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ACCT 342 CH 13/14
Terms in this set (15)
Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.
An amortization schedule for bonds issued at a premium:
Is a schedule that reflects the changes in the debt over its term to maturity.
Straight-line amortization of bond discount or premium:
Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.
On January 1, 2018, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2018 (assume annual interest payments and amortization)?
$291,000 × 10%
Interest expense is:
The effective interest rate times the amount of the debt outstanding during the interest period.
A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:
Less than $500,000
When the market rate of interest is higher than the bonds' stated rate, the bonds will sell at a discount.
On January 1, 2018, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.
Legion should pay cash interest for the six months ended June 30, 2018, in the amount of:
(10% × ½ × $200,000)
An asset for a gain contingency should not be accrued unless it is probable that the gain contingency will be realized.
A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.
Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:
Disclosed and accrued as a liability.
A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:
Probable and the amount of the loss can be reasonably estimated.
Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is reasonably possible, a loss contingency should be:
Disclosed but not accrued as a liability.
Short-term obligations can be reported as long-term liabilities if:
The firm intends to and has the ability to refinance as long-term.
Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?
The company intended to refinance the debt and did so prior to issuance of the financial statements.
Z Co. filed suit against W Inc. in 2018 seeking damages for patent infringement. At December 31, 2018, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2019. Z should report this award in its 2018 financial statements, issued in March 2019 as:
A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.
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