Chapter 13- Long-term Liabilities

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

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 interest payments. c. the same as if the straight-line method were used. d. less than if the straight-line method were used.

A

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 discount, 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.

A

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2024. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2024, balance sheet? a. $14,709,481 b. $15,000,000 c. $14,718,844 d. $14,706,232

A (Explanation: Effective Interest Method)

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 (Explanation: $500,000-$481,250= $18,750 discount)

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 discounts. At the end of the first year, Patterson should report an unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000.

B (Explanation: Effective Interest Method Coupon payment = $5,000,000 × 9% = $450,000 Interest expense under the effective interest method = $4,695,000 × 10% = $469,500 Amortization of discount on bonds payable = $469,500 - $450,000 = $19,500 The beginning balance of discount on bonds payable = $5,000,000 - $4,695,000 = $305,000 At the end of the first year, the unamortized bond discount is $305,000 - $19,500 = $285,500.)

On January 1, 2024, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semi-annually 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 2024 is a. $200,000. b. $214,836. c. $215,400. d.$240,000.

B (Explanation: Premium case, interest is paid semi-annually)

The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2024. 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, 2025, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2025 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2025? Ignore taxes. a. $60,000. b. $189,000. c. $168,000. d. $210,000.

B (Explanation: This is an extinguishment of bonds prior to maturity. When debt is retired prior to maturity, a gain or loss must be recognized for the difference between the carrying value of the debt and the amount to satisfy the obligation (the reacquisition price). Thus, we need to determine the carrying value of the debt as of the extinguishment. July 1, 2025 Dr. Interest expense $171,000 Cr. discount on bonds payable $21,000 Cr. Cash (coupon amount) $150,000 The carrying value of bonds as of July 1, 2025 = $2,871,000 (= $2,850,000 + $21,000). Cash paid to retire bonds = $3,000,000 x 1.02 = $3,060,000 The loss that Nixon should record on the early retirement of the bonds on July 2, 2025 = $2,871,000 - $3,060,000 = $189,000. July 2, 2025 Dr. Bonds Payable (Face value) $3,000,000 Dr. Loss on Retirement of Bonds $189,000 Cr. Discount on Bonds Payable $129,000* Cr. Cash $3,060,000 *$3,000,000 - $2,871,000 = $129,000)

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

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Gain/Loss-Income. d.Realized Holding Gain

C

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2024. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,192. Using effective-interest amortization, how much interest expense will be recognized in 2024? a. $723,504 b. $745,347 c. $784,259 d. $768,346

C (Explanation: Effective Interest Method · The amount of interest to be recognized each period is computed at a uniform interest rate (the market / effective rate) · The amount paid is determined by the stated rate (coupon rate) Coupon = $10,000,000 x 7.8% (coupon Rate) / 2 = $390,000 · Difference between the amount paid and the compound interest expense is reflected as amortization of discount or premium)

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. A gain or loss must be recognized for the difference between the net carrying amount of the bonds and the reacquisition price. 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

The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate.

D

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