Int Acct CH14 Spiceland

On September 1, 2011, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds? A. $378,000. B. $364,000. C. $354,667. D. $350,000.

C. $354,667 [$350,000 + ($350,000 x 8% x 2/12) = $354,667]

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow. T/F

FALSE

Bonds will sell for a premium when the market rate of interest exceeds their stated rate. T/F

FALSE

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period. T/F

FALSE

Premium on bonds payable is a contra liability account. T/F

FALSE

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation. T/F

FALSE

When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to: *Bonds Payable* *Bond Premium* A. Yes Yes B. No Yes C. No No D. Yes No

*Bonds Payable* *Bond Premium* A. Yes Yes

On January 1, 2011, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2016, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize in the following methods: *Book Value*; *Market Value* A. No Gain or Loss; No Gain or Loss B. No Gain or Loss; Loss C. Loss; No Gain or Loss D. Loss; Loss

*Book Value* *Market Value* B. No Gain or Loss Loss [By the book value method we record the stock issued at the book value of the converted bonds. There is no gain or loss recognized. The market value method results in a gain or loss for the difference between the market value of the stock issued and the carrying value of the converted bonds. At the time of conversion, the common stock's $11 million exceeded the book value of the bonds ($10,500,000 - the amortized premium). Therefore, using the market value method to record the conversion results in a loss.]

For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a: *Discount* *Premium* A. No No B. No Yes C. Yes Yes D. Yes No

*Discount* *Premium* A. No No

How would the carrying value of bonds payable be affected by the amortization of each of the following? *Premium* *Discount* A. No Effect No Effect B. No Effect Increase C. Increase Decrease D. Decrease Increase

*Premium* *Discount* D. Decrease Increase

Red Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(an) *Return on Assets* * Debt/Equity* A. Increase Increase B. Decrease Decrease C. Increase Decrease D. Decrease Increase

*Return on Assets* * Debt/Equity* C. Increase Decrease [Retiring debt reduces both assets and liabilities. Assets are the denominator in the return on assets, and liabilities are the numerator in the debt/equity ratio.]

Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's: *Return on Assets* * Debt/Equity* A. Yes Yes B. No No C. Yes No D. No Yes

*Return on Assets* * Debt/Equity* C. Yes No [The bond issue increase both assets and liabilities. Assets are the denominator in the return on assets so that ratio will decrease; liabilities are the numerator in the debt/equity ratio so that ratio will increase.]

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs? A. $330,000. B. $300,000. C. $120,000. D. $20,000.

A. $330,000. [Printing costs 20,000 Legal Fees 100,000 CPA fees 10,000 Underwriting fees 200,000 *Total bond issue costs* *330,000*]

The times interest earned ratio indicates A. the margin of safety provided to creditors. B. the extent of "trading on the equity" or financial leverage. C. profitability without regard to how resources are financed. D. the effectiveness of employing resources provided by owners.

A. the margin of safety provided to creditors.

On January 1, 2006, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2016, but were callable at 101 any time after December 31, 2009. Interest was payable semiannually on July 1 and January 1. On July 1, 2011, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in 2011 on this early extinguishment of debt was: A. $16,000 gain. B. $20,000 loss. C. $24,000 gain. D. $60,000 gain.

A. $16,000 gain. [Bond Premium at issue = 80k Amort of premium thru July 1, 2011: (80k/20= 4k per period) (4k x 11 periods) = 44k Unamort. premium July 1, 2011: (80k - 44k) = 36k Face Value = 2 mill Carrying Value July 1, 2011: (2 mill + 36k) = 2,036,000 Call (redemption) price: (2 mill x 1.01) = 2,020,000 Gain on extinguishment: (2.036M - 2.02M) = 16k]

On January 31, 2011, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2010, and mature on December 31, 2020. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2011, balance sheet? A. $18,000. B. $36,000. C. $54,000. D. $48,000.

A. $18,000. [The interest payable at September 30, 2011, will be for the three month's interest that has accrued since the last interest was paid on June 30, 2011 ($600,000 × 12% × 3/12 = $18,000).]

Nickel Inc. owns $100,000 of 10-year, 6% bonds as an investment on December 31, 2010. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000. Nickel uses straight-line amortization. On May 1, 2011, $10,000 of the bonds were redeemed at 110. How much, and what type of gain or loss, most likely results from this redemption? A. $467 ordinary gain. B. $467 extraordinary gain. C. $467 extraordinary loss. D. $467 ordinary loss.

A. $467 ordinary gain. [Proceeds from redempt: (10k x 10%) = 11k Carry Val:[100k + 6k - (6k x 1/3 x 4/12)] x 10% = 10,533 Ordinary Gain: (11k -10,533) = 467]

TMC issued $50 million of its 12% bonds on April 1, 2011, at 98 plus accrued interest. The bonds are dated January 1, 2011, and mature on December 31, 2030. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance? A. $50.5 million B. $51.5 million C. $49.0 million D. $49.5 million

A. $50.5 million [$50 million x .98 = $49 million 12% x $50 million x 3/12 = $1.5 million $49 million + 1.5 Million = $50.5 million]

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 11,487,747 1 400k 344,632 55,368 11,432,379 2 400k 342,971 57,029 11,375,350 3 400k 341,261 58,739 11,316,611 4 400k What would be the total interest expense recognized for the bond issue over its full term? A. $6,512,253. B. $8,000,000. C. $11,256,109. D. $11,487,747.

A. $6,512,253. [($400,000 x 2 x 10) - ($11,487,747 - 10,000,000) = $6,512,253]

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%. How much cash interest does Auerbach pay on March 31, 2012? A. $6.0 million B. $12.0 million C. $9.0 million D. $18.0 million

A. $6.0 million [This is $300 million x 4% x 6/12.]

MSG Corporation has $100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000. MSG uses straight-line amortization. On May 1, 2011, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement? A. $667 ordinary loss. B. $667 extraordinary loss. C. $667 ordinary gain. D. $667 extraordinary gain.

A. $667 ordinary loss. [Paid at redemption: (10k x 112%) = 11,200 Carrying Value:[100k + 6k - (6k x 1/3 x 4/12)] x 10%] = 10,533 Ordinary Loss: (11,200 - 10,533) = 667]

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the *partial* bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 8,640,967 1 300k 345,639 45,639 8,686,606 2 300k 347,464 47,464 8,734,070 3 300k 349,363 49,363 8,783,433 4 300k What is the interest expense on the bonds in 2012? A. $700,700. B. $600,000. C. $351,337. D. $100,700.

A. $700,700. [Semiannual effective rate = $345,639/$8,640,967 = 4% Interest expense = $349,363 + ($8,783,433 x 4%) = $700,700]

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the *partial* bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 8,640,967 1 300k 345,639 45,639 8,686,606 2 300k 347,464 47,464 8,734,070 3 300k 349,363 49,363 8,783,433 4 300k What is the carrying value of the bonds as of December 31, 2012? A. $8,834,770. B. $8,686,606. C. $8,734,070. D. $8,783,433.

A. $8,834,770. [Semiannual effective rate = $345,639/$8,640,967 = 4%Amortization Payment 4 = ($8,783,433 x 4%) - $300,000 = $51,337 Carrying value = $8,783,433 + $51,337 = $8,834,770]

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2011. The bonds sold for $739,816 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2011, the fair value of the bonds was $730,000. Pierce's earnings for the year will include: A. A gain from change in the fair value of debt of $10,617. B. A loss from change in the fair value of debt of $10,617. C. A gain from change in the fair value of debt of $10,204. D. A loss from change in the fair value of debt of $10,204.

A. A gain from change in the fair value of debt of $10,617. [June 30,2011: Debit: Interest Expense(6% x 739,816) = 44,389 Credit: Discount on bonds payable = 389 Cash (5.5% x 800k) = 44,000 Dec. 31 2011: Debit: Interest Expense(6% x 739,816+389) = 44,412 Credit: Discount on bonds payable = 412 Cash (5.5% x 800k) = 44,000 Debit: Bonds Payable([739,816 + 389 + 412] - 730k) = 10,617 Credit: Gain on change in fair value of bonds = 10,617]

On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2011, cash proceeds from the issuance of the convertible bonds should be reported as A. A liability for the entire proceeds. B. Paid-in capital for the entire proceeds. C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. D. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

A. A liability for the entire proceeds. [Convertible bonds are debt securities reported entirely as a liability.]

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on: A. Bond ratings provided by financial investment services such as Moody's. B. Newspaper articles. C. Bond interest payments. D. The company's audit report.

A. Bond ratings provided by financial investment services such as Moody's.

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct? A. Both bonds sell for the same amount. B. Both bonds sell for more than $100,000. C. Bond X sells for more than bond Y. D. Bond Y sells for more than bond X

A. Both bonds sell for the same amount.

Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financial statements, the discount should be: A. Deducted from bonds payable. B. Added to bonds payable. C. Included as an expense in the year of issue. D. Reported as a deferred charge.

A. Deducted from bonds payable.

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the: A. Face amount price less any unamortized discount or plus any unamortized premium. B. Current bond market price. C. Face amount less any unamortized premium or plus any unamortized discount. D. Face amount less accrued interest since the last interest payment date

A. Face amount price less any unamortized discount or plus any unamortized premium.

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is: A. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. B. Less than the effective interest amount in the early years and more than the effective interest amount in the later years. C. Higher than the effective interest amount every year. D. Less than the effective interest amount every year.

A. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

When a company issues bonds between interest dates, the entry to record the issuance of the bonds will: A. Include a credit to interest payable. B. Include a debit to interest expense. C. Include a debit to cash that has been reduced by interest accrued from the last interest date. D. Include a debit to cash that has been increased by interest that will accrue from sale to the next interest date.

A. Include a credit to interest payable.

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: A. Increases. B. Decreases. C. Remains the same. D. Is equal to the change in book value.

A. Increases.

Crawford Inc. has bonds outstanding during a year in which the market rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year? A. Interest expense and a gain. B. Interest expense and a loss. C. A gain and no interest expense. D. A loss and no interest expense.

A. Interest expense and a gain.

The method used to pay interest depends on whether the bonds are: A. Registered or coupon. B. Mortgaged or unmortgaged. C. Indentured or debentured. D. Callable or redeemable.

A. Registered or coupon.

On March 31, 2011, MDS, Inc.'s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion? A. Shareholders' equity is increased. B. Additional paid-in capital is decreased. C. Retained earnings is increased. D. An extraordinary loss is recognized.

A. Shareholders' equity is increased. [Under the book value approach, the book value of the bonds is transferred to shareholders' equity. There is no gain or loss.]

When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for: A. Six months. B. Four months. C. Ten months. D. Twelve months

A. Six months.

A $500,000 bond issue sold for 98. Therefore, the bonds: A. Sold at a discount because the stated rate of interest was lower than the effective rate. B. Sold for the $500,000 face amount less $10,000 of accrued interest. C. Sold at a premium because the stated rate of interest was higher than the yield rate. D. Sold at a discount because the effective interest rate was lower than the face rate.

A. Sold at a discount because the stated rate of interest was lower than the effective rate.

Interest expense is: A. The effective interest rate times the amount of the debt outstanding during the interest period. B. The stated interest rate times the amount of the debt outstanding during the interest period. C. The effective interest rate times the face amount of the debt. D. The stated interest rate times the face amount of the debt.

A. The effective interest rate times the amount of the debt outstanding during the interest period.

When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue? A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values. B. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values. C. A nominal amount is allocated to the warrants. D. All of the proceeds are allocated to the bonds.

A. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.

On January 1, 2011, Ozark Minerals issued $20 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ozark applies International Financial Reporting Standards. Upon issuance, Ozark should A. credit bonds payable $18,800,000. B. credit premium on bonds payable $200,000. C. credit equity $200,000. D. credit bonds payable $20,200,000.

A. credit bonds payable $18,800,000. [Debit: Cash(given) = 20,200,000 Credit: Convertible bonds payable(99% x 20 mill) = 18,800,000 Paid in Capital - conversion feature (to balance) = 400,000]

Zero-coupon bonds A. offer a return in the form of a deep discount off the face value. B. result in zero interest expense for the issuer. C. result in zero interest revenue for the investor. D. are reported as shareholders' equity by the issuer.

A. offer a return in the form of a deep discount off the face value.

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Brown Imports prepares its financial statements using IFRS: A. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense. B. the decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. C. the transaction costs are recorded separately as an asset. D. the recorded amount of the debt is increased by the transaction costs.

A. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.

Patrick Roch International issued 5% bonds convertible into shares of the company's common stock. Roch applies International Financial Reporting Standards. Upon issuance, Patrick Roch International should record A. the proceeds of the bond issue as part debt and part equity. B. the proceeds of the bond issue entirely as debt. C. the proceeds of the bond issue entirely as equity. D. the proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.

A. the proceeds of the bond issue as part debt and part equity.

Cramer Company sold 5-year, 8% bonds on October 1, 2011. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2011, income statement (assume straight-line amortization)? A. $2,000. B. $1,900. C. $1,778. D. $2,040.

B. $1,900. [Cash Interest: (100k x 8% x 3/12) = 2k Premium amort: (2k x 1/5 x 3/12) = 100 Interest Expense: (2k - 100) = 1,900]

On June 30, 2011, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2016. Interest is payable semiannually every June 30 and December 31. On June 30, 2011, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2011, what amount should K recognize as gain before income taxes on redemption of bonds? A. $40,000. B. $160,000. C. $240,000. D. $360,000.

B. $160,000. [Carrying value of bonds at June 30, 2011 is $9,960,000 ($10,000,000 + $60,000 - $100,000). Subtract repurchase price: 98% x $10,000,000 = $9, 800,000. Gain = $160,000.]

On January 1, 2011, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2011 (assume annual interest payments and amortization)? A. $23,280 B. $29,100. C. $24,000. D. $30,000.

B. $29,100. [$291,000 x 10% = $29,100]

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2011 income statement? A. $0 B. $3,830,535 C. $5,107,380 D. $7,661,070

B. $3,830,535 [This is the issue price of $255,369,000 x 6% effective rate x 3 mos./12 mos.]

On April 1, 2011, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities? A. $285,000 B. $300,000 C. $315,000 D. $0

B. $300,000 [300 x 25 = 7,500 7,500 x 2 = 15,000 300k x 1.05 = 315k 315k - 15k = 300k]

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 11,487,747 1 400k 344,632 55,368 11,432,379 2 400k 342,971 57,029 11,375,350 3 400k 341,261 58,739 11,316,611 4 400k What is the interest expense on the bonds in 2012? A. $800,000. B. $680,759. C. $342,961. D. $119,241.

B. $680,759. [Semiannual effective rate = $344,632/$11,487,747 = 3% Interest expense = $341,261 + ($11,316,611 x 3%) = $680,759]

On June 30, 2011, Blair Industries had outstanding $80 million of 8%, convertible bonds that mature on June 30, 2012. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2011, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2011, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par: A. $6 million B. $8 million C. $10 million D. $12 million

B. $8 million [Bonds Payable (80 mill x 1/2) = 40 mill Discount bonds payable ( 4 mill x 1/2) = 2 mill Common stock: (6 mill x 1/2 x 10) = 30 mill PIC (40 - 2 - 30) = 8 mill

On January 1, 2011, Solo Inc. issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is: A. $80,000. B. $82,000. C. $78,000. D. $89,000.

B. $82,000. [Interest consists of cash paid out, $80,000, plus $20,000/10 years.]

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: Date- Cash int- Eff int- DcrBal- OutBal/ 1/1/11 207,020 6/30/11 7k 6,211 789 206,230 12/31/11 7k 6,187 813 205,417 6/30/12 7k 6,163 837 204,580 12/31/12 7k 6,137 863 203,717 6/30/13 7k 6,112 888 202,829 12/31/13 7k 6,085 915 201,913 6/30/14 7k 6,057 943 200,971 12/31/14 7k 6,029 971 200,000 LPC issued the bonds: A. At par. B. At a premium. C. At a discount. D. Cannot be determined from the given information.

B. At a premium.

Most corporate bonds are: A. Mortgage bonds. B. Debenture bonds. C. Secured bonds. D. Collateral bonds.

B. Debenture bonds.

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2011, rounded up to the nearest thousand? A. $252,369,000. B. $256,369,000. C. $256,200,000. D. $257,030,070.

C. $256,200,000. [This is the beginning liability of $255,369,000 + interest accrued for three months (1.5% of issue price) - interest payable of $3,000,000 ($300,000,000 x 4% x 3/12).]

When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is: A. Higher than the effective interest amount every year. B. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years. C. Less than the effective interest amount in the early years and more than the effective interest amount in the later years. D. Less than the effective interest amount every year.

B. Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

AMC issues a note in exchange for a machine with no stated interest rate. In accounting for the transaction: A. The machine should be depreciated over the note's term to maturity. B. If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest. C. Both the note and machine are recorded at the face amount of the note or the fair value of the machine, whichever is more clearly determinable. D. The note is recorded at its face amount unless the fair value of the machine is readily available.

B. If fair values of the note and machine are unavailable, the note should be recorded at its present value, discounted at the market rate of interest.

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: A. More than the effective interest. B. Less than the effective interest. C. Equal to the effective interest. D. More than if the bonds had been sold at a premium.

B. Less than the effective interest.

In each succeeding payment on an installment note: A. The amount of interest paid increases. B. The amount of principal paid increases. C. The amount of interest paid is unchanged. D. The amounts paid for both interest and principal increase proportionately.

B. The amount of principal paid increases.

When bonds are retired prior to their maturity date: A. GAAP has been violated. B. The issuing company probably will report an ordinary gain or loss. C. The issuing company probably will report an extraordinary gain or loss. D. The issuing company will report a non-operating gain or loss.

B. The issuing company probably will report an ordinary gain or loss.

Bonds were issued at a discount. In the bond amortization schedule: A. The interest expense is less with each successive interest payment. B. The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid. C. The outstanding balance (book value) of the bonds declines eventually to face value. D. The reduction in the discount is less with each successive interest payment.

B. The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.

Which of the following indicates the margin of safety provided to creditors? A. Rate of return on shareholders' equity. B. Times interest earned ratio. C. Gross margin. D. Debt to equity ratio.

B. Times interest earned ratio.

Heidi Aurora Imports issued shares of the company's Class B stock. Heidi Aurora Imports should report the stock in the company's statement of financial position A. among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder. B. as equity unless the shares are mandatorily redeemable. C. as equity unless the shares are redeemable at the option of the issuer. D. among liabilities unless the shares are mandatorily redeemable.

B. as equity unless the shares are mandatorily redeemable.

On January 1, 2011, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should A. debit discount on bonds payable $100,000. B. credit premium on bonds payable $100,000. C. credit equity $100,000. D. credit bonds payable $10,100,000.

B. credit premium on bonds payable $100,000.

The debt to equity ratio indicates A. the margin of safety provided to creditors. B. the extent of "trading on the equity" or financial leverage. C. profitability without regard to how resources are financed. D. the effectiveness of employing resources provided by owners.

B. the extent of "trading on the equity" or financial leverage.

Patrick Roch International issued 5% bonds convertible into shares of the company's common stock. Upon issuance, Patrick Roch International should record A. the proceeds of the bond issue as part debt and part equity. B. the proceeds of the bond issue entirely as debt. C. the proceeds of the bond issue entirely as equity. D. the proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.

B. the proceeds of the bond issue entirely as debt.

On January 1, 2011, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2011, in the amount of: A. $8,850 B. $10,000 C. $10,620 D. $12,000

C. $10,620 [6% x $177,000 = $10,620]

On January 1, 2011, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a carrying amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2011. What is the amount of the loss on early extinguishment? A. $0. B. $6,932. C. $7,241. D. $7,629.

C. $7,241. [Interest expense(7% x 966,130) = 67,629 Discount on bond payable = 7,629 Cash (6% x 1 mill) = 60,000 Bonds payable (face amt) = 1 mill Loss on early extinguish = 7,241 Discount on bonds payable [1 mill - (966130 + 7629)] = 26,241 Cash (call price) = 981,000]

On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2011, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement? A. $0 gain. B. $111,800 gain. C. $72,800 gain. D. $96,000 gain.

C. $72,800 gain. [Paid at redemption(1mill x 102%)= 1,020,000 Carrying Value:(1mill + 92.8k) = 1,092,800 Gain on bond retirement = 72,800]

During 2011 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2009, payable to Third Bank. Interest was last paid on December 31, 2010. On December 31, 2011, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2011 income statement? A. $20,000 B. $50,000 C. $80,000 D. $0

C. $80,000 [$300,000 + 10% ($300,000) - 250,000 = $80,000]

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: Date- Cash int- Eff int- DcrBal- OutBal/ 1/1/11 207,020 6/30/11 7k 6,211 789 206,230 12/31/11 7k 6,187 813 205,417 6/30/12 7k 6,163 837 204,580 12/31/12 7k 6,137 863 203,717 6/30/13 7k 6,112 888 202,829 12/31/13 7k 6,085 915 201,913 6/30/14 7k 6,057 943 200,971 12/31/14 7k 6,029 971 200,000 What is the effective interest rate on the bonds? A. 3% B. 3.5% C. 6% D. 7%

C. 6% [This is interest expense x 2, divided by the previous outstanding liability balance.]

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the *partial* bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 8,640,967 1 300k 345,639 45,639 8,686,606 2 300k 347,464 47,464 8,734,070 3 300k 349,363 49,363 8,783,433 4 300k What is the stated annual rate of interest on the bonds? A. 3%. B. 4%. C. 6%. D. 8%.

C. 6%. [($300,000/$10,000,000) x 2 = 6%]

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 11,487,747 1 400k 344,632 55,368 11,432,379 2 400k 342,971 57,029 11,375,350 3 400k 341,261 58,739 11,316,611 4 400k What is the effective annual rate of interest on the bonds? A. 3%. B. 4%. C. 6%. D. 8%

C. 6%. [($344,632/$11,487,747) x 2 = 6%]

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: Date- Cash int- Eff int- DcrBal- OutBal/ 1/1/11 207,020 6/30/11 7k 6,211 789 206,230 12/31/11 7k 6,187 813 205,417 6/30/12 7k 6,163 837 204,580 12/31/12 7k 6,137 863 203,717 6/30/13 7k 6,112 888 202,829 12/31/13 7k 6,085 915 201,913 6/30/14 7k 6,057 943 200,971 12/31/14 7k 6,029 971 200,000 What is the annual stated interest rate on the bonds? A. 3.5% B. 6% C. 7% D. None of the above is correct.

C. 7% [This is the annual cash interest paid ($14,000), divided by the maturity (face) value of $200,000.]

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%. Auerbach issued the bonds: A. At par. B. At a premium. C. At a discount. D. Cannot be determined from the given information.

C. At a discount. [The effective interest rate is more than the stated rate.]

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would: A. Not be required. B. Be for six months. C. Be for four months. D. Be for ten months.

C. Be for four months.

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct? A. Both bonds sell for the same amount. B. Bond X sells for more than bond Y. C. Bond Y sells for more than bond X. D. Both bonds sell at a discount.

C. Bond Y sells for more than bond X.

The rate of interest that actually is incurred on a bond payable is called the: A. Face rate. B. Contract rate. C. Effective rate. D. Stated rate.

C. Effective rate.

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: A. Less than the effective interest. B. Equal to the effective interest. C. Greater than the effective interest. D. More than if the bonds had been sold at a discount.

C. Greater than the effective interest.

An amortization schedule for bonds issued at a premium: A. Summarizes the amortization of the premium, a contra-asset account with a credit balance. B. Is reported in the balance sheet. C. Is a schedule that reflects the changes in the debt over its term to maturity. D. All of the above are correct.

C. Is a schedule that reflects the changes in the debt over its term to maturity.

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is: A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided.

C. Less than $500,000. [When the market rate of interest is higher than the bonds' stated rate, the bonds will sell at a discount]

On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Accounting Standards (IFRS). On March 1, 2011, cash proceeds from the issuance of the convertible bonds should be reported as A. A liability for the entire proceeds. B. Paid-in capital for the entire proceeds. C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. D. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. [Under US GAAP, the entire issue price is recorded as debt. Under IFRS, convertible debt is divided into its liability and equity elements.]

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest A. Less the present value of all future interest payments at the rate of interest stated on the bond. B. Plus the present value of all future interest payments at the rate of interest stated on the bond. C. Plus the present value of all future interest payments at the market (effective) rate of interest. D. Less the present value of all future interest payments at the market (effective) rate of interest.

C. Plus the present value of all future interest payments at the market (effective) rate of interest.

Bonds usually sell at their: A. Maturity value. B. Face value. C. Present value. D. Statistical expected value

C. Present value.

Ordinarily, the proceeds from the sale of a bond issue will be equal to: A. The face amount of the bond. B. The total of the face amount plus all interest payments. C. The present value of the face amount plus the present value of the stream of interest payments. D. The face amount of the bond plus the present value of the stream of interest payments.

C. The present value of the face amount plus the present value of the stream of interest payments.

The rate of return on assets indicates A. the margin of safety provided to creditors. B. the extent of "trading on the equity" or financial leverage. C. profitability without regard to how resources are financed. D. the effectiveness of employing resources provided by owners.

C. profitability without regard to how resources are financed.

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 11,487,747 1 400k 344,632 55,368 11,432,379 2 400k 342,971 57,029 11,375,350 3 400k 341,261 58,739 11,316,611 4 400k What is the carrying value of the bonds as of December 31, 2012? A. $11,432,379. B. $11,375,350. C. $11,316,611. D. $11,256,109.

D. $11,256,109. [semi-ann. eff.rate(344,632/11,487,747)= 3% Amort pmt 4(400k-(11,316,611 x .03)= 60,502 Carry value(11,316,611-60,502)= 11,256,109]

On March 1, 2011, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2021. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2011, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity? A. $0. B. $30,000. C. $90,000. D. $120,000

D. $120,000 [Since no market value is given for the bonds, the amount attributable to the warrants (shareholders' equity) is $4 each × 30 warrants per bond = $120 × 1,000 bonds = $120,000.]

Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2011. LPC's accountant has projected the following amortization schedule from issuance until maturity: Date- Cash int- Eff int- DcrBal- OutBal/ 1/1/11 207,020 6/30/11 7k 6,211 789 206,230 12/31/11 7k 6,187 813 205,417 6/30/12 7k 6,163 837 204,580 12/31/12 7k 6,137 863 203,717 6/30/13 7k 6,112 888 202,829 12/31/13 7k 6,085 915 201,913 6/30/14 7k 6,057 943 200,971 12/31/14 7k 6,029 971 200,000 LPC calls the bonds at 103 immediately after the interest payment on 12/31/2012 and retires them. What gain or loss, if any, would LPC record on this date? A. No gain or loss B. $3,717 gain C. $6,000 loss D. $2,283 loss

D. $2,283 loss [The cash paid by LPC was 103% of $200,000 maturity (face) value, or $206,000. The liability removed is $203,717. The difference is the loss on the bond retirement, $2,283.]

Auerbach Inc. issued 4% bonds on October 1, 2011. The bonds have a maturity date of September 30, 2021 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2012. The effective interest rate established by the market was 6%. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2012, rounded up to the nearest thousand? A. $252,369,000. B. $256,369,000. C. $256,300,000. D. $257,030,000.

D. $257,030,000. [This is the beginning liability of $255,369,000 + interest accrued for six months (3% of issue price) - cash paid of $6,000,000.]

On January 1, 2011, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2012 (assume annual interest payments and amortization)? A. $23,280. B. $25,140. C. $29,100. D. $29,610.

D. $29,610. [[$291,000 + ($291,000 x 10%) - ($300,000 x 8%)] x 10% = $29,610]

On June 30, 2011, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30, 2018. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2011? A. $32,000 B. $40,000 C. $46,000 D. $60,000

D. $60,000 [5% x 9.2 mill = 460,000 4% x 10 mill = 400,000 460k- 400k = 60,000]

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the *partial* bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 8,640,967 1 300k 345,639 45,639 8,686,606 2 300k 347,464 47,464 8,734,070 3 300k 349,363 49,363 8,783,433 4 300k What would be the total interest cost of the bonds over their full term? A. $1,359,033. B. $4,640,967. C. $6,000,000. D. $7,359,033.

D. $7,359,033. [($300,000 x 2 x 10) + ($10,000,000 - $8,640,967) = $7,359,033]

On January 1, 2011, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2011, balance sheet? A. $1,045,000. B. $1,040,000. C. $987,000. D. $982,000.

D. $982,000. [980k + [(1 mill - 980k) x 1/10] = 982k Bond issue costs are reported and amortized separately. Cash Interest: 1 mill x 8% = 80k Discount Amort. [(1 mill - 980k) x 1/10] = 2k Interest Expense(80k + 2k) = 82k]

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the *partial* bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 8,640,967 1 300k 345,639 45,639 8,686,606 2 300k 347,464 47,464 8,734,070 3 300k 349,363 49,363 8,783,433 4 300k What is the effective annual rate of interest on the bonds? A. 3%. B. 4%. C. 6%. D. 8%.

D. 8%. [($345,639/$8,640,967) x 2 = 8%]

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Pmt Cash Eff.Int Decr.Bal Out.Bal 11,487,747 1 400k 344,632 55,368 11,432,379 2 400k 342,971 57,029 11,375,350 3 400k 341,261 58,739 11,316,611 4 400k What is the stated annual rate of interest on the bonds? A. 3%. B. 4%. C. 6%. D. 8%.

D. 8%. [($400,000/$10,000,000) x 2 = 8%]

The unamortized balance of discount on bonds payable is reported in the balance sheet as: A. A prepaid expense. B. An expense account. C. A current liability. D. A contra-liability.

D. A contra-liability.

Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financial statements, the premium should be: A. Reported as an intangible asset. B. Included in revenue for the year of sale. C. Deducted from bonds payable. D. Added to bonds payable.

D. Added to bonds payable.

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense: A. Remains constant. B. Is equal to the change in book value. C. Increases. D. Decreases.

D. Decreases.

The interest rate that is printed on the bond certificate is not referred to as the: A. Stated rate. B. Contract rate. C. Nominal rate. D. Effective rate.

D. Effective rate.

When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes: A. Is treated as a current liability at the exchange date. B. Is recorded as interest revenue at the exchange date. C. Is recorded as interest receivable at the exchange date. D. Is credited to sales revenue at the exchange date.

D. Is credited to sales revenue at the exchange date.

For a bond issue that sells for more than the bond face amount, the effective interest rate is: A. The rate printed on the face of the bond. B. The Wall Street Journal prime rate. C. More than the rate stated on the face of the bond. D. Less than the rate stated on the face of the bond.

D. Less than the rate stated on the face of the bond.

Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond carrying value, respectively? A. Understated, understated. B. Understated, overstated. C. Overstated, understated. D. Overstated, overstated.

D. Overstated, overstated.

Straight-line amortization of bond discount or premium: A. Can be used for amortization of discount or premium in all cases and circumstances. B. Provides the same amount of interest expense each period as does the effective interest method. C. Is appropriate for deep discount bonds. D. Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

D. Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2011, is for a period of: A. Three months. B. Four months. C. Six months. D. Seven months.

D. Seven months. [The interest expense is for the time the bonds were outstanding during the reporting period - 7 months in this case.]

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is: A. The invoice price. B. The wholesale price. C. The present value of cash outflows discounted at the stated rate. D. The present value of the note payments discounted at the market rate.

D. The present value of the note payments discounted at the market rate.

The rate of return on shareholders' equity indicates A. the margin of safety provided to creditors. B. the extent of "trading on the equity" or financial leverage. C. profitability without regard to how resources are financed. D. the effectiveness of employing resources provided by owners.

D. the effectiveness of employing resources provided by owners.

An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest. T/F

TRUE

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value. T/F

TRUE

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement. T/F

TRUE

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants. T/F

TRUE

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized. T/F

TRUE

The interest expense on an installment note decreases with each periodic payment. T/F

TRUE

The specific provisions of a bond issue are described in a document called a bond indenture. T/F

TRUE