Intermediate CH. 14

A company issues $15200000, 9.8%, 20-year bonds to yield 10% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14939182. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet? A) $14943608 B) $14952970 C) $15200000 D) $14941341

A) $14943608

On January 1, 2013, Bramble Corp. issued 2800 of its 10%, $1,000 bonds for $2912000. These bonds were to mature on January 1, 2023 but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, Bramble called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Bramble's gain or loss in 2018 on this early extinguishment of debt was A) $22400 gain. B) $28000 loss. C) $84000 gain. D) $33600 gain

A) $22400 gain.

A company issues $25750000, 7.8%, 20-year bonds to yield 8.0% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $25240330. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet? A) $25251270.92 B) $25750000.00 C) $25266873.92 D) $25245691.00

A) $25251270.92

Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30, 2017 payment? A) $392,083 B) $400,000 C) $784,164 D) $390,000

A) $392,083

On July 1, 2016, Bramble Corp. issued 9% bonds in the face amount of $13800000, which mature on July 1, 2022. The bonds were issued for $13200000 to yield 10%, resulting in a bond discount of $600000. Bramble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2018, Bramble's unamortized bond discount should be A) $436200. B) $465800. C) $423800. D) $453800.

A) $436200.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? A) The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. B) The amount of interest expense will remain constant over the 10-year period. C) The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. D) The balance of mortgage payable will remain a constant amount over the 10-year period.

A) The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include A) a credit to Premium on Bonds Payable for $2,000,000. B) a credit to Interest Expense for $2,000,000. C) a debit to Cash for $100,000,000. D) a credit to Bonds Payable for $102,000,000.

A) a credit to Premium on Bonds Payable for $2,000,000.

On January 1, 2012, Sheridan Company issued $18000000 of 8% ten-year bonds at 103. The bonds are callable at the option of Sheridan at 105. Sheridan has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2018, when the fair value of the bonds was 96, Sheridan repurchased $4020000 of the bonds in the open market at 96. Sheridan has recorded interest and amortization for 2018. Ignoring income taxes and assuming that the gain is material, Sheridan should report this reacquisition as A) a gain of $176800. B) a loss of $224800. C) a loss of $176800. D) a gain of $224800.

A) a gain of $176800.

The interest rate written in the terms of the bond indenture is known as the A) coupon rate, nominal rate, or stated rate. B) effective rate. C) market rate. D) yield rate.

A) coupon rate, nominal rate, or stated rate.

Pontchartrain Company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective-interest amortization. Interest expense reported on the 2017 income statement will total A) $1,560,000. B) $1,568,498. C) $1,529,115. D) $1,600,000.

B) $1,568,498.

On June 30, 2017, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $200,000. On June 30, 2017, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? A) $505,000 gain B) $250,000 loss C) $300,000 loss D) $200,000 gain

B) $250,000 loss

On January 1, 2017, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2017, Kimbrough should report unamortized bond discount of A) $258,050. B) $285,500. C) $274,500. D) $255,000.

B) $285,500.

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? A) $5,730,000. B) $5,790,000. C) $5,940,000. D) $5,640,000.

B) $5,790,000.

On January 1, Sheridan Company issued $5400000, 10% bonds for $5751000. The market rate of interest for these bonds is 9%. Interest is payable annually on December 31. Sheridan uses the effective-interest method of amortizing bond premium. At the end of the first year, Sheridan should report unamortized bond premium of: A) $329850 B) $306590 C) $328590 D) $270000

C) $328590

On January 1, 2018, Oriole Company sold property to Sandhill Company. There was no established exchange price for the property, and Sandhill gave Oriole a $5300000 zero-interest-bearing note payable in 5 equal annual installments of $1060000, with the first payment due December 31, 2018. The prevailing rate of interest for a note of this type is 10%. The present value of the note at 10% was $4018248 at January 1, 2018. What should be the balance of the Discount on Notes Payable account on the books of Sandhill at December 31, 2018 after adjusting entries are made, assuming that the effective-interest method is used? A) $917284. B) $879927. C) $1281752. D) $0.

B) $879927.

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year,zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include A) a credit to Interest Payable for $60,000. B) a credit to Discount on Notes Payable for $90,156. C) a debit to Interest Expense for $29,850. D) a debit to Interest Expense for $120,000.

B) a credit to Discount on Notes Payable for $90,156.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the A) bond debenture. B) bond indenture. C) registered bond. D) bond coupon

B) bond indenture.

The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the A) coupon rate. B) market rate. C) stated rate. D) nominal rate.

B) market rate.

On January 1, 2018, Swifty Corporation redeemed its 15-year bonds of $7050000 par value for 101. They were originally issued on January 1, 2006 at 93 with a maturity date of January 1, 2021. Swifty amortizes discounts and premiums using the straight-line method. What amount of loss should Swifty recognize on the redemption of these bonds (ignore taxes)? A) $70500 B) $0 C) $169200 D) $85200

C) $169200

Accrued liabilities are disclosed in the financial statements by A) showing the amount among the liabilities but not extending it to the liability total. B) an appropriation of retained earnings. C) appropriately classifying them as regular liabilities in the balance sheet. D) a footnote to the statements

C) appropriately classifying them as regular liabilities in the balance sheet.

Eckert Company issues $10,000,000, 6%, 5-year bonds dated July 1, 2017 on July 1, 2017. The bonds pay interest semiannually on December 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue? A) $10,434,616 B) $10,000,000 C) $10,432,988 D) $10,437,618

D) $10,437,618

The 10% bonds payable of Vaughn Manufacturing had a net carrying amount of $2900000 on December 31, 2017. The bonds, which had a face value of $3050000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2018, several years before their maturity, Vaughn retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. What is the loss that Vaughn should record on the early retirement of the bonds on July 2, 2018? Ignore taxes. A) $168500. B) $210500. C) $61000. D) $189500.

D) $189500.

On January 1, 2017, Coronado Industries sold 10% bonds with a face value of $2200000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2378500 to yield 8%. Using the effective-interest method of amortization, interest expense for 2017 is A) $190230. B) $220000. C) $176000. D) $189686.

D) $189686.

On January 1, Sheridan Company issued $4400000, 9% bonds for $4095000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Sheridan uses the effective-interest method of amortizing bond discount. At the end of the first year, Sheridan should report unamortized bond discount of A) $264050. B) $261000. C) $280500. D) $291500.

D) $291500.

If a bond sold at 97, the market rate was: A) equal to the coupon rate. B) less than the stated rate. C) equal to the stated rate. D) greater than the stated rate.

D) greater than the stated rate

Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that A) the market and stated rates coincided. B) no necessary relationship exists between the two rates. C) the market rate of interest exceeded the stated rate. D) the stated rate of interest exceeded the market rate.

D) the stated rate of interest exceeded the market rate.