Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 14 Bonds and Long-Term Notes
a. $252,369,000.
b. $256,369,000.
c. $256,200,000.
d. $257,030,070.
61. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report
for its net bond liability balance after its first interest payment on March 31, 2017, rounded up
to the nearest thousand?
a. $252,369,000.
b. $256,369,000.
c. $256,300,000.
d. $257,030,000.
62. 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 an underwriter as a commission. What is the amount of bond issue costs?
a. $330,000.
b. $300,000.
c. $120,000.
d. $ 20,000.
63. Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the
resulting effect on interest expense and the bond book value, respectively?
a. Understated, understated.
b. Understated, overstated.
c. Overstated, understated.
d. Overstated, overstated.
64. 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 pays interest at 8%. The current market rate of interest is 8% for
each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is
correct?
a. Both bonds sell for the same amount.
b. Both bonds sell for more than $100,000.
c. Bond X sells for more than bond Y.
d. Bond Y sells for more than bond X.
65. 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. The current market rate of interest is 8%. Which of the following is correct?
a. Both bonds sell for the same amount.
b. Bond X sells for more than bond Y.
c. Bond Y sells for more than bond X.
d. Both bonds sell at a discount.
66. On June 30, 2016, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The
bonds were priced to yield 10%. The bonds are dated June 30, 2016, and mature on June 30,
2026. Interest is payable semiannually on December 31 and July 1. If the effective interest
method is used, by how much should the bond discount be reduced for the six months ended
December 31, 2016?
a. $32,000.
b. $40,000.
c. $46,000.
d. $60,000.
67. On January 1, 2016, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is
payable semiannually on January 1 and July 1. The bonds mature on January 1, 2026. Zebra
paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is
the bond book value reported in the December 31, 2016, balance sheet?
a. $1,045,000.
b. $1,040,000.
c. $987,000.
d. $982,000.
Chapter 14 Bonds and Long-Term Notes
68. On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $300,000. The
contract 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 2017
(assume annual interest payments and amortization)?
a. $23,280.
b. $25,140.
c. $29,100.
d. $29,610.
69. Cramer Company sold five-year, 8% bonds on October 1, 2016. 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 fiscal year of Cramer Company ends on December 31. How much interest expense will
Cramer Company report in its December 31, 2016, income statement (assume straight-line
amortization)?
a. $ 2,000.
b. $ 1,900.
c. $ 1,778.
d. $ 2,040.
70. In each succeeding payment on an installment note:
a. The amount of interest paid increases.
b. The amount of principal paid increases.
c. The amount of principal paid decreases.
d. The amounts paid for both interest and principal increase proportionately.
71. When a long-term note is given in exchange for equipment, the amount considered as paid for
the machine is:
a. The invoice price.
b. The wholesale price.
c. The present value of cash outflows discounted at the stated rate.
d. The present value of the note payments discounted at the market rate.
72. When the interest payment dates are March 1 and September 1, and notes are issued on July 1,
the amount of interest expense to be accrued at December 31 of the year of issue would:
a. Not be required.
b. Be for six months.
c. Be for four months.
d. Be for 10 months.
Chapter 14 Bonds and Long-Term Notes
73. When an equipment dealer receives a long-term note in exchange for equipment, and the
stated rate of interest is indicative of the market rate of interest at the time of the transaction,
the present value of the future cash flows received on the notes:
a. Is treated as a current liability at the exchange date.
b. Is recorded as interest revenue at the exchange date.
c. Is recorded as interest receivable at the exchange date.
d. Is credited to sales revenue at the exchange date.
74. AMC issues a note with no stated interest rate in exchange for a machine. In accounting for
the transaction:
a. The machine should be depreciated over the note’s term to maturity.
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.
c. Both the note and machine are recorded at the face amount of the note or the fair value
of the machine, whichever is more clearly determinable.
d. The note is recorded at its face amount unless the fair value of the machine is readily
available.
75. Green Industries purchased a machine from Cyan Corporation on October 1, 2016. In
payment for the $144,000 purchase, Green issued a one-year installment note to be
paid in equal monthly payments at the end of each month. The payments include
interest at the rate of 12%. Monthly installment payments are closest to:
a. $12,000.
b. $12,445.
c. $12,668.
d. $12,794.
Chapter 14 Bonds and Long-Term Notes
76. Magenta Company purchased a machine from Pink Corporation on October 31,
2016. In payment for the $288,000 purchase, Magenta issued a one-year
installment note to be paid in equal monthly payments of $25,588 at the end of
each month. The payments include interest at the rate of 12%. The amount of
interest expense that Magenta will report in its income statement for the year
ended December 31, 2016, is:
a. $2,559.
b. $2,880.
c. $5,533.
d. $5,760.
77. 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.
b. Newspaper articles.
c. Bond interest payments.
d. The company's audit report.
78. 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.
79. 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.
80. 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.
81. 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.
Chapter 14 Bonds and Long-Term Notes
b. Added to bonds payable.
c. Included as an expense in the year of issue.
d. Reported as a deferred charge.
82. 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.
83. 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
Chapter 14 Bonds and Long-Term Notes
84. 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
85. 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.
86. 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.
87. The rate of return on assets indicates:
a. The margin of safety provided to creditors.
Chapter 14 Bonds and Long-Term Notes
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.
88. 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.
89. 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.
90. On June 30, 2016, Blair Industries had outstanding $80 million of 8% convertible bonds that
mature on June 30, 2017. 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, 2016, the
unamortized balance in the discount on bonds payable account was $4 million. On June 30,
2016, 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.
Chapter 14 Bonds and Long-Term Notes
91. On February 1, 2015, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000.
PWI retired all of these bonds on January 1, 2016, 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.
92. On March 31, 2016, 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.
93. On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, 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, 2016, 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.
94. 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
95. 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.
96. On April 1, 2016, 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.
97. MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2015
for $106,000. MSG uses straight-line amortization. On May 1, 2016, $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.
98. Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2015 for
$106,000. Nickel uses straight-line amortization. On May 1, 2016, $10,000 of the bonds were
redeemed at 110. As a result of the retirement, MSG will report:
a. a $467 gain.
b. a $467 loss.
c. a $1,000 gain.
d. a $5,000 loss.
99. On January 1, 2016, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a
book amount of $966,130. The indenture specified a call price of $981,000. The bonds were
issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1,
2016. What is the amount of the loss on early extinguishment?
a. $0.
b. $6,932.
c. $7,241.
d. $7,629
Chapter 14 Bonds and Long-Term Notes
Chapter 14 Bonds and Long-Term Notes
100. On March 1, 2016, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on
February 28, 2026. 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, 2016, 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.
101. On January 1, 2016, Bell Co. issued $10 million of 10-year convertible bonds at 105. On
January 1, 2021, 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
102. On June 30, 2016, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June
30, 2021. Interest is payable semiannually every June 30 and December 31. On June 30, 2016,
after amortization was 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 98 and retired them. At June 30, 2016, what amount should K Co.
recognize as gain on redemption of bonds before income taxes?
a. $ 40,000.
Chapter 14 Bonds and Long-Term Notes
b. $160,000.
c. $240,000.
d. $360,000.
103. On January 1, 2011, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These
bonds were to mature on January 1, 2021, but were callable at 101 any time after December
31, 2014. Interest was payable semiannually on July 1 and January 1. On July 1, 2016, 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 2016 on this early extinguishment of debt
was:
a. $16,000 gain.
b. $20,000 loss.
c. $24,000 gain.
d. $60,000 gain.
Chapter 14 Bonds and Long-Term Notes
104. 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.
105. Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on
January 1, 2016. The bonds sold for $739,816 and mature in 2035 (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, 2016, 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.
106. 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.
Chapter 14 Bonds and Long-Term Notes
b. Interest expense and a loss.
c. A gain and no interest expense.
d. Interest expense and no gain or loss.
107. Rick’s Pawn Shop issued 11% bonds, dated January 1, with a face amount of
$400,000 on January 1, 2017. 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, 2017, 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.
❖
