81) Which of the following indicates the margin of safety provided to creditors?
A) Rate of return on shareholders’ equity.
B) Times interest earned ratio.
C) Gross margin.
D) Debt to equity ratio.
82) Bonds payable should be reported as a long-term liability in the balance sheet of the issuing
corporation at the:
A) Face amount price less any unamortized discount or plus any unamortized premium.
B) Current bond market price.
C) Face amount less any unamortized premium or plus any unamortized discount.
D) Face amount less accrued interest since the last interest payment date.
83) The unamortized balance of discount on bonds payable is reported in the balance sheet as:
A) A prepaid expense.
B) An expense account.
C) A current liability.
D) A contra-liability.
84) Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial
statements, the discount should be:
A) Deducted from bonds payable.
B) Added to bonds payable.
C) Included as an expense in the year of issue.
D) Reported as a deferred charge.
85) Liberty Company issued 10-year bonds at 105 during the current year. In the year-end
financial statements, the premium should be:
A) Reported as an intangible asset.
B) Included in revenue for the year of sale.
C) Deducted from bonds payable.
D) Added to bonds payable.
86) Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not
including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is
a(n):
Return on Assets
Debt to Equity
a.
increase
increase
b.
decrease
decrease
c.
increase
decrease
d.
decrease
increase
A) Option A
B) Option B
C) Option C
D) Option D
87) Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance
will immediately decrease Yellow’s:
Return on Assets
Debt to Equity Ratio
a.
yes
yes
b.
no
no
c.
yes
no
d.
no
yes
A) Option A
B) Option B
C) Option C
D) Option D
88) The times interest earned ratio indicates:
A) The margin of safety provided to creditors.
B) The extent of “trading on the equity” or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.
89) The debt to equity ratio indicates:
A) The margin of safety provided to creditors.
B) The extent of “trading on the equity” or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.
90) The rate of return on assets indicates:
A) The margin of safety provided to creditors.
B) The extent of “trading on the equity” or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.
91) The rate of return on shareholders’ equity indicates:
A) The margin of safety provided to creditors.
B) The extent of “trading on the equity” or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.
92) When bonds are retired prior to their maturity date:
A) GAAP has been violated.
B) The issuing company probably will report an ordinary gain or loss.
C) The issuing company probably will report a gain.
D) The issuing company will report a non-operating gain or loss.
93) On June 30, 2018, Blair Industries had outstanding $80 million of 8% convertible bonds that
mature on June 30, 2019. Interest is payable each year on June 30 and December 31. The bonds
are convertible into 6 million shares of $10 par common stock. At June 30, 2018, the
unamortized balance in the discount on bonds payable account was $4 million. On June 30,
2018, half the bonds were converted when Blair’s common stock had a market price of $30 per
share. When recording the conversion, Blair should credit paid-in capital–excess of par:
A) $6 million.
B) $8 million.
C) $10 million.
D) $12 million.
94) On February 1, 2017, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000.
PWI retired all of these bonds on January 1, 2018, at 102. Unamortized bond premium on that
date was $92,800. How much gain or loss should be recognized on this bond retirement?
A) $0 gain.
B) $111,800 gain.
C) $72,800 gain.
D) $96,000 gain.
95) On March 31, 2018, Ashley, Inc.’s bondholders exchanged their convertible bonds for
common stock. The book value of these bonds on Ashley’s books was less than the fair value but
greater than the par value of the common stock issued. If Ashley used the book value method of
accounting for the conversion, which of the following statements correctly states an effect of this
conversion?
A) Shareholders’ equity is increased.
B) Additional paid-in capital is decreased.
C) Retained earnings is increased.
D) A loss is recognized.
96) On March 1, 2018, Doll Co. issued 10-year convertible bonds at 106. During 2021, the bonds
were converted into common stock when the market price of Doll’s common stock was 500
percent above its par value. On March 1, 2018, cash proceeds from the issuance of the
convertible bonds should be reported as:
A) A liability for the entire proceeds.
B) Paid-in capital for the entire proceeds.
C) Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a
liability for the balance.
D) A liability for the face amount of the bonds and paid-in capital for the premium over the par
value.
97) When outstanding bonds are converted into common stock, under either the book value
method or the market value method, the same amount would be debited to:
Bonds Payable
Bond Premium
a.
Yes
Yes
b.
No
Yes
c.
No
No
d.
Yes
No
A) Option A
B) Option B
C) Option C
D) Option D
98) When bonds include detachable warrants, what is the appropriate accounting for the cash
proceeds from the bond issue?
A) The proceeds from the bond issue are allocated between the bonds and the warrants on the
basis of their relative market values.
B) The proceeds from the bond issue are allocated between the bonds and the warrants on the
basis of their relative face values.
C) A nominal amount is allocated to the warrants.
D) All of the proceeds are allocated to the bonds.
99) On April 1, 2018, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000
bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one
share of common stock for $17. On that date, the market value of the common stock was $15 per
share and the market value of each warrant was $2. Austere should record what amount of the
proceeds from the bond issue as an increase in liabilities?
A) $285,000.
B) $300,000.
C) $315,000.
D) $0.
100) MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2017
for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May
1, 2018, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:
A) a $600 loss.
B) a $667 loss.
C) a $1,200 loss.
D) a $1,200 gain.
101) Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2017
for $106,000. The investment receives interest annually and Nickel uses straight-line
amortization. On May 1, 2018, the issuer retired $10,000 of the bonds at 110. As a result of the
retirement, Nickel will report a:
A) $467 gain.
B) $467 loss.
C) $1,000 gain.
D) $5,000 loss.
102) On January 1, 2018, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a
book value of $966,130. The indenture specified a call price of $981,000. The bonds were issued
previously at a price to yield 14% and interest payable semi-annually on July 1 and January 1.
Tiny Tim called the bonds (retired them) on July 1, 2018. What is the amount of the loss on early
extinguishment?
A) $0.
B) $6,932.
C) $7,241.
D) $7,629.
103) On March 1, 2018, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on
February 28, 2028. Each $1,000 bond was issued with 30 detachable stock warrants, each of
which entitled the holder to purchase, for $50, one share of Evan’s $25 par common stock. On
March 1, 2018, the market price of each warrant was $4. By what amount should the bond issue
proceeds increase shareholders’ equity?
A) $0.
B) $30,000.
C) $90,000.
D) $120,000.
104) On January 1, 2018, Bell Co. issued $10 million of 10-year convertible bonds at 105. On
January 1, 2023, the bonds were converted into common stock with a market value of $11
million. Upon conversion, Bell would recognize:
Book value method
Market value method
a.
no gain or loss
no gain or loss
b.
no gain or loss
loss
c.
loss
no gain or loss
d.
loss
loss
A) Option A
B) Option B
C) Option C
D) Option D
105) On June 30, 2018, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on
June 30, 2023. Interest is payable semiannually every June 30 and December 31. On June 30,
2018, after amortization was recorded for the period, the unamortized bond premium was
$60,000. On that date, K acquired all its outstanding bonds on the open market at 98 and retired
them. At June 30, 2018, what amount should K Co. recognize as gain on redemption of bonds
before income taxes?
A) $60,000.
B) $160,000.
C) $200,000.
D) $260,000.
106) On January 1, 2013, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These
bonds were to mature on January 1, 2023, but were callable at 101 any time after December 31,
2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, F called all of
the bonds and retired them. The bond premium was amortized on a straight-line basis. Before
income taxes, F Corp.’s gain or loss in 2018 on this early extinguishment of debt was:
A) $16,000 gain.
B) $20,000 loss.
C) $24,000 gain.
D) $60,000 gain.
107) Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of
interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will
the company report for the bonds in its income statement for the year?
A) Interest expense and a gain.
B) Interest expense and a loss.
C) A gain and no interest expense.
D) Interest expense and no gain or loss.
108) Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on
January 1, 2018. The bonds sold for $739,816 and mature in 2037 (20 years). For bonds of
similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and
December 31. Pierce determines interest at the effective rate and elected the option to report
these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $730,000.
The entire change in fair value was due to a change in the general (risk-free) rate of interest.
Pierce’s net income for the year will include:
A) An unrealized gain from change in the fair value of debt of $10,617.
B) An unrealized loss from change in the fair value of debt of $10,617.
C) A gain from change in the fair value of debt of $10,204.
D) A loss from change in the fair value of debt of $10,204.
109) Markel Inc. has bonds outstanding during a year in which the general (risk-free) rate of
interest has not changed. Markel elected the fair value option for the bonds upon issuance. What
will the company report for the bonds in its income statement for the year?
A) Interest expense and a gain.
B) Interest expense and a loss.
C) A gain and no interest expense.
D) Interest expense and no gain or loss.
110) Rick’s Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on
January 1, 2019. The bonds sold for $370,000. For bonds of similar risk and maturity the market
yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick’s determines
interest at the effective rate and elected the option to report these bonds at their fair value. On
December 31, 2019, the fair value of the bonds was $365,000, with $2,000 of the change due to a
change in general interest rates. Rick’s statement of comprehensive income will include:
A) An unrealized gain from change in the fair value of debt of $5,412.
B) An unrealized loss from change in the fair value of debt of $3,412.
C) An unrealized gain from change in the fair value of debt of $2,000.
D) An unrealized gain from change in the fair value of debt of $3,412.
111) On March 1, 2018, Doll Co. issued 10-year convertible bonds at 106. During 2021, the
bonds were converted into common stock when the market price of Doll’s common stock was
500 percent above its par value. Doll prepares its financial statements according to International
Financial Reporting Standards (IFRS). On March 1, 2018, cash proceeds from the issuance of the
convertible bonds should be reported as:
A) A liability for the entire proceeds.
B) Paid-in capital for the entire proceeds.
C) Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a
liability for the balance.
D) A liability for the face amount of the bonds and paid-in capital for the premium over the par
value.
112) When a company issues bonds between interest dates, the entry to record the issuance of the
bonds will:
A) Include a credit to interest payable.
B) Include a debit to interest expense.
C) Include a debit to cash that has been reduced by interest accrued from the last interest date.
D) Include a debit to cash that has been increased by interest that will accrue from sale to the
next interest date.
113) TMC issued $50 million of its 12% bonds on April 1, 2018, at 98 plus accrued interest. The
bonds are dated January 1, 2018, and mature on December 31, 2037. Interest is payable
semiannually on June 30 and December 31. What amount did TMC receive from the bond
issuance?
A) $50.5 million.
B) $51.5 million.
C) $49.0 million.
D) $49.5 million.
114) On September 1, 2018, Sam’s Shoe Co. issued $350,000 of 8% bonds. The bonds pay
interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face
amount. How much cash did Sam’s receive upon sale of the bonds?
A) $378,000.
B) $364,000.
C) $354,667.
D) $350,000.
115) When a company issues bonds between interest dates the entry to record the issuance of the
bonds will:
A) Include a debit to cash that has been reduced by accrued interest from the last interest date.
B) Include a credit to accrued interest payable.
C) Include a debit to interest expense.
D) Be unaffected by the timing of issue.
116) Brown Co. issued $100 million of its 10% bonds on April 1, 2018, at 99 plus accrued
interest. The bonds are dated January 1, 2018, and mature on December 31, 2037. Interest is
payable semiannually on June 30 and December 31. What amount did Brown receive from the
bond issuance?
A) $87.8 million.
B) $99.0 million.
C) $100.0 million.
D) $101.5 million.
117) On September 1, 2018, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued
interest. The bonds are dated June 1, 2018, and mature on May 30, 2028. Interest is payable
semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:
A) $1,640,000.
B) $1,608,000.
C) $1,607,200.
D) $1,568,000.
118) On September 1, 2018, Red Co., issued $48 million of its 10% bonds at face value. The
bonds are dated June 1, 2018, and mature on May 30, 2028. Interest is payable semiannually on
June 1 and December 1. At the time of issuance, Red would receive cash proceeds that would
include accrued interest of:
A) Zero.
B) $600,000.
C) $1,200,000.
D) $4,800,000.
119) On January 1, 2018, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at
101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into
40 shares of Ozark’s no par common stock. Bonds that are similar in all respects, except that they
are nonconvertible, currently are selling at 99. Upon issuance, Ozark should:
A) Debit discount on bonds payable $100,000.
B) Credit premium on bonds payable $100,000.
C) Credit equity $100,000.
D) Credit bonds payable $10,100,000.