ACC202 Intermediate Accounting II Chapter 14 Smartbook

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 Reason: (100,000 x 0.61027) + (3,500 x 15.58916)

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

$2,575,000 Reason: (10,000 x 1,000 + 300,000) x 25%

On January 1, 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, 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 Reason:(200,000 x 0.82035) + (6,000 x 8.98259)

On January 1, 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 year 1, the company should recognize a discount amortization of

$354. Reason: (95,842 x 0.035) - 3,000

On January 1, 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 interest rate is 7%. The bond issues for $191,684. On June 30 year 1, the company should recognize a discount amortization of

$709. Reason: (191,684 x 0.035) - 6,000 7% x 6/12 = .035

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

-Future cash payments are certain or estimable. -Interest accrues as time passes on long-term liabilities. -The requirement of future cash payments.

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

-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 pay a specific amount. They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to repay the bonds when interest rates increase. They obligate the issuing company to repay the bonds when market interest rates decrease. They obligate the issuing company to pay an estimated amount.

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

Periodic payments on installment notes typically include Multiple select question. a portion that reflects interest at the effective interest rate. a portion that reduces the outstanding loan balance. a portion that reflects interest at the stated interest rate. installment fees.

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

On January 1, 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 bonds payable $200,000 debit cash $200,000 credit investment in bonds $200,000 credit cash $200,000 debit investment in bonds $200,000

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

Common methods used by bond issuers to induce bond holders to convert their bonds to common stock are (Select all that apply.) discounts on bonds payable favorable conversion ratios promises of additional dividends stock warrants additional cash

-favorable conversion ratios -stock warrants -additional cash

Debt issue costs Multiple select question. do not affect the cash proceeds from the issuance of debt. increase the cash proceeds from the issuance of debt. decrease the effective interest rate of borrowing. increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.

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

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

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

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. Reason: ($100 + $150)/($120 + $50 + $20)

Which of the following correctly describes a bond indenture?

A document detailing the promises made by the bond issuer.

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

False

True or false: Holding gains resulting from decreases in the fair value of debt indicate that the company's debt has become less risky,

False Reason: Holding gains arise from decreases in the fair value of debt, which may be due to an increase in the riskiness of the company's debt.

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.

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

It can be applied on an "instrument-by-instrument" basis.

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.

On January 1, 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

Burns Company issues bonds for their face amount of $2 million. Over the life of the bonds, the company pays a total of $3.2 million to bondholders. What can you deduce from these facts regarding the difference between the face amount and the bonds' cash flows?

The $1.2 million represents the time value of money.

What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuance?

The difference represents the time value of money.

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.

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

The warrants can be separated from the bonds.

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

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

accrued since the last interest date

Which of the following is a common factor that affects the fair value of a company's bonds?

changes in current market rates

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

convertible or conversion

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

debt to equity ratio.

Volk Company selected the fair value option for its outstanding bonds. During the current year, the company recognized a holding gain relating to the bonds in income. The holding gain is a result of the value of the bonds

decreasing

A bond that sells for less than its face amount is sold at a

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.

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

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

indenture

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

market

Changes in the current ______ often represent a major contributor to changes in the fair value of bonds.

market interest rate

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. Schulz should credit

notes payable

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

notes receivable

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

pay no interest

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.) premium on bonds payable for $75,000. bonds payable for $2,500,000. loss on conversion of bonds for $75,000.

premium on bonds payable for $75,000. bonds payable for $2,500,000.

Generally, liabilities are valued at their

present value

Jones Company wants to improve its debt equity ratio and offers holders of convertible bonds additional consideration for converting their bonds to common stock. During 20X1, the company paid $500,000 for such consideration. This amount should be

recognized as an expense when paid.

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

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

true

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