SB Ch 14

When we multiply the face amount of bonds with the stated interest rate, we calculate

the amount of interest paid

Abby Corp. purchases a machine and signs a $20,000 note. The note requires periodic payments of 8% interest. The equipment would normally sell for $19,000 in cash. This implies that the company's implicit interest rate probably is 1. higher than 8%. 2. lower than 8%. 3. equal to 8%.

1

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? 1. The value of the conversion feature is not recognized separately. 2. The value of the conversion feature is recognized as additional paid-in capital.

1

On January 2, 20X1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 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 8%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). 1. $95,944 2. $100,000 3. $82,032 4. $69,804

1. (100,000 x 0.67556) + (3,500 x 8.11090)= $95,944

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). 1. $115,589 2. $81,307 3. $107,000 4. $100,000

1. (100,000x0.61027)+(3,500x15.58916)=115,589

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). 1. $217,966 2. $183,777 3. 215,567 4. $200,000

1. (200,000x0.82035)+(6,000x8.98259)=217966

Small Company purchases new machinery by signing a $100,000 face amount 2-year note. The market interest rate is 8%, but no interest is due over the life of the note. Small should recognize a net note payable of 1. $85,734 2. $100,000 3. $108,000

1. 100,000x0.85734

At the beginning of the current year, Wagner Company purchases equipment and signs an installment note requiring 6 annual equal payments at the end of each year. The equipment would sell for $200,000 if the company paid cash. The company's effective borrowing rate is 7%. Wagner must make annual installment payments of (use the tables in your textbook and round to the nearest dollar) 1. $41,959. 2. $95,331. 3. $33,333.

1. 200,000/4.76654

For bonds reported under the fair value option, changes in fair value due to interest rate changes are reported in 1. other comprehensive income. 2. net income. 3. retained earnings.

2

On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, First Rate Bank should debit "notes receivable" for 1. $324,000. 2. $300,000. 3. $372,000.

2

Private placements of bonds typically incur lower bond issue costs because they are not subject to 1. any regulation. 2. SEC registration. 3. financial reporting.

2

At the time of maturity, the repayment amount for bonds is equal to the: 1. face amount plus unamortized premium 2. face amount less unamortized discount 3. face amount of the bonds

3

Which of the following correctly describes a bond indenture? 1. The relationship between the effective interest and the stated interest rates. 2. The portfolio of bonds that are issued during a particular fiscal period. 3. A document detailing the promises made by the bond issuer.

3

Grunwald elected to report its bonds at fair value. During the current year, the fair value of the bonds increased due to changes in the related credit risk. Grunwald should report the gain: 1. as part of net income. 2. by disclosing it in the financial statement notes. 3. as a reduction in interest expense. 4. as part of OCI.

4

If a company elects the fair value option for its bonds, related gains and losses that arise from changes to credit risk are reported as: 1. premium or discount amortization 2. part of net income 3. interest expense or revenue 4. other comprehensive income

4

The following selected information pertains to Wilson Company. Net income: $50; taxes: $20; interest: $10. The company's times interest earned ratio is

8

Callable bonds can be redeemed at the choice of the

bond issuer

Bonds that do not include a call provision

cannot be retired prior to the maturity date

A bond that sells for less than its face amount

discount

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. (Enter only one word per blank.)

effective interest

A conversion feature is "beneficial" if the stock into which the bond can be converted

exceeds the face amount of the bond

The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate.

face amount; stated

Assets that are used to satisfy troubled debt are valued at

fair value

True or false: If a company elects the fair value option, it must report all of its financial instruments at fair value.

false

As a result of applying the effective interest method, the carrying value of bonds is equal to the present value of the ___ cash flows.

future, expected, or remaining

In situations when the interest rate is not readily apparent, the rate used to measure and account for the transaction should be the ___ interest rate.

implicit

Emil Company has $4 million in bonds outstanding. During the current year, the applicable market interest rate decreases. The fair value of Emil Company's bonds likely will:

increase

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

indenture

The return on assets is calculated by dividing ___ ___ by total assets. (Enter only one word per blank.)

net income

The return on shareholders' equity is calculated by dividing ___ ___ by total shareholders' equity.

net income

The times interest earned ratio is calculated as

net income plus interest taxed divided by interest

Accounting for convertible bonds subsequent to issuance is the same as accounting for _____.

non-convertible bonds

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

operating activity

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

retired prior to maturity

Bonds that retire in installments during all or part of the life of the bond issue are called ___ bonds.

serial

Bonds that systematically mature over a succession of years are referred to as

serial bonds

Convertible bonds are retired when bondholders choose to convert them into shares of ___.

stock

Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as

subordinate

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

true

On October 1, 20X1, Snorkel Company issues $4 million, 8% interest bonds at face amount. Interest is payable on March 30 and Sept. 30. On 12/31/X1, the company's balance sheet date, Snorkel should 1. accrue interest expense of $80,000. 2. accrue interest expense of $160,000. 3. not accrue any interest expense. 4. accrue interest expense of $320,000.

1

Glueck Inc. issues $5 million face amount bonds at $5.2 million; interest of $100,000 is paid semi-annually for five years. At the maturity date, Glueck will pay bond investors: 1. $5.2 million 2. $6 million 3. $5 million

3

For bonds reported under the fair value option, unrealized gains or losses due to fair value changes attributable to changing interest rates are reported as part of 1. net income. 2. other comprehensive income.

1

Glen Inc. elected to report its bonds at fair value. If the unadjusted carrying value of the bonds is $500,000 and the fair value rises to $515,000, Glen should credit ________ 1. fair value adjustment for $15,000 2. unrealized holding loss - OCI for $15,000 3. bonds payable for $15,000 4. unrealized holding loss - Net income for $15,000

1

Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. Which of the following facts may explain why the bonds sell at a discount? 1. Hatter Company's stated interest rate must be lower than that of competing companies in the bond market. 2. Hatter Company's reputation must have been recently impaired. 3. Hatter Company must have issued its bonds after the first interest payment was due.

1

If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price 1. plus accrued interest. 2. plus the first interest payment. 3. minus the first interest payment. 4. minus accrued interest.

1

Margot, an accounting student, tries to determine whether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium, discount, or face amount 1. by comparing the effective and stated interest rates. 2. only by calculating the exact issue price and comparing it to the face amount.

1

Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct? 1. Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000. 2. Debit cash for $749,000; debit loss on bonds payable for $51,000; credit bonds payable for $800,000. 3. Debit cash for $800,000; credit bonds payable for $800,000.

1

Mitchell's investment in convertible bonds has a net book value of $1.4 million when Mitchell converts the bonds to common stock. The fair value of the common stock is $1.5 million. Mitchell should recognize its investment in common stock at 1. $1.4 million 2. $1.45 million 3. $100,000 4. $1.5 million

1

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for 1. $2,575,000 2. $2,500,000 3. $10,300,000

1

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? 1. Peter should recognize 3 months of interest. 2. Peter should not recognize any interest until April 1, 20X2. 3. Peter should recognize 6 months of interest.

1

Smith Company purchases new machinery by signing an $80,000 face amount, 2-year note. The market interest rate is 6%, but no interest payment is due during the life of the note. Smith should record the machinery at 1. $71,200 2. $80,000 3. $84,800

1

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 1. mislead investors. 2. improve net income. 3. reduce reporting costs. 4. be easier to apply.

1

The difference between the effective interest and the interest paid represents 1. amortization of a discount or premium. 2. a gain or loss due to changes in market interest rates. 3. the time value of money.

1

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is 1. 12.5%. 2. 13.75%. 3. 15%.

1

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is: 1. 27.78% 2. 12.50% 3. 13.75% 4. 33.33%

1

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 1. troubled debt restructuring. 2. bankruptcy agreement. 3. debt refinancing agreement. 4. financial restructuring.

1

Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The market value of the bonds is $10.2 million. If the company chose the fair value option, the bonds should be reported at 1. $10,200,000. 2. $10,000,000. 3. $9,675,000.

1

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. Consistent with IFRS, on the date of issuance Wasser should 1. credit premium on bonds payable for $10,000. 2. credit equity-conversion option for $10,000. 3. not recognize any premium or additional equity.

1

Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds? 1. They are less costly to issue than publicly offered bonds. 2.. They are more costly to issue than publicly offered bonds.

1

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? 1. The method can only be used if it produces results that are not materially different from those produced by the effective interest method. 2. The method can be used if a company irrevocably elects the method on the bond issue date. 3. The method is not permitted under current U.S. GAAP.

1

Installment notes typically involve the purchase of assets and (Select all that apply.) 1. require installment payments over time. 2. periodic payments include principal and interest. 3. require periodic payments of interest and payment of the loan at maturity. 4. defer interest payments until maturity.

1 and 2

Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.) 1. It indicates the company's margin of safety in terms of paying its fixed interest. 2. It indicates the company's ability to pay its cost of borrowing. 3. It indicates the leverage of the company. 4. It indicates the likelihood the loan will be paid back at maturity.

1 and 2

Bond issue costs 1. increase the effective interest rate of borrowing. 2. decrease the effective interest rate of borrowing. 3. reduce the cash proceeds from the issuance of debt. 4. do not affect the cash proceeds from the issuance of debt. 4. increase the cash proceeds from the issuance of debt.

1 and 3

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) 1. operating activity inflow of $9,000. 2. operating activity inflow of $15,200. 3. investing activity inflow of $6,200. 4. investing activity inflow of $15,200.

1 and 3

Periodic payments on installment notes typically include 1. a portion that reflects interest at the effective interest rate. 2. installment fees. 3. a portion that reduces the outstanding loan balance. 4. a portion that reflects interest at the stated interest rate.

1 and 3

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) 1. Including a call feature when the bonds are issued. 2. Factoring bonds through a licensed factor. 3. Purchasing bonds on the open market.

1 and 3

Which of the following are valid valuation methods for reporting bonds payable? (Select all that apply.) 1. current fair value on each reporting date 2. par value regardless of issue price 3. amortized cost

1 and 3

Which of the following purchases frequently involve installment notes payable? (Select all that apply.) 1. buildings 2. utilities 3. supplies 4. automobiles

1 and 4

Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.) 1. Holds the bond indenture 2. Represents the rights of the bond holders 3. Appointed by bond issuer 4. Represents the rights of the bond issuer

1, 2, 3

Which of the following represent the typical characteristics of liabilities? (Select all that apply.) 1. The requirement of future cash payments. 2. Future cash payments are certain or estimable. 3. Future cash payments cannot be measured. 4. Interest accrues as time passes on long-term liabilities.

1, 2, and 4

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) 1. To sell the bonds at a higher price. 2. To provide investors with a means for diversifying investment risk. 3. To enable smaller or debt-heavy companies to gain access to the bond market. 4. To use a medium of exchange in mergers and acquisitions.

1, 3, and 4

Consistent with IFRS, if the fair value of convertible bonds for which no active market exists cannot be determined, the value of the bonds can be calculated based on the 1. face amount of the bonds plus interest 2. present value of the bonds' cash flows using the market interest rate 3. residual value between issue price and fair value of the conversion feature 4. present value of the bonds' cash using the stated interest rate

2

Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the 1. present value of the cash payments using a 12% interest rate. 2. present value of the cash payments using a 7% interest rate. 3. the sum of the cash paid over the life of the note.

2

Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium? 1. The company's reputation must have been recently enhanced by positive publicity. 2. The company's stated interest rate must be higher than that of other competing companies. 3. The company must have issued its bonds earlier than other companies competing in the same market.

2

Leslie Corp. is experiencing financial difficulties and is unable to meet the terms of its $2 million note. Currently, the company also owes $200,000 in unpaid interest. The lender agrees to forgive part of the principal and to decrease the interest rate substantially. The lender's accountant determines that the future cash payments total $1.8 million. On the date of restructuring, Leslie should recognize 1. Interest payable of $400,000 2. a gain on debt restructuring of $400,000 3. Interest revenue of $200,000

2

Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster 1. classified the bonds as held to maturity 2. elected the fair value option 3. issued discounted bonds 4. issued premium bonds

2

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? 1. $37,500 2. $12,500 3. $11,250

2

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: 1. $824,000 2. $812,000 3. $836,000 4. $800,000

2

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 1. $260,000. 2. $200,000. 3. $212,000.

2

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. 1.47. 2. 1.32. 3. 1.27. 4. 0.79.

2

Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The company chose the fair value option; however, because of private placement, the fair value is not readily observable. As an alternative, the company 1. must report the bonds at par value less unamortized discount until market value become available. 2. can report the bonds at the present value of the remaining cash flows using the current effective rate.

2

Which of the following is correct regarding the effective interest method? 1. Interest paid is equal to the effective interest rate multiplied by the maturity value. 2. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. 3. Interest recorded is equal to the effective interest rate multiplied by the issue price.

2

Which of the following is correct regarding the return on assets? 1. It indicates profitability earned on nonfinancial assets. 2. It indicates profitability without regard to how resources are financed. 3. It indicates profitability on the company's financial assets. 4. It indicates profitability on borrowed funds.

2

Which of the following is true regarding a debenture bond? 1. It is secured by an outside third party. 2. It is secured by the faith and credit of the issuer. 3. It is secured by the issuer's long-term assets.

2

Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? 1. They receive payment after secured debt has been satisfied. 2. They receive payment only after other specific debt has been satisfied. 3. They are paid at the same time that other specific debt is satisfied.

2

Which of the following statements regarding the times interest earned ratio is correct? 1. It provides assurance that the loan will be paid back at maturity. 2. It indicates the margin of safety provided to creditors.

2

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.) 1. loss on conversion of bonds for $75,000. 2. premium on bonds payable for $75,000. 3. bonds payable for $2,500,000.

2 and 3

Which of the following are correct regarding bonds? (Select all that apply.) 1. They obligate the issuing company to repay the bonds when market interest rates decrease. 2. They obligate the issuing company to pay a specific amount. 3. They obligate the issuing company to repay the bonds at a specific date. 4. They obligate the issuing company to pay an estimated amount. 5. They obligate the issuing company to repay the bonds when interest rates increase.

2 and 3

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) 1. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock. 2. The warrants can be sold by the bondholder to another investor. 3. The warrants can be exercised separately from the bonds.

2 and 3

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.) 1. debit cash $200,000 2. debit investment in bonds $200,000. 3. credit investment in bonds $200,000 4. credit cash $200,000 5. credit bonds payable $200,000

2 and 4

On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit 1. interest expense for $7,800. 2. bond discount for $800. 3. interest expense for $7,000.

2. (195,000x0.04)-(200,000x0.035)= 800

On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of 1. $215 2. $354 3. $709 4. $0

2. (95,842x0.035)-3,000= 354

Otto Company purchases $200,000 face amount, 8% semi-annual 10-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is

20 periods

Alabaster Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The market value of the bonds is $10.2 million. If the company elected to use the fair value option, Alabaster should recognize an 1. unrealized holding loss of $200,000. 2. unrealized holding gain of $200,000. 3. unrealized holding loss of $525,000. 4. unrealized holding gain of $525,000.

3

Amortization of bond discounts results in the bond being valued on the balance sheet at the 1. maturity value of the bonds. 2. maturity value of the bonds plus the remaining interest payments. 3. present value of the associated future cash flows.

3

Changes in the current ______ often represent a major contributor to changes in the fair value of bonds. 1. stated interest rate 2. coupon interest rate 3. market interest rate

3

Glen Inc. elected to report its bonds at fair value. If the unadjusted carrying value of the bonds is $500,000 and the fair value rises to $515,000 due to the credit risk associated with the bonds, Glen should debit ________ 1. unrealized holding loss - Net income for $15,000 2. bonds payable for $15,000 3. unrealized holding loss - OCI for $15,000 4. fair value adjustment for $15,000

3

Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? 1. Bond issuers are not permitted to enter into separate agreements with bondholders. 2. A bank must guarantee a new bond issue. 3. It is impractical for the issuer to enter into an agreement with each bondholder.

3

If bonds are not traded on an open-market exchange, their fair value can be estimated as the 1. present value of the remaining future cash flows discounted at the stated interest rate. 2. sum of the undiscounted remaining future cash flows 3. present value of the remaining future cash flows discounted at the current interest rate.

3

Leslie Corp. is experiencing financial difficulties and is unable to meet the terms of its $2 million note. Currently, the company also owes $200,000 in unpaid interest. The lender agrees to forgive part of the principal and to decrease the interest rate substantially. The lender's accountant determines that the future cash payments total $1.8 million. How should the debtor recognize subsequent interest payments? 1. As a gain from debt restructuring 2. As interest expense 3. As a reduction of the outstanding loan balance

3

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to 1. reacquire the bonds when interest rates fall. 2. reacquire the bonds when interest rates rise. 3. repay a certain amount at a specific date. 4. repay a certain amount at a date to be determined in the future. 5. pay interest if the company is profitable.

3

Neumann Corp. compares three different investment opportunities. Opportunity A has $1 million in debt and $2 million in equity; Opportunity B, $1.5 million in debt and $2 million in equity; Opportunity C, $1 million in debt and $2.5 million in equity. If the companies are equal in all other aspects, which of the investment opportunities tends to have the lowest investment risk? 1. Opportunity B 2. Opportunity A 3. Opportunity C

3

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 1. maturity amount of the note. 2. interest rate stated in the note. 3, value of the purchased equipment.

3

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? 1. Reduce the cash proceeds and increase the bonds payable account 2. Increase the cash proceeds and increase the discount and debt issue costs account 3. Reduce the cash proceeds and increase the discount and debt issue costs account

3

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 1. gain on disposal of land for $1 million 2. gain on troubled debt restructuring for $1 million 3. gain on disposal of land for $700,000

3

The primary purpose of the call feature associated with bonds is to 1. allow investors to regain control over their invested funds. 2. exchange the bonds for another type of financing source. 3. protect the issuer against declining interest rates.

3

Using the effective interest method, the bond issuer calculates interest expense based on the: 1. face amount of the bonds 2. expected future value of the bonds 3. outstanding balance of the bonds

3

Waldo Inc. purchases equipment and signs a note in exchange. The note specifies an interest rate of 8%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 6%. On the day the note is signed, the note should be recognized at the 1. present value of the cash payments using a 8% interest rate. 2. the sum of the cash paid over the life of the note. 3. present value of the cash payments using a 6% interest rate.

3

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should 1. not recognize any premium or additional equity. 2. credit additional paid-in capital—convertible bonds for $10,000. 3. credit premium on bonds payable for $10,000.

3

When an accounting period ends between interest dates, interest should be 1. prepaid 2. ignored until the next interest payment date 3. accrued since the last interest date

3

Which of the following is a common factor that affects the fair value of a company's bonds? 1. changes in the stock fair value of the company's common stock 2. changes in global currency rates 3. changes in current market rates

3

Which of the following is correct regarding the rate of return on shareholders' equity? 1. It indicates profitability on the company's financial assets. 2. It indicates profitability earned on nonfinancial assets. 3. It indicates the effectiveness of employing resources provided by owners. 4. It indicates profitability without regard to how resources are financed.

3

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond consistent with IFRS? 1. The value of the conversion feature is recognized as net income. 2. The value of the conversion feature is not recognized separately. 3. The value of the conversion feature is recognized as equity.

3

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? 1. Bonds with detachable warrants typically sell for less than convertible bonds. 2. The warrants give the holder the option to purchase additional bonds at a favorable price. 3. The warrants can be separated from the bonds.

3

Which of the following statements regarding the fair value option is correct? 1. It must be applied to all financial instruments in the same category. 2. It must be applied to all or none of the financial assets and liabilities. 3. It can be applied on an "instrument-by-instrument" basis.

3

Zero-coupon bonds typically issue at a deep discount because they 1. offer a low interest rate 2. offer a high interest rate 3. pay no interest 4. are high risk bonds

3

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.) 1. premium on bonds payable for $20,000. 2. bonds payable for $520,000. 3. bonds payable for $500,000. 4. interest payable for $20,000.

3 and 4

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 bond issues for $191,684 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars) 1. $5,751. 2. $6,000. 3. $6,709. 4. $13,418

3. 191684x0.035(7% semiannually)= 6,709

Margot wants to calculate the installment payment amount for a new installment notes payable of $200,000, which is due in ten years. Based on the interest rate, Margot determined that the applicable present value factor is 8.1109. Rounding to whole dollars, the installment payment amount is: 1. $26,452 2. $20,000 3. $24,658 4. $25,000

3. 200,000/8.1109

On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to the nearest full dollar) 1. $2,875. 2. $6,709 3. $3,354. 4. $3,000.

3. 95,842x0.035= 3,354

Emil Company purchases $400,000 face amount, 8% semi-annual 15-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is

30 periods

During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was: 1. $0 2. $9,400 3. $9,000 4. $400

4

For the current interest period, Jones Corporation's accountant correctly recognized interest expense of $7,350 relating to Jones' bonds and paid $7,000 in interest to bond holders. The journal entry recording the interest also must have included a: 1. debit to premium on bonds payable 2. debit to discount on bonds payable 3. credit to premium on bonds payable 4. credit to discount on bonds payable

4

Gruenwald Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 25 shares of common stock. At the bond issue date, the company's common shares trade for $44 per share. At the date of issue, Gruenwald should recognize an addition to equity of

4

On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, Smite Corp. should credit 1. accounts payable for $324,000. 2. notes payable for $372,000. 3. accounts payable for $300,000. 4. notes payable for $300,000.

4

On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will 1. increase by $1,418 2. not change. 3. decrease by $709. 4. increase by $709. 5. decrease by $1,418

4

This ratio provides information about a company's effectiveness of employing resources provided by owners. 1. Profit ratio 2. Rate of return on assets 3. Debt to equity ratio 4. Rate of return on shareholders' equity

4

Which ratio indicates profitability without regard to how resources are financed? 1. Debt to equity ratio 2. Gross profit 3. Profit margin 4. Rate of return on assets

4

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 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). 1. $143,811 2. $167,199 3. $200,000 4. $191,684

4. (200,000x0.70892)+(6,000x8.31661)= $191,684

Milky Company's 5%, $100,000 face amount bonds have a carrying value of $98,000. When the bonds were issued two years ago, the effective interest rate was 6%. The bonds pay interest semi-annually on April 1 and October 1. In the December 31 adjusting entry, Milky Company should recognize interest expense of 1. $0 2. $2,500 3. $5,000 4. $1,470 5. $2,940

4. (98,000x0.6)x3/12=1470

Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds.

callable

A bond feature that aims at making the bonds more attractive to investors is the ____ feature.

conversion

Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds.

convertible

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

convertible or conversion

The risk that bondholders will not receive interest and principal payments when due is ___ risk.

credit

On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also

credit discount on bonds payable for $709

A bond is secured only by the faith and credit of the issuing corporation is referred to as a(n)

debenture bond

This ratio may provide information about a company's default risk.

debt to equity

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

debt to equity ratio

The fundamental reason why companies issue convertible bonds is to

make the bonds more attractive to investors

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

market

Under both US GAAP and IFRS, if the fair value of bonds is not readily determinable, the fair value may be calculated as the present value of the future cash flows using the ___ ___ of interest.

market rate

Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds.

mortgage

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

notes payable

A bond that sells for more than its face amount

premium

The issue price of bonds is calculated as the ___ value of all the cash flows required of the bonds.

present

Generally, liabilities are valued at their

present value

If a company sells its entire bond issue to a a single investor, the sale is referred to as a

private placement

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

zero