Fair Value of Warrants Issued

Number of Warrants Issued x Fair Value of Each Warrant

Hoffman Corporation issued $95 million of 5%, 10-year bonds at 102. Each of the 95,000 bonds was convertible into one share of $1 par common stock. Prepare the journal entry to record the issuance of the bonds. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5). If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the issuance of the bonds. (d) Cash (c) Convertible bonds payable (c) Premium on bonds payable

On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for?

Reduce the cash proceeds and increase the discount and debt issue costs account

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?

The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

Assume that Levier Corporation elected the fair value option for reporting bonds and the bonds decreased in fair value during the year. Which of the following statements is correct?

The portion of that that gain that is a result of a change in general interest rates is reported as part of net income, while any portion of that gain that is a result of a change in the "credit risk" of the debt is reported as other comprehensive income (OCI).

In a bond amortization table for bonds issued at a discount:

The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. (Total interest expense for bonds issued at a discount is equal to the total interest payments over the life of the bonds plus the initial discount when the bonds are sold.)

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?

The warrants can be separated from the bonds.

Debt to Equity Ratio

Total liabilities / Shareholders' equity *measures the degree of risk *the higher the ratio, the higher the risk

True or false: The interest rate stated in a note is typically equal to the market rate.

True Reason: The rate is typically negotiated at the time of the loan so the two are equal.

When an accounting period ends between interest dates, interest should be

accrued since the last interest date

Southfield Company reached an agreement with its bank to transfer a piece of land with a historical cost of $500,000 and a fair value of $1.2 million to the bank in full settlement of its outstanding loan principal plus accrued interest of $1.5 million. Prior to the transfer, Southfield should credit

gain on disposal of land for $700,000 (the land will be value at fair value prior to transfer)

The specific promises made to bondholders are described in a document called a bond ___.

indenture

The specific promises made to bondholders are described in a document referred to as a bond

indenture.

In a troubled debt restructuring with modified terms, if total cash payments are less than the book value of the debt,

the difference is recorded as a gain in net income.

Accounting for troubled debt restructuring with modified terms depends on whether under the new agreement,

total cash payments are more or less than the book value of the debt

A ___ ___ restructuring refers to a change in the original terms of a debt agreement that is motivated by the financial difficulties of the borrower.

troubled debt

The result of changes in the original terms of a debt agreement that are motivated by financial difficulties experienced by the debtor are referred to as

troubled debt restructuring.

If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the:

value of the asset or service exchanged

Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the

value of the purchased equipment.

Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ___ coupon bonds.

zero