Long-Term Debt (Financial Liabilities)

On January 2 of the current year, West Co. issued 9% bonds in the amount of $500,000, which mature in ten years. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the effective interest method of amortizing bond discount. In its June 30 current year balance sheet, what amount should West report as bonds payable? A $469,500 B $470,475 C $471,025 D $500,000

$469,500 + $975 = $470,475 Bonds payable carrying amount, 1/2 $ 469,500 Effective interest rate (10% × 6/12) × 5% = Interest expense, 1/2 - 6/30 $ 23,475 Interest payment [$500,000 × (9% × 6/12)] (22,500) = Amortization of discount, 6/30 $ 975

On July 31 of the current year, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face value bonds, due in ten years on July 31, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its year-end income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds? A $ 53,000 gain B $0 C $(65,000) loss D $(77,000) loss

A $ 53,000 gain A gain is recognized because the cost to redeem the bonds is less than the carrying amount of the bonds. Face amount of bonds retired (600 × $1,000) $ 600,000 Add: Unamortized bond premium 65,000 = Bond carrying amount at retirement date $ 665,000 Less: Cost to retire ($600,000 × 102%) (612,000) = Pretax gain on retirement of bonds $ 53,000

On January 1, year 7, Dean Company issued ten-year bonds with a face value of $1,000,000 and a stated interest rate of 8% per year payable semiannually on July 1 and January 1. The bonds were sold to yield 10%. Present value factors are as follows: Present value of $1 for 10 periods at 10% .386 Present value of $1 for 20 periods at 5% .377 Present value of an annuity of 1 for 10 periods at 10% 6.145 Present value of an annuity of 1 for 20 periods at 5% 12.462 What is the total amount of Dean Company's term bonds? A $ 875,480 B $ 877,600 C $ 980,000 D $1,000,000

A $ 875,480 The total amount consists of 2 calculations: the present value of the interest annuity and the present value of the principle. Interest is paid semi-annually, so there are 20 compounding periods. The discount rate is always the market/yield rate, which is 10% annually or 5% semi-annually. The semi-annual interest payment is (computed using the face/stated interest rate) $40,000 [$1,000,000 * 8% * 6/12]. The total amount for the bonds is $875,480: the pv of the interest annuity $498,480 [$40,000 * 12.462] + the pv of the principle $377,000 [$1,000,000 * .377].

On January 1, Stunt Corp. had outstanding convertible bonds with a face value of $1,000,000 and an unamortized discount of $100,000. On that date, the bonds were converted into 100,000 shares of $1 par stock. The market value on the date of conversion was $12 per share. The transaction will be accounted for with the book value method. By what amount will Stunt's stockholders' equity increase as a result of the bond conversion? A $ 100,000 B $ 900,000 C $1,000,000 D $1,200,000

B $ 900,000 The carrying amount of the bonds on the date of conversion is the $1,000,000 face value less the $100,000 unamortized discount. The market value is not considered when using the book value method. The journal entry: Bonds Payable 1,000,000 Bond Discount 100,000 Common Stock (100,000 × $1 par) 100,000 APIC (to balance) 800,000 The $100,000 credit to common stock and $800,000 credit to APIC would increase stockholders' equity $900,000.

How would the amortization of discount on bonds payable affect each of the following? # Carrying amount of bond Net Income A Increase Decrease B Increase Increase C Decrease Decrease D Decrease Increase

A Increase Decrease When bonds are issued at a discount, the Discount on Bonds Payable account is a contra-liability account to Bonds Payable, i.e., it reduces the carrying amount of the bonds. Thus, as the bond discount is amortized, the carrying amount of the bonds increases. The bond discount amortization increases the interest expense on the bonds, and so net income decreases.

When purchasing a bond, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond? A Price. B Par. C Yield. D Interest.

A Price. The market value of a bond consists of two parts: The present value of cash flows from interest (calculated at the stated rate) and discounted at market rate, and The present value of the principal discounted at the market rate of interest.

Which of the following is true regarding debt issued with detachable stock warrants? A Proceeds must be allocated between the warrants and the debt security based on relative fair values. B If the fair value (FV) of one security is not determinable, the proceeds are assigned based on the book value of the other security. C The warrants are accounted for as an expense. D All of the above

A Proceeds must be allocated between the warrants and the debt security based on relative fair values. When bonds are issued with detachable stock warrants, the proceeds must be allocated between the warrants and the debt security based on relative fair values.

On July 1, year 2, Flax Corporation issued 2,000 of its 9%, $1,000 callable bonds for $1,920,000. The bonds are dated July 1, year 2 and mature on July 1, year 12. Interest is payable semiannually on January 1 and July 1. Flax uses the straight-line method of amortizing bond discount. The bonds can be called by the issuer at 101 at any time after June 30, year 7. On July 1, year 8, Flax called in all of the bonds and retired them. Before income taxes, how much loss should Flax report on this early extinguishment of debt for the year ended December 31, year 8? A $ 20,000 B $ 52,000 C $ 68,000 D $100,000

B $ 52,000 Face amount of bonds (2,000 × $1,000) $2,000,000 Less unamortized discount at extinguishment: Discount at issuance ($2,000,000 - $1,920,000) $80,000 Amortized to date of extinguishment ($80,000 × 6/10) 48,000 = 32,000 Bond carrying amount at extinguishment 1,968,000 Cost to reacquire ($2,000,000 × 101%) 2,020,000 = Loss on early extinguishment of debt, before taxes $ 52,000

On June 30, year 1, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, year 6. Interest was payable semiannually every June 30 and December 31. On June 30, year 1, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, year 1, what amount should King recognize as gain before income taxes on redemption of bonds? A $ 20,000 B $ 80,000 C $120,000 D $180,000

B $ 80,000 A gain is recognized because the cost to redeem the bonds is less than the carrying amount of the bonds. Face amount of bonds $5,000,000 Add: Unamortized bond premium 30,000 Less: Unamortized bond issue costs (50,000) = Bond carrying amount at redemption date $ 4,980,000 Cost to redeem ($5,000,000 × 98%) (4,900,000) = Pretax gain on redemption of bonds $ 80,000

On December 31, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in nine months at 8% is .944. At what amount should the note payable be reported in Roth's December 31 balance sheet? A $10,300 B $10,000 C $ 9,652 D $ 9,440

B $10,000 The note payable arose from a transaction with a vendor in the normal course of business and is due in customary trade terms not exceeding one year; therefore, the note can be reported at its face amount of $10,000, despite the fact that the 3% stated interest rate of the note does not approximate the prevailing market interest rate of 8% for similar notes at the date of the transaction.

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year? A $0 B $100,000 C $400,000 D $500,000

B $100,000 Verona's issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis. The balance of the obligation ($100,000) must be reported as a current liability.

A marketable debt security was purchased on September 1 of the current year between interest dates and classified as a held-to-maturity debt security. The next interest payment date was February 1, next year. Because of a permanent decline in market value, the cost of the debt security substantially exceeded its market value at December 31. On the balance sheet at December 31 of the current year, the debt security should be carried at A Market value plus the accrued interest paid B Market value C Cost plus the accrued interest paid D Cost

B Market value Subsequent to purchase, debt securities classified as held-to-maturity are carried in the investment account at cost, net of premium or discount amortization to date, with a separate valuation account for any difference between unamortized cost and fair value.

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the # Cash paid to seller Face amount of bond A No Yes B No No C Yes No D Yes Yes

B No No If bonds are purchased between interest payment dates, the purchaser/borrower will also include the accrued interest through the purchase date in the total cash paid for the bonds. When a bond is purchased at a discount, the carrying value of the bond will be lower than the face value of the bond. Therefore, a bond purchased between interest dates at a discount has a carrying amount that is lower than both the cash paid to the seller and the face value of the bond.

Straight-line amortization calls for the amortization of an equal amount of premium or discount each period over the life of the bonds. When is the use of straight-line amortization acceptable? A Only when the bond term is less than five years B Only when the premium or discount is immaterial C When the bond term is greater than five years D When the premium or discount is material

B Only when the premium or discount is immaterial The straight-line method is acceptable only when the premium or discount is immaterial because it fails to determine the periodic interest expense in terms of the effective rate of interest.

What type of bonds in a particular bond issuance will not all mature on the same date? A Debenture bonds B Serial bonds C Term bonds D Sinking fund bonds

B Serial bonds Serial bonds are a set of bonds issued at the same time but having a different maturity date; thus providing a series of installments for repayment of principal.

Which of the following statements is false regarding the amortization of bonds? A Straight-line amortization calls for the amortization of an equal amount of premium or discount each period over the life of the bonds. B The straight-line method is acceptable in all cases. C The effective interest method of amortization calls for recognizing interest expense at the effective interest rate at which the bonds were sold. D The use of the effective interest method results in a constant rate of interest when applied to the carrying amount of the bonds at the beginning of the period.

B The straight-line method is acceptable in all cases. The straight-line method is acceptable only when the premium or discount is immaterial, because it fails to determine the periodic interest expense in terms of the effective rate of interest.

On July 1, Cody Co. paid $1,198,000 for 10%, 20-year bonds with a face amount of $1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest rate method to recognize interest income from this investment. What should be reported as the carrying amount of the bonds in Cody's December 31 balance sheet? A $1,207,900 B $1,198,000 C $1,195,920 D $1,193,050

C $1,195,920 Bond investment carrying amount, 7/1 $1,198,000 Times: Effective interest rate (8% / 2) x 4% = Interest income, 7/1 - 12/31 $ 47,920 Semiannual interest payment [$1,000,000 x (10% / 2)] (50,000) = Amortization of bond premium, 12/31 $ (2,080)

At December 31 of the prior year, Cain, Inc. owed notes payable of $1,750,000, due on May 15, of the current year. Cain expects to retire this debt with proceeds from the sale of 100,000 shares of its common stock. The stock was sold for $15 per share on March 10 of the current year, prior to the issuance of the year-end financial statements. In Cain's prior year December 31 balance sheet, what amount of the notes payable should be excluded from current liabilities? A $0 B $ 250,000 C $1,500,000 D $1,750,000

C $1,500,000 Since after the date of the enterprise's balance sheet but before the balance sheet was issued, $1,500,000 (100,000 x $15) of common stock was issued for the purpose of refinancing the note payable on a long-term basis, $1,500,000 of the note payable should be excluded from current liabilities at the balance sheet date.

On December 31 of the current year, Moss Co. issued $1,000,000 of 11% bonds at 109. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4. On December 31, what amount should Moss record as discount or premium on issuance of bonds? A $ 40,000 premium. B $ 90,000 premium. C $110,000 discount. D $200,000 discount.

C $110,000 discount. Issuance Price (1,000 bonds × $1,000 × 109%) $1,090,000 Fair value of the warrants (1,000 × 50 × $4) (200,000) = Portion allocated to bonds $ 890,000 Face value of bonds $1,000,000 Portion allocated to bonds (890,000) = Discount on bonds $110,000

The following is deducted/added from carrying value of bonds and amortized using effective interest method, except: A Discount on bonds payable B Premium on bonds payable C Loss on Extinguishment of debt D Bond issue costs

C Loss on Extinguishment of debt A Bond issue cost is a cost directly associated with bond issuance e.g., printing & engraving costs, legal & accounting fees, underwriter commissions, promotion costs, etc. Per the FASB standard update issued in 2015, bond issue costs should be deducted from the carrying value of bonds and amortized using the effective interest method (i.e., bond issue costs are treated similar to the discount/premium on bonds payable and is reported as an adjustment to bond payable liability).

Kamy Corp. is in liquidation under Chapter 7 of the Federal Bankruptcy Code. The bankruptcy trustee has established a new set of books for the bankruptcy estate. After assuming custody of the estate, the trustee discovered an unrecorded invoice of $1,000 for machinery repairs performed before the bankruptcy filing. In addition, a truck with a carrying amount of $20,000 was sold for $12,000 cash. This truck was bought and paid for in the year before the bankruptcy. What amount should be debited to estate equity as a result of these transactions? A $0 B $1,000 C $8,000 D $9,000

D $9,000 Therefore, $9,000 [i.e., $1,000 + ($20,000 - $12,000)] should be debited to Estate Equity as a result of the discovery of the unrecorded invoice and the sale of the truck.

______________ funds result from the setting aside of specific assets, usually under the custody of a trustee for a particular purpose. A Special purpose B Preferred stock acquisition C Debt retirement D All of the above

D All of the above Special purpose funds result from the setting aside of specific assets, usually under the custody of a trustee for a particular purpose. Some funds may be voluntarily created, such as preferred stock acquisition funds and plant expansion funds. Other funds result from contractual obligations, such as debt retirement funds. The funds may or may not be under the custody of a separate trustee.

The market price of a bond issued at a premium is equal to the present value of its principal amount A Only, at the stated interest rate. B And the present value of all future interest payments, at the stated interest rate. C Only, at the market (effective) interest rate. D And the present value of all future interest payments, at the market (effective) interest rate.

D And the present value of all future interest payments, at the market (effective) interest rate. The market price of a bond is equal to the present value of the bond's interest and principal payments, discounted using the market interest rate for that type of bond.

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position? A At the face amount. B At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. C At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate. D At the face amount minus a discount calculated at the imputed interest rate.

D At the face amount minus a discount calculated at the imputed interest rate. Notes payable, like bonds payable, have a principal component and interest component that must be calculated each period. If the interest rate is not stated, the note is recorded at the fair value of the property, goods, or services exchanged or at the amount that approximates the market value of the note, whichever is more clearly determinable.

Which of the following statements is false with respect to serial bonds? A To determine the selling price of serial bonds, compute the present value of the principal and interest payments for each series separately, then total the present value of each series. B The amortization of bond premium or discount on serial bonds requires the recognition of a declining debt principal. C Successive bond years cannot be charged with equal amounts of premium or discount because of a shrinking debt and successively smaller interest payments. D Bond premium or discount, if material, should be amortized using the straight-line method.

D Bond premium or discount, if material, should be amortized using the straight-line method.

How would the amortization of premium on bonds payable affect each of the following? # Carrying amount of bond Net income A Increase Decrease B Increase Increase C Decrease Decrease D Decrease Increase

D Decrease Increase The carrying amount of the bonds is the sum of their face amount and the unamortized premium. Therefore, premium amortization will reduce the carrying amount of the bonds. Bond premium amortization will increase income because it will reduce the interest expense associated with the bonds.

The discount resulting from the determination of a note payable's present value should be reported on the balance sheet as a (an) A Addition to the face amount of the note. B Deferred charge separate from the note. C Deferred credit separate from the note. D Direct reduction from the face amount of the note.

D Direct reduction from the face amount of the note. If a bond is sold at a discount, it is sold for less than its face value. Therefore, the discount is a direct reduction from the face amount of the note. 'Addition to the face amount of the note' describes a premium, not a d

Perk, Inc. issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance? A Discount the bonds at the stated rate of interest. B Discount the bonds at the market rate of interest. C Discount the bonds at the stated rate of interest and deduct bond issuance costs. D Discount the bonds at the market rate of interest and deduct bond issuance costs.

D Discount the bonds at the market rate of interest and deduct bond issuance costs. The net proceeds of a bond issuance is determined by calculating the present value of the projected cash flows of the bonds at the yield rate (market rate) of interest and then deducting bond issuance costs. The stated rate of interest is used to determine the amount of cash to be paid at each payment date, but the market rate is the rate used to discount the cash flows to present values.

For a bond issue which sells for less than its face amount, the market rate of interest is A Dependent on rate stated on the bond B Equal to rate stated on the bond C Less than rate stated on the bond D Higher than rate stated on the bond

D Higher than rate stated on the bond A bond issue will sell for less than its face amount (i.e., at a discount) when the nominal or stated interest rate is less than the market rate.

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On June 30, year 2, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on bond should Webb report in its June 30, year 3, balance sheet? A $1,050 B $3,950 C $4,300 D $4,500

Unamortized bond premium, 6/30, year 2 ($105,000 - $100,000) $5,000 Bonds payable carrying amount, 6/30, year 2 $105,000 Times: Annual effective interest rate × 6% = Interest expense, 6/30, year 2 - 6/30, year 3 $ 6,300 Annual interest payment ($100,000 × 7%) (7,000) = Bond premium amortization, 6/30, yr 2 - 6/30, yr3 (700) Unamortized bond premium, 6/30, year 3 $4,300

During the year, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101½. In connection with the sale of these bonds, Lake paid the following expenses: Promotion costs $ 20,000 Engraving and printing 25,000 Underwriters' commissions 200,000 What amount should Lake record as bond issue costs to be amortized over the term of the bonds? A $0 B $220,000 C $225,000 D $245,000

Therefore, $245,000 (i.e., $20,000 + $25,000 + $200,000) should be recorded as bond issue costs to be amortized over the term of the bonds.

On December 30 of the current year, Fort Inc. issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Fort's common stock at a specified option price of $25 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000 and the market value of the warrants was $120,000. In its December 31 current year balance sheet, what amount should Fort report as bonds payable? A $1,000,000 B $ 975,000 C $ 900,000 D $ 880,000

A $1,000,000 o compute the amount at which the bonds payable should be reported, the proceeds from the bonds and the detachable stock warrants must be allocated between the two securities based on their aggregate relative fair values at the date of issue. Since the bonds are allocated $900,000 of the proceeds received, they were issued at a discount of $100,000 (i.e., $1,000,000 - $900,000). Therefore, the bonds should be reported in the balance sheet at face amount less unamortized discount. Relative aggregate fair value FMV % Proceeds to be allocated Proceeds allocated to each Bonds payable $1,080,000 90% $1,000,000 = $ 900,000 Stock warrants 120,000 10% $1,000,000 = 100,000 $1,200,000 100% = $1,000,000

On January 1, year 13, Hart, Inc., redeemed its 15-year bonds of $500,000 face amount for 102. They were originally issued on January 1, year 1 at 98 with a maturity date of January 1, year 16. The bond issue costs relating to this transaction were $20,000. Hart amortizes discounts, premiums, and bond issue costs using the straight-line method. Before income taxes, what amount of loss should Hart recognize on the redemption of these bonds? A $16,000 B $12,000 C $10,000 D $0

A $16,000 Face amount of bonds $ 500,000 Discount at issuance [$500,000 - ($500,000 x 98%)] $ 10,000 Amortization to extinguishment date ($10,000 × 12/15*) (8,000) = Less unamortized discount at extinguishment $ (2,000) Bond issue costs incurred $ 20,000 Amortization to date of extinguishment ($20,000 × 12/15*) (16,000) = Less unamortized bond issue cost at extinguishment (4,000) Bond carrying amount at extinguishment 494,000 Cost to redeem ($500,000 × 102%) (510,000) = Pretax loss on early debt extinguishment $ (16,000)

A corporation recently issued $4 million of 10-year, 3% bonds at 101. There were 200,000 detachable stock warrants included as part of the sale. Each warrant allows the bondholder to purchase one share of no-par common stock for $12 per share. On the date of issuance, the stock warrants had a fair value of $1 per warrant. By what amount did the corporation's long-term debt increase as a result of this issuance? A $3,840,000 B $4,000,000 C $4,040,000 D $4,200,000

A $3,840,000 In the given problem statement, the fair value of only the detachable warrant is known i.e. $1 x 200,000 = $200,000. Since the bonds were issued at 101, the cash inflow = $4,000,000 x 101 = $4,040,000. The value of bonds i.e. long-term debt = 4,040,000 - 200,000 = $3,840,000.

Clay Corp. had $600,000 convertible 8% bonds outstanding at June 30. Each $1,000 bond was convertible into 10 shares of Clay's $50 par value common stock. On July 1, the interest was paid to bondholders, and the bonds were converted into common stock, which had a fair market value of $75 per share. The unamortized premium on these bonds was $12,000 at the date of conversion. Under the book value method, this conversion increased the following elements of the stockholders' equity section by # Common stock Additional paid-in capital A $300,000 $312,000 B $306,000 $306,000 C $450,000 $162,000 D $600,000 $12,000

A $300,000 $312,000 The market price per common share is irrelevant under this method. Bonds payable 600,000 Bond premium 12,000 Common stock [($600,000 / 1,000) × 10 shs. × $50 PV] 300,000 Additional paid-in capital (to balance) 312,000

Bondholders of Balm Co. converted their bonds into 90,000 shares of $5 par value common stock. In Balm's accounting records, the bonds had a par value of $775,000 and unamortized discount of $23,000 at the time of conversion. What amount of additional paid-in capital from the conversion should Balm record? A $302,000 B $325,000 C $348,000 D $798,000

A $302,000 The carrying amount of the bonds on the date of conversion is the $775,000 face value less the $23,000 unamortized discount. The journal entry would be: Bonds Payable 775,000 Bond Discount 23,000 Common Stock (90,000 × $5 par) 450,000 APIC (to balance) 302,000

On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds? A $360,000 B $367,200 C $476,400 D $480,000

A $360,000 Carrying value of the bonds Payable = Face value of the bond - Unamortized discount on bond Issue.Ending carrying value of bond = Beginning balance + Amortization expense. When bond is amortized, Beginning period balance is added to amortized portion to arrive at ending carrying value of the bonds $360,000 = ($363,600 - $3,600). Amortization of $3,600 is reduced from the $363,600 carrying value at the end of the year which is otherwise added to the beginning value.

Hancock Co.'s December 31, year 1 balance sheet contained the following items in the long-term liabilities section: Unsecured 9.375% registered bonds ($25,000 maturing annually beginning in year 5) $275,000 11.5% convertible bonds, callable beginning in year 10, due year 21 125,000 Secured 9.875% guaranty security bonds, due 2020 $250,000 10.0% commodity-backed bonds ($50,000 maturing annually beginning year 6) 200,000 What are the total amounts of serial bonds and debenture bonds? # Serial bonds Debenture bonds A $475,000 $400,000 B $475,000 $125,000 C $450,000 $400,000 D $200,000 $650,000

A $475,000 $400,000 Bond issues maturing on a single date are called term bonds, whereas bond issues maturing in installments are called serial bonds. Since the registered bonds and the commodity-backed bonds both mature in installments, the total amount of serial bonds is $475,000 (i.e., $275,000 + $200,000). Debenture bonds are unsecured bonds; they are not supported by a lien or mortgage on specific assets. Since the registered bonds and the convertible bonds are unsecured, the total amount of debenture bonds is $400,000 (i.e., $275,000 + $125,000).

An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund Increases by revenue earned on the investments. Is not affected by revenue earned on the investments. Decreases when the investments are purchased. A I only. B I and III. C II and III. D III only.

A I only. When cash is transferred to a sinking fund account, the sinking fund balance increases for the amount of cash transferred. When this cash is used to purchase investments, there is no effect in the balance of sinking fund, only the composition changes - cash becomes investments or a current asset becomes a non-current asset.

On July 1, year 1, Cobb, Inc., issued 9% bonds in the face amount of $1,000,000, which mature in ten years. The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000. Cobb uses the interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, year 3, Cobb's unamortized bond discount should be A $52,810 B $51,000 C $48,800 D $43,000

A $52,810 Unamortized bond discount, 7/1, year 1 $61,000 Amortization, 7/1, year 1 - 6/30, year 2: Bonds payable carrying amount, 7/1, year 1 $939,000 Effective interest rate x 10% Interest expense, 7/1, year 1 - 6/30, year 2 = $ 93,900 Interest payment ($1,000,000 x 9%) (90,000) = Bond discount amortization, 7/1, year 1 - 6/30, year 2 (3,900) Bonds payable carrying amount, 7/1, year 2 ($939,000 + $3,900) $942,900 Effective interest rate x 10% Interest expense, 7/1, year 2 - 6/30, year 3 $ 94,290 Interest payment ($1,000,000 x 9%) (90,000) = Amortization for 7/1, year 2 - 6/30, year 3 (4,290) Unamortized bond discount, 6/30, year 3 $52,810

On July 1 of the current year, York Co. purchased as a long-term investment $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1 seven years from now and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31 current year balance sheet, what amount should York report as investment in bonds? A $911,300 B $916,600 C $953,300 D $960,600

A $911,300 The carrying amount of the bond investment is the amortization of the bond discount from the purchase date plus the cost of the bond investment ($906,000 + $5,300 = $911,300). Bond investment cost ($946,000 - $40,000) $906,000 Times: effective interest rate (10% / 2) × 5% = Interest income, 7/1 - 12/31 45,300 Portion of annual interest payment applicable to 7/1 - 12/31 [($1,000,000 x 8%) / 2] (40,000) = Amortization of bond premium to 12/31 $ 5,300

On June 30, Huff Corp. issued at 99, one thousand of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Huff should report the bond liability at A $955,000 B $ 990,000 C $1,000,000 D $1,035,000

A $955,000 The Bonds Payable liability is $1,000,000 - $10,000 - $35,000 = $955,000. Face amount of bonds ($1,000 x 1,000) $1,000,000 Bond Issue Costs (35,000) Discount on bonds [$1,000,000 - ($1,000,000 x 99%)] (10,000) Amount to be reported as bond liability, 6/30 $ 955,000 The journal entry would be as follows: DR Cash 955,000 DR Bond issue Costs 35,000 DR Discount on Bonds Payable 10,000 CR Bonds Payable 1,000,000

In a troubled debt restructuring, the total fair value of the consideration given to discharge the obligation will __________ the recorded amount of the debt. A Always be less than B Always be more than C Always equal D Equal or exceed

A Always be less than In a troubled debt restructuring, the total fair value of the consideration given to discharge the obligation will always be less than the recorded amount of the debt.

Main Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as A Discount on bonds payable. B Premium on bonds payable. C Common stock subscribed. D Contributed capital in excess of par-stock warrants.

A Discount on bonds payable. he proceeds from the issuance of debt with detachable warrants is to be allocated to paid-in capital (the warrants) and to debt (the bonds) based on the relative fair values of the two securities at the time of issuance

oley Co. is preparing the electronic spreadsheet below, to amortize the discount on its 10-year, 6%, $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts. A B C D E 1 Year Cash paid Interest expense Discount amortization Carrying amount 2 1 $86,580 3 2 $6,000 Which formula should Foley use in cell E3 to calculate the bonds' carrying amount at the end of year 2? A E2 + D3 B E2 - D3 C E2 + C3 D E2 - C3

A E2 + D3 Amortization of a bond discount increases the carrying amount of the bond. Adding the bonds' year 1 carrying amount (cell E2) the discount amortization (cell D3) would net the bond's carrying amount at the end of year 2 (cell E3).

When bonds are issued the ____________ of the bonds is recorded in the "Bonds Payable" account. A Face amount B Issue amount C Bond discount D Bond premium

A Face amount When bonds are issued, only the face amount of the bonds is recorded in the "Bonds Payable" account.

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the A Face value of the bonds at the beginning of the period by the contractual interest rate. B Face value of the bonds at the beginning of the period by the effective interest rates. C Carrying value of the bonds at the beginning of the period by the contractual interest rate. D Carrying value of the bonds at the beginning of the period by the effective interest rates

A Face value of the bonds at the beginning of the period by the contractual interest rate. The effective interest method of amortization calls for recognizing interest expense at the effective interest rate at which the bonds were sold. Thus, this interest method overcomes the criticism of the straight-line method because it offers a more accurate measurement of interest expense. To amortize a premium using the effective interest method, multiply the carrying amount of the bond issue by the effective yield. This equals interest expense for the period. The difference between the cash interest payment and the interest expense equals the amount of premium amortization for the period. The cash payment is always computed by multiplying the face amount of the bond by the face or stated interest rate.

In a partnership liquidation proceeding, where a partnership converts its assets into cash and distributes the cash to creditors and partners, the partnership does which of the following? A Gives priority to creditors on any distribution B May hold each partner personally liable if a partner or other individual prematurely distributes cash to another partner whose capital account later shows a deficit, and the latter partner is unable to repay the premature distribution C Is required to distribute the liquidation's proceeds to partners in a lump sum, after all assets have been sold and all creditors have been satisfied D None of the above

A Gives priority to creditors on any distribution In a partnership liquidation, creditors have priority on any distribution.

On April 1, year 9, Ward Corp. issued $750,000 of 10% nonconvertible bonds at 102 that are due on March 31, year 19. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholder to purchase one share of Ward $10 par common stock for $25. On April 1, year 9, the market value of Ward's common stock was $20 per share, and the market value of each warrant was $4. What amount of the proceeds from the bond issue should Ward record as an increase in stockholders' equity? A $ 15,000 B $120,000 C $300,000 D $750,000

B $120,000 The question provides the fair value of the warrants, but not the fair value of the bonds without the warrants; therefore, the $4 fair value of the warrants is used. A stockholders'' equity account, paid-in capital--stock purchase warrants, is increased by $120,000 [($750,000 / $1,000) bonds × 40 warrants × $4 fair value].

On November 1 of the current year, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1 of the current year. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 current year balance sheet? A $17,500 B $16,000 C $11,667 D $10,667

B $16,000 Interest payable is the amount of interest due to the bondholder from the date of last payment of interest (October 1, 20X1) till the year end (December 31, 20X1), irrespective of the date of issue of the bond (November 1, 20X1). Interest payable = Face value x Stated interest rate x period since last payment = $8,00,000 x 8% x 3/12= $16,000.

On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. Greendale uses the effective interest method for amortizing premiums on bonds payable. What is the balance of the premiums on bonds payable account immediately following the first interest payment? A $22,960 B $23,709 C $33,691 D $34,440

B $23,709 Interest paid = $700,000 x 8% = $56,000 Interest expense = $728,700 x 7% = $51,009 Premium amortization = $28,700 ($728,700 - $700,000) - $4,991 ($56,000 - $51,009) = $23,709.

On January 1 of the current year, Carr Company purchased Fay Corp., 9% bonds with a face amount of $400,000 for $375,600 to yield 10%. The bonds are dated this January 1, mature on December 31 in ten years, and pay interest annually on December 31. Carr uses the effective interest method of amortizing bond discount. In its income statement for the current year ended December 31, what total amount should Carr report as interest revenue from the long-term bond investment? A $40,000 B $37,560 C $36,000 D $34,440

B $37,560 Bond investment carrying amount, January 1 $375,600 Effective interest rate × 10% Interest revenue recognized in the current year $ 37,560

On January 1, year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, year 1, and mature in fifteen years on October 1 . Interest is payable semiannually on April 1, and October 1. Accrued interest for the period October 1, year 1, to January 1, year 2, amounted to $8,000. On January 1, year 2, what amount should Oak report as bonds payable, net of discount? A $380,300 B $388,000 C $388,300 D $392,000

B $388,000 The bonds payable account should reflect only the principal amount and does not include accrued interest. Therefore, the bonds payable account should be reported by Oak Co. as $388,000 (400 bonds x (1,000 x 97%)).

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, year 1, House purchased an annuity for $418,250 to provide the $950,000 prize money remaining after the first $50,000 installment, which was paid on January 2 year 2. In its December 31, year 1, balance sheet, what amount should House report as note payable contest winner, net of current portion? A $368,250 B $418,250 C $900,000 D $950,000

B $418,250 The amount that should be reported as the noncurrent portion of Note Payable to Contest Winner at 12/31 of year 1 is $418,250, the cost of the annuity purchased to provide for the $950,000 of prize money to be paid after 12/31 of year 2.

On January 2 of the current year, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest bearing note due on January 2 in three years. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2 of the current year was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme's current year income statement, what amount should be reported as interest income? A $ 9,000 B $45,000 C $50,000 D $60,000

B $45,000 Face amount of note $ 600,000 Less: Imputed interest [$600,000 × (1 - 0.75)] (150,000) = Carrying amount of note, 1/2 450,000 Times: Effective interest rate × 10% = Interest income $ 45,000

The following information relates to noncurrent investments that Fall Corp. placed in trust as required by the underwriter of its bonds: Bond sinking fund bal., 12/31, year1 $ 450,000 Year 2 additional investment 90,000 Dividends on investments 15,000 Interest revenue 30,000 Administration costs 5,000 Carrying amount of bonds payable 1,025,000 What amount should Fall report in its December 31, Year 2, balance sheet related to its noncurrent investment for bond sinking fund requirements? A $585,000 B $580,000 C $575,000 D $540,000

B $580,000 The bond sinking fund balance increases as a result of the additional investment and the income on the investments in the fund (i.e., the dividend and interest revenue). It decreases due to the expenses of the fund (i.e., the administrative costs incurred). The carrying amount of the bonds payable does not affect the bond sinking fund balance. Bond sinking fund balance, 12/31, year 1 $450,000 Add: Additional investment, year 2 90,000 Dividends on investments 15,000 Interest revenue 30,000 Less: Administrative costs (5,000) = Bond sinking fund balance, 12/31, year 2 $580,000

On May 1, Bolt Corp. issued 11% bonds in the face amount of $1,000,000 that mature in ten years. The bonds were issued to yield 10%, resulting in bond premium of $62,000. Bolt uses the effective interest method of amortizing bond premium. Interest is payable semiannually on November 1 and May 1. In its October 31 balance sheet, what amount should Bolt report as unamortized bond premium? A $62,000 B $60,100 C $58,900 D $58,590

B $60,100 $62,000 - $1,900 = $60,100 Bonds payable carrying amount, 5/1 ($1,000,000 + 62,000) $1,062,000 Semiannual effective interest rate (10% / 2) × 5% = Interest expense, 5/1 - 10/31 $ 53,100 Semiannual interest payment due 11/1 [$1,000,000 × (11% / 2)] (55,000) = Bond premium amortization, 5/1 - 10/31 $ (1,900)

On January 1, year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available: 5% 8% Present value of $1 (n = 5) 0.78353 5% 0.68058 8% Present value of an ordinary annuity (n = 5) 4.32948 5% 3.99271 8% What amount is the value of net bonds payable at the end of year 1? A $88,022 B $90,064 C $100,000 D $110,638

B $90,064 Step 1 : PV of Bond Market Interest Rate of 8% (PV of $1) x Principle PV of Bond = $100,000 x .68058 = $68,058 Step 2: PV of Interest Calculate Bond Interest: Bond Interest Rate of 5% x Principle = $100,000 x 5% = $5,000 PV of Ordinary Annuity Due on 12/31 at 8% x Bond interest = $5,000 * 3.99271 = $19,964 Step 3: PV of bond + PV of interest $68,058 + $19,964 = $88,022 Step 4: Calculate the amortization for this discount bond. Effective Interest = $88,022 x 8% = $7,041.76 Interest Paid = $5,000 Amortization of Discount = Effective Interest - Interest Paid = $7,041.76 - $5,000 = $2,041.76 Step 5: Add the amortization back to the Carrying Value $88,022 + $2,041.76 = $90,064 (rounded)

On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, year 2, the note was refinanced. How should Taylor report the note payable in its December 31, year 1, balance sheet? A A current liability B A long-term liability C A long-term note receivable D A current note receivable

B A long-term liability Long-term liabilities are all obligations not expected to be liquidated by the use of existing current assets or by the creation of current liabilities. Examples include: (1) long-term notes payable, (2) refinancing of short-term obligations, and (3) bonds payable.

Which of the following is reported as interest expense? A Pension cost interest. B Amortization of discount of a note. C Deferred compensation plan interest. D Interest incurred to finance a software development for internal use.

B Amortization of discount of a note. Amortization of a bond premium decreases interest expense and the carrying amount of the bond for the issuer, while the amortization of a bond discount increases the issuer's interest expense and the carrying amount of the bond.

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date? A An interest expense that is less than the cash payment made to bondholders. B An interest expense that is greater than the cash payment made to bondholders. C A debit to the unamortized bond discount. D A debit to the unamortized bond premium.

B An interest expense that is greater than the cash payment made to bondholders. A bond that is issued with a stated rate of interest that is less than the effective rate on the issuance date is a bond issued with a discount. A bond issued at a discount will have an increasing carrying value and an increasing amount of interest expense

On December 31, year 2, Paxton Co. had a note payable due on August 1, year 3. On January 20, year 3, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, year 3, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton's financial statements were issued on March 31, year 3. How should Paxton classify the note on its balance sheet at December 31, year 2? A As a current liability because the financing agreement was signed after the balance sheet date B As a current liability because the lender is not expected to be financially capable of honoring the agreement C As a long-term liability because the agreement does not expire within one year D As a long-term liability because no violation of any provision in the financing agreement exists

B As a current liability because the lender is not expected to be financially capable of honoring the agreement Short-term obligations are those scheduled to mature within one year or operating cycle, whichever is longer. Generally, short-term obligations are classified as current liabilities since they will require use of working capital during the ensuing period. If they are to be refinanced on a long-term basis they will not require the use of working capital and appropriately are classified as noncurrent liabilities. Exclusion from current liabilities requires that two conditions be met:

A 15-year bond was issued in year 1 at a discount. During year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over the 15-year bond's A Face amount. B Carrying amount. C Face amount less the deferred loss on bond retirement. D Carrying amount less the deferred loss on bond retirement.

B Carrying amount. The new 10-year bond was issued at its face amount which, from the facts, either equals or exceeds the face amount of the 15-year bond which exceeds the carrying amount of the 15-year bond because the 15-year bond was issued at a discount (a price less than the face amount).

How should bond issue costs be recorded? A Expensed in the period incurred. B Deducted from Carrying Value of Bonds and amortized using Effective Interest Method. C Classified as an asset. D All of the above

B Deducted from Carrying Value of Bonds and amortized using Effective Interest Method.

On August 15 of the current year, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The four-month note was dated this July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased? A Unearned discount B Interest receivable C Prepaid interest D Interest revenue

B Interest receivable When an interest-bearing instrument is sold between interest payment dates, the seller collects accrued interest from the buyer. The buyer will later collect interest for a full interest period at the next interest payment date. In the case at hand, inventory is being exchanged for the note. Because the market rate of interest is equal to the note's stated rate, the note's present value is equal to the face amount of the note plus the one month's accrued interest.

On December 1, year 1, Tigg Mortgage Co. gave Pod Corp. a $200,050, 12% loan. Pod received proceeds of $193,829 after the deduction of a $6,221 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, year 2. The repayments yield an effective interest rate of 12% at a present value of $200,050 and 13.4% at a present value of $193,829. What amount of accrued interest receivable should Tigg include in its December 31, year 1, balance sheet? A $4,450 B $2,164 C $2,000 D $0

C $2,000 The note was issued on 12/1, year 1. Principal and interest on the note are due in monthly installments, beginning 1/1, year 2. Therefore, at 12/31, year 1, Tigg should report one month of accrued interest receivable, the amount of which is determined by multiplying the face amount of the note by 1/12 of the note's stated annual interest rate, as follows: Face amount of note, issued 12/1, year 1$200,050 Times 1/12 stated annual interest rate of note (12% ÷ 12)× 1% Accrued interest receivable, 12/31, year 1$ 2,000

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense? A $0 B $14,200 C $22,500 D $30,000

C $22,500 World's interest rate on the $1,000,000 note payable was 9%. The loan is outstanding for three months interest for the year. The interest expense is $1,000,000 × .09 × 3/12 = $22,500.

On July 1, year 6, Fox Company purchased 400 of the $1,000 face amount, 8% bonds of Dey Corporation for $369,200 to yield 10% per annum. The bonds, which mature on July 1, year 11, pay interest semiannually on January 1 and July 1. Fox uses the effective interest method of amortization and the bonds are appropriately recorded as a long-term investment. The bonds should be reported on Fox's December 31, year 6, balance sheet at? A $397,540 B $374,120 C $371,660 D $366,740

C $371,660 Cash 369,200 Investment in Bonds $371,660 Plug Interest Receivable $400,000 * 8% * 6/12 = 16,000 Interest Income $369,200 * 10% * 6/12 = 18,460

On July 28, Vent Corp. sold $500,000 of 4%, eight-year subordinated debentures for $450,000. The purchasers were issued 2,000 detachable warrants, each of which was for one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance? A $50,000 B $60,000 C $70,000 D $74,000

C $70,000 Vent would debit Cash $450,000, credit Bond Payable $500,000, and credit APIC-Stock Warrants for their fair value of $20,000 (2,000 detachable warrants at the market price of $10). The entry needs a $70,000 debit to balance and that is the discount on the debentures.

Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds? A 6% B 7% C 12% D 14%

C 12% Interest paid = Face value x Stated interest rate. On 30th Jun the interest paid is semi-annual, hence $12,000 x 2 = $24,000 represents annual interest paid. $12,000/$200,000 = 6% which is semi-annual rate. To arrive at the annual stated interest rate for the debenture of 12%, semi-annual rate should be multiplied by 2. 12% = (6% x 2). (OR) using annual amount 24,000/$200,000 = 12%.

A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following? A A debit to bond discount of $1,000. B A credit to bonds payable of $49,000. C A credit to bond premium of $1,000. D A debit to bonds payable of $50,000.

C A credit to bond premium of $1,000. J/E for bond issued at discount: DR Cash $49,000 DR Discount on bond issuance $1,000 CR Bonds payable $50,000

Cali, Inc., had a $4,000,000 note payable due on March 15 of the current year. On January 28 of the current year, before the issuance of its prior year financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its prior year December 31 financial statements? A As a current liability, with separate disclosure of the note refinancing. B As a current liability, with no separate disclosure required. C As a noncurrent liability, with separate disclosure of the note refinancing. D As a noncurrent liability, with no separate disclosure required.

C As a noncurrent liability, with separate disclosure of the note refinancing. The portion of long-term debt due within the next fiscal period is classified as a current liability if payment is expected to require the use of current assets or the creation of other current liabilities. Short-term debt expected to be refinanced on a long-term basis is to be excluded from current liabilities when the enterprise has the intent and ability to refinance the obligation on a long-term basis.

As of December 1, year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company's debt be presented in its classified balance sheet on December 31, year 2 if no debt repayments were made in December? A Current liabilities of $1,000,000; long-term liabilities of $1,050,000. B Current liabilities of $500,000; long-term liabilities of $1,550,000. C Current liabilities of $400,000; long-term liabilities of $900,000. D Current liabilities of $500,000; long-term liabilities of $800,000.

C Current liabilities of $400,000; long-term liabilities of $900,000. Total current liabilities would be $400,000 - the amount outstanding on the LOC ($250,000) and the current amount due on the secured note ($750,000/5 = $150,000). Total long-term liabilities would be $900,000 - the remaining $600,000 secured note and the $300,000 balloon note (i.e., no payment is due until the third year).

Which of the following is reported as interest expense? A Pension cost interest B Postretirement healthcare benefits interest C Imputed interest on non-interest bearing note D Interest incurred to finance construction of machinery for own use

C Imputed interest on non-interest bearing note Noninterest-bearing notes must be recorded at the fair value of the property, goods, or services exchanged, or at an amount which approximates the market value of the note, whichever is the more clearly determinable. I

On January 2, year 1, Burnt Co. issued 10-year convertible bonds at 105. During year 4, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Burnt's common stock was 50 percent above its par value. Depending on whether the book value method or the market value method was used, Burnt would recognize gains or losses on conversion when using the # Book value method Market value method A Either gain or loss Gain B Either gain or loss Loss C Neither gain or loss Loss D Neither gain or loss Gain

C Neither gain or loss Loss A major characteristic of the book value method is that neither a gain nor a loss is recognized on the conversion of bonds to stock; the carrying amount of debt is taken out of the debt accounts and recorded in stockholders' equity accounts. The market value method may result in a gain or loss because the stock is to be recorded at the market value of the stock (or bonds) and the carrying amount of the debt is to be removed from liability accounts.

If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders' equity? # Interest expense Total stockholders' equity A Overstated Overstated B Understated Overstated C Overstated Understated D Understated Understated

C Overstated Understated Amortization of a bond premium decreases interest expense and the carrying amount of the bond for the issuer, while the amortization of a bond discount increases the issuer's interest expense and the carrying amount of the bond.

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid A Minus discount B Minus discount minus par value C Plus discount D Plus discount plus par value

C Plus discount A bond will sell at a discount (less than par) when the stated interest rate is less than the market rate. The amount of the discount will be equal to the difference between the bond payable amount and the cash received

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 market (effective) rate of interest. B Less 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 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. The total amount consists of 2 calculations: the present value of the interest annuity and the present value of the principle. Present value is computed using the market/yield/effective interest rate.

When the cash proceeds from a bond issued with detachable stock purchase warrants exceeds the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to A Additional paid-in capital B Retained earnings C Premium on bonds payable D Detachable stock warrants outstanding

C Premium on bonds payable The proceeds from the sale of debt with stock purchase warrants should be allocated between the two instruments based on the relative fair values of the debt security without the warrants and the warrants themselves.

A company issued bonds with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and face value of the bonds. The fair value of the bonds cannot be determined. What value, if any, should be assigned to the warrants? A The excess of the proceeds over the face value of the bonds. B The proportion of the proceeds that the warrants' fair value bears to the face value of the bonds. C The fair value of the warrants. D No amount, because the total proceeds should be assigned to the bonds

C The fair value of the warrants. Detachable Warrant is a security that can be sold / exercised by the bondholder while retaining the bond. Since the warrant is separable from the bond, a value is assigned to both bond and warrant.Value for the detachable warrants is recorded in Additional Paid in capital (APIC)

Which of the following is (are) true regarding convertible bonds? A The market value method recognizes no gain or loss upon conversion. B The market value method does not recognize costs associated with the conversion as an expense. C The market value method recognizes a gain or loss on retirement equal to the difference between the carrying amount of the debt at the conversion and the fair value of the shares issued upon conversion. D Both A. and B.

C The market value method recognizes a gain or loss on retirement equal to the difference between the carrying amount of the debt at the conversion and the fair value of the shares issued upon conversion.

On October 1 of the prior year, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December 1 of the prior year. Fleur's prior year financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1 of the current year. Fleur's prior year cost of goods sold for the holiday merchandise was A Overstated by the difference between the note's face amount and the note's October 1 present value. B Overstated by the difference between the note's face amount and the note's October 1 present value plus 11% interest for two months. C Understated by the difference between the note's face amount and the note's October 1 present value. D Understated by the difference between the note's face amount and the note's October 1 present value plus 16% interest for two months.

C Understated by the difference between the note's face amount and the note's October 1 present value. The note should not be recorded at its face amount because its stated interest rate of 16% does not approximate the market rate of interest of 11% for similar notes. When a note which does not bear the market rate of interest is exchanged for property, goods, or services, the note is to be recorded at the fair value of the property, goods, or services or the fair value of the note, whichever is more clearly determinable. Since neither of these amounts are determinable for the note in question, the note should be recorded at its present value

A company issues $1,500,000 of par bonds at 98 on January 1, year 1, with a maturity date of December 31, year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called? A $30,000 B $50,000 C $90,000 D $110,000

D $110,000 Bonds Payable (Face Value) $1,500,000 Unamortized Discount [($30,000 / 30) × 20 yrs.] ($20,000) Unamortized Issue costs [($90,000 / 30) × 20 yrs.] ($60,000) = Carrying amount of bonds retired $1,420,000 Purchase price ($1,500,000 × 102%) $1,530,000 = Loss on bond retirement, before income taxes ($110,000)

Able, Inc. had the following amounts of long-term debt outstanding at December 31 of the current year: 14 1/2% term note, due next year $ 3,000 11 1/8% term note, due in four years 107,000 8% note, due in 11 equal annual principal payments, plus interest beginning December 31 of next year 110,000 7% guaranteed debentures, due in five years 100,000 Total $320,000 Able's annual sinking-fund requirement on the guaranteed debentures is $4,000 per year. What amount should Able report as current maturities of long-term debt in its current year December 31 balance sheet? A $ 4,000 B $ 7,000 C $10,000 D $13,000

D $13,000 14 1/2% term note, due next year $ 3,000 8% note, principal due 12/31 next year ($110,000 / 11) 10,000 Current maturities of long-term debt, 12/31 of current year $13,000

A company issues $2,000,000 of par bonds at 97 on January 1, year 1, with a maturity date of December 31, year 30. Bond issue costs are $120,000, and the stated interest rate of the bonds is 8%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 103 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called? A $40,000 B $80,000 C $120,000 D $180,000

D $180,000 The par bonds being sold at 97 indicate that they are being sold at a 3% discount. Total Discount is 3% x $2,000,000 = $60,000 Bonds Payable (Face Value) $2,000,000 Unamortized Discount [($60,000 / 30) × 20 yrs.] ($40,000) Unamortized Issue costs [($120,000 / 30) × 20 yrs.] ($80,000) = Carrying amount of bonds retired $1,880,000 Purchase price ($2,000,000 × 103%) $2,060,000 = Loss on bond retirement, before income taxes ($180,000)

On July 1, year 1, Pell Co. purchased Green Corp. ten-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, year 9 and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the six months ended December 31, year 1. From this long-term investment, Pell should report year 1 revenue of A $16,800 B $18,200 C $20,000 D $21,800

D $21,800 Simple interest 7/1 - 12/31, year 1 [$500,000 x (8% / 2)] $20,000 Amortization of discount on bond investment (given) 1,800 Interest revenue recognized in year 1 $21,800

Wilk Co. reported the following liabilities at December 31 of the current year Accounts payable-trade $ 750,000 Short-term borrowings 400,000 Bank loan, current portion $100,000 3,500,000 Other bank loan, matures June 30, next year 1,000,000 The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31 this year? A $1,250,000 B $2,150,000 C $2,250,000 D $5,650,000

D $5,650,000 Of course, accounts payable and short-term borrowings are also current. $750,000 + $400,000 + $3,500,000 + $1,000,000 = $5,650,000

Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart's three million shares will receive payment of the note principal plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year? A $ 450,000 B $2,250,000 C $4,500,000 D $6,750,000

D $6,750,000 The amount paid to the stockholders at the end of the fifth year should be the accumulated annual interest, $4,500,000 × 10% × 5 yrs = $2,250,000 over the five years, plus the notes payable issue amount of $4,500,000.

On July 1 of the current year, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1 of the current year and mature in ten years. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance? A $579,000 B $594,000 C $600,000 D $609,000

D $609,000 Bond Price ($1,000 × 99% × 600 bonds) $594,000 Plus: Accrued interest at stated interest rate (10% × $1,000 × 600 bonds × 3/12) $ 15,000 Proceeds from bond issuance $609,000

Casey entered into a troubled debt restructuring agreement with First State Bank. First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000. Casey has restructured debt twice in the last five years. Disregarding income taxes, what amount should Casey report as gain on troubled debt restructuring in its income statement? A $ 35,000 B $ 0 C $100,000 D $65,000

D $65,000 In the given case, Casey first recognizes a gain for revaluing the real estate to its fair value = Fair Value of real estate - Carrying Value of the real estate Revaluation Gain = $120,000 - $85,000 = $35,000 gain Casey then would recognize a restructuring gain for the difference between the carrying value of the liability and the fair value of the real estate transferred Restructuring Gain = $185,000 - $120,000 = $65,000.

On January 1, year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, year 11, but were callable at 101 any time after December 31, year 4. Interest was payable semiannually on July 1 and January 1. On July 1, year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox's gain or loss in year 6 on this early extinguishment of debt was A $30,000 gain B $12,000 gain C $10,000 loss D $8,000 gain

D $8,000 gain Face amount of bonds (1,000 × $1,000) $1,000,000 Premium at issuance ($1,040,000 - $1,000,000) $40,000 Amortized to extinguishment date ($40,000 × 11/20*) _ (22,000) Add unamortized premium at extinguishment 18,000 = Bond carrying amount at extinguishment 1,018,000 Cost to reacquire ($1,000,000 × 101%) (1,010,000) = Pretax gain on early extinguishment of debt $ 8,000

In the previous year, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds as a long-term investment. At December 31 of the current year, Enfield's bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds' market value? A Enfield issued a stock dividend. B Enfield is expected to call the bonds at a premium, which is less than Lee's carrying amount. C Interest rates have declined since Lee purchased the bonds. D Interest rates have increased since Lee purchased the bonds.

D Interest rates have increased since Lee purchased the bonds. The purchaser of a bond acquires the right to receive two cash flows: a lump sum paid at maturity for the face amount of the bond, and an annuity consisting of periodic interest payments over the life of the bond. The price the market is willing to pay for the bond is equal to the present value of these two cash flows, discounted at the prevailing market interest rate for bonds having the same maturity and perceived degree of risk.

Andro Co. has a $10 million note payable that is due three months after year-end. The note payable was refinanced when long-term bonds were issued one month after year-end for $11 million. The December 31 financial statements were issued two months after year end. How should Andro classify and disclose the note? # Classification of liability Note disclosure required A Current No B Current Yes C Non-current No D Non-current Yes

D Non-current Yes Under GAAP, if a company demonstrates both the intent and ability to refinance short-term obligations on a long-term basis after the balance sheet date but before the issuance of the financial statements, then the obligations may be categorized as long-term on the financial statements and will be classified as a non-current liability. As Andro Co. issued the bonds to refinance the notes payable, both these conditions are satisfied. The note payable will be classified as a non-current liability. Per the disclosure requirements, if a short term obligation is excluded from current liabilities, the notes to financial statements should include the description of the financing agreement and the terms of the new obligation incurred or expected to be incurred issued as a result of refinancing.

What type of bonds mature in installments? A Debenture B Term C Variable rate D Serial

D Serial Serial bonds are bonds issued at the same time but having different maturity dates. These are also called installment bonds because they provide a series of installments for repayment of principal.

A bond issued on June 1 of the current year, has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 31, is for a period of A Three months B Four months C Six months D Seven months

D Seven months When the interest date does not coincide with the end of the accounting period, the issuer must accrue interest expense through year-end. Therefore, bond interest expense for the year ended December 31, is for a period of seven months--from the date of issuance of June 1 to year-end of December 31.

On March 1, Year 1, a company established a sinking fund in connection with an issue of bonds due in year 8. At December 31, Year 5, the independent trustee held cash in the sinking fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the company's balance sheet at December 31, Year 5? A The cash in the sinking fund should appear as a current asset. B Only the accumulated deposits should appear as a noncurrent asset. C The entire balance in the sinking fund account should appear as a current asset. D The entire balance in the sinking fund account should appear as a noncurrent asset.

D The entire balance in the sinking fund account should appear as a noncurrent asset. Because the bond sinking fund is earmarked for the retirement of long-term debt, its entire balance (i.e., all contributions to the fund plus all interest accumulations added to the fund balance to date) should be reported as a noncurrent asset in the investments section of the balance sheet.

On July 1, year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, year 1 and year 2. On July 1, year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay's proceeds from the discounted note were A $48,400 B $49,350 C $50,350 D $51,700

Face amount of note on 7/1, year 1 $100,000 Less: Payment of first installment on 12/31, year 1 (50,000) Face amount of note on 12/31, year 1 (due 12/31, year 2) 50,000 Add: Interest to maturity ($50,000 × 10% × 12/12) 5,000 = Maturity value of remaining portion of note 55,000 Less: Bank discount ($55,000 × 12% × 6/12) (3,300) = Proceeds from discounted note $ 51,700