101 terms

# ch 14

###### PLAY
The interest rate that is printed on the bond certificate is not referred to as the:
D Effective Rate
Most corporate bonds are
B. Debenture Bond
The method used to pay interest depends on whether the bonds are
A. Registered or Coupon
The rate of interest that actually is incurred on a bond payable is called the
C. Effective Rate
Interest Expense is
A. The effective interest rate times the amount of the debt outstanding during the interest period
Bonds usually sell at their
C. Present Value
Straight-line amortization of bond discount or premium
D.Provides the same total amount of interest expense over the life of the bond issue as does theeffective interest method
An amortization schedule for bonds issued at a premium
C. Is a schedule that reflects the changes in the debt over its term to maturity
LPC issued the bonds
Lopez Plastics Co. What is the annual stated interest rate on the bonds
C. 7%
Lopez Plastics Co. What is the effective interest rate on the bonds
C. 6%
Lopez Plastics Co. 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?
D. \$2,283 Loss
Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interestexpense for the year ended December 31, 2011, is for a period of
D. Seven Months
Ordinarily, the proceeds from the sale of a bond issue will be equal to
C. The present value of the face amount plus the present value of the stream of interest payments
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
When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, theamount of interest expense reported in the December 31 income statement for the year of issue wouldbe for
A. Six Months
How would the carrying value of bonds payable be affected by the amortization of each of thefollowing?
D. Option D
For the issuer of 20-year bonds, the amount of amortization using the effective interest method woulddecrease each year if the bonds are sold at a:
A. Option A
For a bond issue that sells for more than the bond face amount, the effective interest rate is
D. Less than the rate stated on the face of the bond
When bonds are sold at a premium and the effective interest method is used, at each subsequent interestpayment date, the cash paid is
C. Greater than the effective interest
When bonds are sold at a discount and the effective interest method is used, at each subsequent interestpayment date, the cash paid is
B. Less than the effective interest
When bonds are sold at a discount and the effective interest method is used, at each interest paymentdate, the interest expense
A. Increases
When bonds are sold at a premium and the effective interest method is used, at each interest paymentdate, the interest expense
D. Decreases
When bonds are sold at a discount, if the annual straight-line amortization amount is compared to theannual effective interest amortization amount over the life of the bond issue, the annual amount of thestraight-line amortization of discount is
B. Higher than the effective interest amount in the early years and less than the effective interest amountin the later years
When bonds are sold at a premium, if the annual straight-line amortization amount is compared to theannual effective interest amortization amount over the life of the bond issue, the annual amount of thestraight-line amortization of premium is
A. Higher than the effective interest amount in the early years and less than the effective interest amountin the later years
Bonds were issued at a discount. In the bond amortization schedule:
B. The total effective interest over the term to maturity is equal to the amount of the discount plus thetotal cash interest paid
On January 1, 2011, Legion Company sold \$200,000 of 10% ten-year bonds. Interest is payablesemiannually 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 sixmonths ended June 30, 2011, in the amount o
C. \$10,620
A bond issue with a face amount of \$500,000 bears interest at the rate of 10%. The current market rateof interest is 11%. These bonds will sell at a price that is:
C. Less than \$500,000
On January 1, 2011, Solo Inc. issued 1,000 of its 8%, \$1,000 bonds at 98. Interest is payablesemiannually on January 1 and July 1. The bonds mature on January 1, 2021. Solo paid \$50,000 in bondissue costs. Solo uses straight-line amortization. The amount of interest expense for the year is
B. \$82,000
On January 1, 2011, an investor paid \$291,000 for bonds with a face amount of \$300,000. The statedrate of interest is 8% while the current market rate of interest is 10%. Using the effective interestmethod, how much interest income is recognized by the investor in 2011 (assume annual interestpayments and amortization)
\$29,100
Zero-coupon bonds
A. offer a return in the form of a deep discount off the face value
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
C. Plus the present value of all future interest payments at the market (effective) rate of interest
On January 31, 2011, B Corp. issued \$600,000 face value, 12% bonds for \$600,000 cash. The bondsare dated December 31, 2010, and mature on December 31, 2020. Interest will be paid semiannually onJune 30 and December 31. What amount of accrued interest payable should B report in its September30, 2011, balance sheet
A. \$18,000
Discount Mart What is the stated annual rate of interest on the bonds
C. 6%
Discount Mart What is the effective annual rate of interest on the bonds?
D. 8%
Discount Mart What is the interest expense on the bonds in 2012?
A. \$700,700
Discount Mart What is the carrying value of the bonds as of December 31, 2012
A. \$8,834,770
Discount Mart What would be the total interest cost of the bonds over their full term?
D. \$7,359,033
Prescott Corporation What is the stated annual rate of interest on the bonds?
D. 8%
Prescott Corporation What is the effective annual rate of interest on the bonds?
C. 6%
Prescott Corporation What is the interest expense on the bonds in 2012?
B. \$680,759
Prescott Corporation What is the carrying value of the bonds as of December 31, 2012?
D. \$11,256,109.
Prescott Corporation What would be the total interest expense recognized for the bond issue over its full term?
A. \$6,512,253
Auerbach Inc. Auerbach issued the bonds
C. At a discount
Auerbach Inc. How much cash interest does Auerbach pay on March 31, 2012
A. \$6.0 Million
Auerbach Inc. Assuming that Auerbach issued the bonds for \$255,369,000, what interest expense would it recognize inits 2011 income statement
B. \$3,830,535
Auerbach Inc. Assuming that Auerbach issued the bonds for \$255,369,000, what would the company report for its netbond liability balance at December 31, 2011, rounded up to the nearest thousand
C. \$256,200,000.
Auerbach Inc. Assuming that Auerbach issued the bonds for \$255,369,000, what would the company report for itsnet bond liability balance after its first interest payment on March 31, 2012, rounded up to the nearest thousand?
D. \$257,030,000
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 anunderwriter as a commission. What is the amount of bond issue costs?
A. \$330,000
Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resultingeffect on interest expense and the bond carrying value, respectively
D. Overstated, Overstated
Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity valueof \$100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond Xmatures in 7 years while bond Y matures in 10 years. Which of the following is correct?
A. Both bonds sell for the same amount
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. Thecurrent market rate of interest is 8%. Which of the following is correct
C. Bond Y sells for more than bond X
On June 30, 2011, Hardy Corporation issued \$10 million of its 8% bonds for \$9.2 million. The bondswere priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30, 2018. Interest ispayable semiannually on December 31 and July 1. If the effective interest method is used, by how muchshould the bond discount be reduced for the 6 months ended December 31, 2011?
D. \$60,000
On January 1, 2011, Zebra Corporation issued 1,000 of its 8%, \$1,000 bonds at 98. Interest is payablesemiannually on January 1 and July 1. The bonds mature on January 1, 2021. Zebra paid \$50,000 inbond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying valuereported in the December 31, 2011, balance sheet?
D. \$982,000
On January 1, 2011, an investor paid \$291,000 for bonds with a face amount of \$300,000. The contractrate of interest is 8% while the current market rate of interest is 10%. Using the effective interestmethod, how much interest income is recognized by the investor in
2012
(assume annual interestpayments and amortization)?
D. \$29,610
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 fiscalyear of Cramer Company ends on December 31. How much interest expense will Cramer Companyreport in its December 31, 2011, income statement (assume straight-line amortization)
B. \$1,900
In each succeeding payment on an installment note
B. The amount of principal paid increases
When a long-term note is given in exchange for equipment, the amount considered as paid for themachine is:
D. The present value of the note payments discounted at the market rate
When the interest payment dates are March 1 and September 1, and notes are issued on July 1, theamount of interest expense to be accrued at December 31 of the year of issue would
C. Be for four months
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
D. Is credited to sales revenue at the exchange date.
AMC issues a note in exchange for a machine with no stated interest rate. In accounting for thetransaction
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
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
Which of the following indicates the margin of safety provided to creditors
B. Times interest earned ratio
Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporationat the
A. Face amount price less any unamortized discount or plus any unamortized premium.
The unamortized balance of discount on bonds payable is reported in the balance sheet as:
D. A contra-liability
Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financialstatements, the discount should be
A. Deducted from bonds payable
Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financialstatements, the premium should be
Red Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including anyindirect effects on earnings, the immediate impact of retiring debt on these ratios is a(an)
C. Option C
Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance willimmediately decrease Yellow's:
C. Option C
The times interest earned ratio indicates
A. The margin of safety provided to creditors
the debt to equity ratio indicates
B. the extent of "trading on the equity" or financial leverage
the rate of return on assets indicates
C. profitability without regard to how resources are financed.
The rate of return on shareholders' equity indicates
D. the effectiveness of employing resources provided by owners
Heidi Aurora Imports issued shares of the company's Class B stock. Heidi Aurora Imports should reportthe stock in the company's statement of financial position
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. Thebonds 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
B. credit premium on bonds payable \$100,000
Patrick Roch International issued 5% bonds convertible into shares of the company's common stock.Upon issuance, Patrick Roch International should record
B. the proceeds of the bond issue entirely as debt.
When bonds are retired prior to their maturity date
B. The issuing company probably will report an ordinary gain or loss
On June 30, 2011, Blair Industries had outstanding \$80 million of 8%, convertible bonds that matureon June 30, 2012. Interest is payable each year on June 30 and December 31. The bonds are convertibleinto 6 million shares of \$10 par common stock. At June 30, 2011, the unamortized balance in thediscount on bonds payable account was \$4 million. On June 30, 2011, half the bonds were convertedwhen Blair's common stock had a market price of \$30 per share. When recording the conversion, Blairshould credit paid-in capital-excess of par
B. \$8 million
On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, \$1,000,000 bonds for \$1,116,000. PWI retiredall 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
C. \$72,800 gain
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 thanthe par value of the common stock issued. If Ashley used the book value method of accounting for theconversion, which of the following statements correctly states an effect of this conversion
A. Shareholders equity is increased
On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds wereconverted into common stock when the market price of Doll's common stock was 500 percent aboveits par value. On March 1, 2011, cash proceeds from the issuance of the convertible bonds should bereported as
A. a liability for the entire proceeds
When outstanding bonds are converted into common stock, under either the book value method or themarket value method, the same amount would be debited to
A. Option A
When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds fromthe 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
On April 1, 2011, Austere Corporation issued \$300,000 of 10% bonds at 105. Each \$1,000 bond wassold with 25 detachable stock warrants, each permitting the investor to purchase one share of commonstock for \$17. On that date, the market value of the common stock was \$15 per share and the marketvalue of each warrant was \$2. Austere should record what amount of the proceeds from the bond issueas an increase in liabilities?
B. \$300,000
MSG Corporation has \$100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bondshave 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. Howmuch, and what type of gain or loss, most likely results from this retirement
A. \$667 extraordinary loss
Nickel Inc. owns \$100,000 of 10-year, 6% bonds as an investment on December 31, 2010. The bondshave 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 extraordinary gain
On January 1, 2011, Tiny Tim Industries had outstanding \$1,000,000 of 12% bonds with a carryingamount of \$966,130. The indenture specified a call price of \$981,000. The bonds were issuedpreviously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2011. What is theamount of the loss on early extinguishment
C \$7,241
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 holderto 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
\$120,000
On January 1, 2011, Bell Co. issued \$10 million of 10-year convertible bonds at 105. On January1, 2016, the bonds were converted into common stock with a market value of \$11 million. Uponconversion, Bell would recognize
B. Option B
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 amortizationwas 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 98and retired them. At June 30, 2011, what amount should K recognize as gain before income taxes onredemption of bonds
B. \$160,000
On January 1, 2006, F Corp. issued 2,000 of its 10%, \$1,000 bonds for \$2,080,000. These bonds wereto mature on January 1, 2016, but were callable at 101 any time after December 31, 2009. Interest waspayable semiannually on July 1 and January 1. On July 1, 2011, F called all of the bonds and retiredthem. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in2011 on this early extinguishment of debt was
A. \$16,000 gain
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 forthe bonds in its income statement for the year
A. Interest expense and a gain
Pierce Company issued 11% bonds, dated January 1, with a face amount of \$800,000 on January1, 2011. The bonds sold for \$739,816 and mature in 2030 (20 years). For bonds of similar risk andmaturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Piercedetermines 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 willinclude
A. A gain from change in the fair value of debt of \$10,617.
On January 1, 2011, Ozark Minerals issued \$20 million of 9%, 10-year convertible bonds at 101. Thebonds 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 to \$18,800,000
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 Internationalshould record
A. the proceeds of the bond issue as part debt and part equity
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 preparesits financial statements using IFRS
A. the increase in the effective interest rate caused by the transaction costs is reflected in the interestexpense
On March 1, 2011, Doll Co. issued 10-year convertible bonds at 106. During 2014, the bonds wereconverted into common stock when the market price of Doll's common stock was 500 percent aboveits 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 reportedas
C. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liabilityfor the balance
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
TMC issued \$50 million of its 12% bonds on April 1, 2011, at 98 plus accrued interest. The bonds aredated January 1, 2011, and mature on December 31, 2030. Interest is payable semiannually on June 30and December 31. What amount did TMC receive from the bond issuance?
A. \$50.5 million
On September 1, 2011, Sam's Shoe Co. issued \$350,000 of 8% bonds. The bonds pay interestsemiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How muchcash did Sam's receive upon sale of the bonds?
C. \$354,667
During 2011 Marquis Company was encountering financial difficulties and seemed likely to default ona \$300,000, 10%, four-year note dated January 1, 2009, payable to Third Bank. Interest was last paid onDecember 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 its2011 income statement
C. \$80,000