chapter 14

Gannon Auto issued a $180,000, five-year note payable to Starkey Vehicles in exchange for cash. The note was issued at 12%, but notes with similar risk have an interest rate of 9 percent. Gannon is expected to make five annual interest payments of $21,600 with one lump-sum payment for the principal at the end of Year 5. How much cash will Gannon receive on the date the note was issued? Assume that the PVF-OA5, 9% = 3.88965, PVF-OA5, 12% = 3.60478, PVF5, 9% = 0.64993, and PVF5, 12% = 0.56743. A $201,003.84 B $102,137.40 C $180,000.00 D $116,987.40

A

If a parent company owns less than 50% of a subsidiary company and they wish to participate in off-balance-sheet financing, they will likely This is correct answer : A not consolidate the subsidiary. B sell their shares in the subsidiary to outside investors. C purchase more of the company so they own more than 50%. D consolidate the subsidiary.

A

On January 1, 2017, Sarg Corporation issued $9,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Sarg at 105. Sarg has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2023, when the fair value of the bonds was 96, Sarg repurchased $2,000,000 of the bonds in the open market at 96. Sarg has recorded interest and amortization for 2023. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as which of the following? A A gain of $98,000. B A loss of $98,000. C A loss of $122,000. D A gain of $122,000.

A

On June 30, 2017, Canton Industries had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2032. 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, 2017 were $210,000 and $60,000, respectively. On June 30, 2017, 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 A $5,730,000. B $5,790,000. C $5,640,000. D $5,940,000.

A

The 10% bonds payable of Yano Company had a net carrying amount of $950,000 on December 31, 2017. 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, 2018, several years before their maturity, Yano retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. Ignoring taxes, the loss that Yano should record on the early retirement of the bonds on July 2, 2018 is A $63,000. B $56,000. C $20,000. D $70,000.

A

Which of the following businesses would be most likely to issue only notes payable as their long-term debt instruments? A Betty's Bakery, a small hometown bakery with a single location. B Valdez Mexican Grille, a regional chain of restaurants found in the southwestern United States. C Parham Enterprises, a corporation with multiple brand labels that sells their products internationally. D Nugent Lumber, a company that cuts and ships lumber and other wood materials to home improvement stores across the country.

A

Turk Industries has the following included in their liabilities: 1. 10-year, $100,000 loan at 8% interest, payable at $10,000/year plus interest, obtained in 2009 2. Five-year term bond with $750,000 par value at 9% interest, issued in 2013 3. Eight-year term bond with $500,000 par value at 5% interest, issued in 2014 4. 20-year, $2 million loan at 6% interest, payable at $100,000/year plus interest, obtained in 2015 How much of these liabilities, excluding interest, will they list under current liabilities at 12/31/17? A $322,500 B $860,000 C $969,600 D $448,725

B

Albany Enterprises uses the fair value option to value its bonds payable. Last year, the firm experienced a moderate decline in its credit rating. If interest rates remained constant over that same period, which of the following entries would you expect to see recorded in Albany's books? A A debit to the Unrealized Holding Gain or Loss—Income account and a credit to the Bonds Payable account B A credit to both the Bonds Payable account and the Unrealized Holding Gain or Loss—Income account C A debit to the Bonds Payable account and a credit to the Unrealized Holding Gain or Loss—Income account D A debit to both the Bonds Payable account and the Unrealized Holding Gain or Loss—Income account

C

The 12% bonds payable of Tegan Industries had a carrying amount of $3,120,000 on December 31, 2017. The bonds, which had a face value of $3,000,000, were issued at a premium to yield 10%. Tegan uses the straight-line interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2018, 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? You got it wrong : A $120,000. B $37,200. This is correct answer : C $24,000. D $0.

C

Peninsula Products has just applied for a loan at your bank. When reviewing Peninsula's books for the year that just ended, you notice that the firm uses the fair value option for its bonds payable. You also see that the firm recorded a $55,000 debit in its Bonds Payable account and a $55,000 credit in its Unrealized Holding Gain or Loss—Income account. Over that same period, interest rates decreased by about 0.5 percent. How should this information affect the bank's decision as to whether to grant Peninsula a loan? A The bank should put little emphasis on the changes in Peninsula's Bonds Payable and Unrealized Holding Gain or Loss—Income accounts because these changes are likely unrelated to either interest rates or the firm's credit rating. B The bank should put little emphasis on the changes in Peninsula's Bonds Payable and Unrealized Holding Gain or Loss—Income accounts because these changes are likely the result of the rise in interest rates. C The bank should strongly consider giving a loan to Peninsula because the changes in firm's Bonds Payable and Unrealized Holding Gain or Loss—Income accounts suggest that Peninsula has seen an increase in its credit rating over the past year. D The bank should hesitate before giving a loan to Peninsula because the changes in firm's Bonds Payable and Unrealized Holding Gain or Loss—Income accounts suggest that Peninsula has seen a decline in its credit rating over the past year.

D

Reardon Pharmaceuticals issued a $2.7 million note payable to Nagel Chemicals in exchange for chemical products. Similar notes have an interest rate of 8 percent. Nagel Chemicals plans to pay Reardon in chemicals equally over the five years, thus equaling five annual payments of $540,000. What should Nagel record as their Discount on Notes Payable when the note is issued? Assume that the PVF-OA5, 6% = 4.21236, PVF-OA5, 8% = 3.99271, PVF5, 6% = 0.74726, and PVF5, 8% = 0.68058. A $682,398.00 B $425,325.60 C $862,434.00 D $543,936.60

D

Valerio Restaurants currently has restaurants throughout Arizona, Texas, and New Mexico. They would like to build five more restaurants throughout Southern California, but this would cause them to go above their current debt limitation. Valerio decided that they will form a special-purpose entity for the Southern California restaurants. For these restaurants, any food not sold will be donated to a homeless shelter for a tax write-off. They expect the tax write-off to amount to 5% of the daily cooking volume. If the new restaurants each cost $1.4 million to build and they were completely financed by debt instruments, how much debt will Valerio be required to add to their balance sheet? A $7 million B $6.65 million C $1.4 million D $0

D

Rowell Industries issued a 10%, five-year, $150,000 note payable to Hogue Financing at a price of $153,400. This note was issued at a(n) A reduction. B discount. C premium. D advantage.

c

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

d