120) Patrick Rach International issued 5% bonds convertible into shares of the company’s
common stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should
record:
A) The proceeds of the bond issue as part debt and part equity.
B) The proceeds of the bond issue entirely as debt.
C) The proceeds of the bond issue entirely as equity.
D) The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
121) During 2018 Marquis Company was encountering financial difficulties and seemed likely to
default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank.
Interest was last paid on December 31, 2017. On December 31, 2018, 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 its 2018 income statement?
A) $20,000.
B) $50,000.
C) $80,000.
D) $0.
122) On January 1, 2018, Ozark Minerals issued $20 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. Ozark applies International Financial Reporting
Standards (IFRS). Upon issuance, Ozark should:
A) Credit bonds payable $19,800,000.
B) Credit premium on bonds payable $200,000.
C) Credit equity $200,000.
D) Credit bonds payable $20,200,000.
123) Patrick Rach International issued 5% bonds convertible into shares of the company’s
common stock. Rach applies International Financial Reporting Standards (IFRS). Upon issuance,
Patrick Rach International should record:
A) The proceeds of the bond issue as part debt and part equity.
B) The proceeds of the bond issue entirely as debt.
C) The proceeds of the bond issue entirely as equity.
D) The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
124) When bonds and other debt are issued, costs such as legal costs, printing costs, and
underwriting fees are referred to as debt issue costs. When debt issue costs are incurred:
A) The increase in the effective interest rate caused by the debt issue costs is reflected in the
interest expense.
B) The decrease in the effective interest rate caused by the debt issue costs is reflected in the
interest expense.
C) The debt issue costs are recorded separately as an asset.
D) The recorded amount of the debt is increased by the debt issue costs.
125) On January 1, 2018, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that
specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at
maturity. If the note had instead been an installment note to be paid in four equal payments at the
end of each year beginning December 31, 2018, which of the following would be true?
A) The effective interest rate would have been higher.
B) The annual cash payment would have been less.
C) The first year’s interest expense would have been higher.
D) The second year’s interest expense would have been less.
126) When bonds are sold at their face amount (no discount, no premium) and the effective
interest method is used, at each interest payment date, the interest expense:
A) Increases.
B) Decreases.
C) Remains the same.
D) Is equal to the change in book value.
127) When bonds are sold at a discount and the straight-line interest method is used, at each
interest payment date, the interest expense:
A) Increases.
B) Decreases.
C) Remains the same.
D) Is equal to the change in book value.
128) Shaq Corporation issued $10,000 of bonds on January 1, 2018. The bonds pay interest
semiannually. This is a partial bond amortization schedule for the bonds.
Payment
Cash
Effective
interest
Decrease in
balance
Outstanding
balance
9,080
1
400
409
9
9,089
2
400
409
9
9,098
3
400
409
9
9,107
4
400
410
10
9,117
What is the effective annual rate of interest on the bonds?
A) 4.0%.
B) 4.5%.
C) 8.0%.
D) 9.0%.
129) DeKay Dental Supplies issued $10,000 of bonds on January 1, 2018. The bonds pay interest
semiannually. This is a partial bond amortization schedule for the bonds.
Payment
Cash
Effective
interest
Decrease in
balance
Outstanding
balance
9,080
1
400
409
9
9,089
2
400
409
9
9,098
3
400
409
9
9,107
4
400
410
10
9,117
What is the stated annual rate of interest on the bonds?
A) 4.0%.
B) 4.5%.
C) 8.0%.
D) 9.0%.
130) Ferris Wheeler Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest
semiannually. This is a partial bond amortization schedule for the bonds.
Payment
Cash
Effective
interest
Decrease in
balance
Outstanding
balance
9,080
1
400
409
9
9,089
2
400
409
9
9,098
3
400
409
9
9,107
4
400
What is the interest expense on the bonds for the year ended December 31, 2019?
A) $800.
B) $809.
C) $818.
D) $819.
131) Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2018. The bonds pay
interest semiannually. This is a partial bond amortization schedule for the bonds.
Payment
Cash
Effective
interest
Decrease in
balance
Outstanding
balance
9,080
1
400
409
9
9,089
2
400
409
9
9,098
3
400
409
9
9,107
4
400
What would be the total interest expense recognized for the bond issue over its full term?
A) $16,000.
B) $16,360.
C) $16,920.
D) $20,000.
132) Gene Poole Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest
semiannually. This is a partial bond amortization schedule for the bonds.
Payment
Cash
Effective
interest
Decrease in
balance
Outstanding
balance
9,080
1
400
409
9
9,089
2
400
409
9
9,098
3
400
409
9
9,107
4
400
What is the book value of the bonds on December 31, 2019?
A) $9,116.
B) $9,117.
C) $9,407.
D) $9,416.
133) Harrell’s Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is
convertible into 45 shares of Harrell’s no par common stock. Bonds that are similar in all
respects, except that they are nonconvertible, currently are selling at 98.
Harrell applies U.S. GAAP. Recording the issuance of the bonds would cause an increase in
Harrell’s:
A) shareholders’ equity of $1,000,000.
B) shareholders’ equity of $3,000,000.
C) assets of $98,000,000.
D) liabilities of $101,000,000.
134) Harrell’s Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is
convertible into 45 shares of Harrell’s no par common stock. Bonds that are similar in all
respects, except that they are nonconvertible, currently are selling at 98.
Harrell applies International Financial Reporting Standards. Recording the issuance of the bonds
would cause an increase in Harrell’s:
A) shareholders’ equity of $1,000,000.
B) shareholders’ equity of $3,000,000.
C) assets of $98,000,000.
D) liabilities of $101,000,000.
135) Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:
A) The reduction in the premium is smaller with each successive interest payment.
B) The outstanding balance (book value) of the bonds increases eventually to face value.
C) The total effective interest over the term to maturity is equal to the amount of the premium
plus the total cash interest paid.
D) The interest expense is less with each successive interest payment.
136) Warren Peace Bookstore issues a note with no stated interest rate in exchange for a
building. In accounting for the transaction:
A) If fair values of the note and building are unavailable, the note should be recorded at its face
amount.
B) The note is recorded at its face amount unless the fair value of the building is readily
available.
C) Both the note and building are recorded at the fair value of the note or the fair value of the
building, whichever is more clearly determinable.
D) The building should be depreciated over the note’s term to maturity.
137) In a ten-year installment note, the portion of the periodic installment payment in the third
year that represents interest is:
A) the same as in the fourth year.
B) the same as in the first year.
C) less than in the fourth year.
D) more than in the fourth year.
138) The interest rate that determines the amount of cash interest paid each interest date is
referred to as the:
A) Stated rate.
B) Market rate.
C) Cash rate.
D) Effective rate.
139) The interest rate that determines the amount of interest expense each interest date is referred
to as the:
A) Stated rate.
B) Expense rate.
C) Cash rate.
D) Effective rate.
140) On June 30, 2018, L. N. Bean issued $10 million of its 8% bonds for $9 million. The bonds
were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the
effective interest method is used, how much bond interest expense should the company report for
the 6 months ended December 31, 2018?
A) $400,000
B) $420,000
C) $450,000
D) $500,000
141) Interest expense is:
A) The effective interest rate times the amount of the debt outstanding during the interest period.
B) The stated interest rate times the amount of the debt outstanding during the interest period.
C) The effective interest rate times the face amount of the debt.
D) The stated interest rate times the face amount of the debt.
142) Ohlson Co. is preparing an Excel spreadsheet for its 20-year, 4.5%, $500,000 bonds
payable. The bonds were issued on January 1 to yield 5% annually. Interest is paid semi-
annually. A portion of the spreadsheet appears as follows:
A
B
C
D
E
1
Stated rate:
0.045
2
Effective rate:
0.05
3
Face amount:
500,000
4
Term to maturity in
years:
20
5
6
Period
Cash Payment
Interest
Expense
Change in
Discount
Outstanding
Balance
7
0
8
1
9
2
What formula should Ohlson use in cell C8 to calculate interest expense for the first interest
payment?
A) =B8 – D8
B) =E7*B3
C) =E7*B3/2
D) =E7*C2/2
143) Mann Co. is preparing an Excel spreadsheet for its 5-year, 6%, $400,000 installment notes.
The notes were issued on January 1 for $421,236. Installment payments are payable each
December 31. A portion of the spreadsheet appears as follows:
A
B
C
D
E
1
Effective rate:
0.06
2
Cash payments:
100,000
3
Term to maturity in
years:
5
4
5
Period
Cash Payment
Interest
Expense
Change in
Balance
Outstanding
Balance
6
0
7
1
8
2
What formula should Mann use in cell E8 to calculate the book value of the notes after the
second interest payment?
A) =E7 – D8
B) =E7 + D8
C) =E8 + D8
D) =PV(C2,C3,0,C1,type)
144) Seaside issues a bond that has a stated interest rate of 10%, face amount of $50,000, and is
due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond
is 12%. What is the issue price of the bond?
A) $83,920.
B) $46,320.
C) $53,605.
D) $50,000.
145) Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $40,000.
If the effective annual rate of interest is 10%, what is the issue price of the bonds? Some relevant
and irrelevant present value factors:
* PV of ordinary annuity of $1: n = 20; i = 10% is 8.51356
**PV of $1: n = 20; i = 10% is 0.14864
* PV of ordinary annuity of $1: n = 40; i = 5% is 17.5909
**PV of $1: n = 40; i = 5% is 0.14205
A) $828,000.
B) $893,000.
C) $1,000,000.
D) $1,686,000.
146) On January 1, 2018, Anne Teak Furniture issued $100,000 of 8% bonds, dated January 1.
Interest is payable semiannually on June 30 and December 31. The bonds mature in 10 years.
The annual market rate for bonds of similar risk and maturity is 10%. What was the issue price
of the bonds?
A) $85,666.
B) $86,711.
C) $87,538
D) $87,711.
147) Kelly Industries issued 11% bonds, dated January 1, with a face value of $100,000 on
January 1, 2018. The bonds mature in 2028 (10 years). Interest is paid semiannually on June 30
and December 31. For bonds of similar risk and maturity the market yield is 12%. What was the
issue price of the bonds?
A) $62,256.
B) $63,273.
C) $94,265.
D) $94,349.
148) Scottie Adams Bird Supplies issued 10% bonds, dated January 1, with a face amount of
$240,000 on January 1, 2018. The bonds mature in 2028 (10 years). For bonds of similar risk and
maturity the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
What is the price of the bonds at January 1, 2018? Some relevant and irrelevant present value
factors:
* PV of annuity due of $1: n = 20; i = 6% is 12.15812
* PV of ordinary annuity of $1: n = 20; i = 6% is 11.46992
**PV of $1: n = 20; i = 6% is 0.31180
A) $212,471.
B) $229,729.
C) $350,110.
D) $366,626.