Chapter 14—Long-Term Liabilities and Receivables Key
1. Which of the following is not a reason for the issuance of long-term liabilities?
2. Which of the following is the best reason for the issuance of long-term liabilities?
3. Which of the following is always equal to the face rate of interest?
4. When the market rate of interest is less than the contract rate of interest, the bonds should sell at
5. If a company sells its bonds at less than face value, the effective interest rate is
6. When the market rate of interest is equal to the contract rate of interest, the bonds should sell at
7. If a company sells its bonds at face value, the effective interest rate is
8. When is interest expense less than interest paid?
9. Which of the following may not be equal to the contract rate of interest?
10. When the market rate of interest is greater than the contract rate of interest, the bonds should sell at
11. Which of the following statements is not true?
12. An unsecured bond is called a
13. Leverage occurs when a company’s
14. Which of the following bonds pay no interest until maturity?
15. In which of the following situations will the book value of a bond be equal to its maturity value?
16. For which of the following types of bonds is interest expense recognized each year even though no interest
is paid?
17. Which of the following is not another term for the true rate or cost of borrowing considering compound
interest?
18. Discount on Bonds Payable is a(n)
19. On January 1, 2010, Tiger Corporation sold $100,000 of its 15%, five-year bonds dated January 1, 2010, for
$102,000 total cash. The bonds sold at
20. If a company sells its bonds at more than face value, the effective interest rate is
21. When is interest expense more than interest paid?
22. Premium on Bonds Payable is a(n)
23. If a company sells its 20-year bonds at a discount, the discount account should be reported on the balance
sheet as a(n)
24. Exhibit 14-1
Alfred issued 9%, ten-year bonds dated January 1, 2010, with a face value of $100,000 at 102 plus accrued
interest on March 1, 2010. Alfred amortizes premiums and discounts using the straight-line method. Expenses
connected with the issue totaled $5,000 and were deducted in arriving at the net proceeds.
Refer to Exhibit 14-1. The entry to record the issue would include a debit to Cash for
25. Exhibit 14-1
Alfred issued 9%, ten-year bonds dated January 1, 2010, with a face value of $100,000 at 102 plus accrued
interest on March 1, 2010. Alfred amortizes premiums and discounts using the straight-line method. Expenses
connected with the issue totaled $5,000 and were deducted in arriving at the net proceeds.
Refer to Exhibit 14-1. Assuming interest is paid semiannually on January 1 and July 1, the balance of the
interest expense account (to the nearest dollar) after the July 1, 2010, entry would be
26. On May 1, 2010, Krypton Corporation sold $150,000 of its 15%, five-year bonds dated January 1, 2010, for
100 plus accrued interest. How much cash was received?
27. Bonds dated June 1 with a face value of $100,000 that are issued for $99,400 on June 1 have a stated
interest rate
28. On April 1, 2010, Everly Corporation issued 8% debentures dated January 1, 2010. The debentures had a
face value of $3,000,000 and interest was payable on January 1 and July 1. The debentures were sold at par plus
accrued interest. To record this event on April 1, 2010, Everly should debit cash for
29. Exhibit 14-2
Mara Corporation issued $400,000 of its 6%, 10-year bonds, dated January 1, 2010, at face value plus accrued
interest on April 1, 2010. Interest is paid on January 1 and July 1. Mara uses the most common method to record
the sale of the bonds between interest payment periods.
Refer to Exhibit 14-2. The entry to record the sale would include a
30. Exhibit 14-2
Mara Corporation issued $400,000 of its 6%, 10-year bonds, dated January 1, 2010, at face value plus accrued
interest on April 1, 2010. Interest is paid on January 1 and July 1. Mara uses the most common method to record
the sale of the bonds between interest payment periods.
Refer to Exhibit 14-2. The entry to record the payment of interest on July 1, 2010, would include a
31. Exhibit 14-2
Mara Corporation issued $400,000 of its 6%, 10-year bonds, dated January 1, 2010, at face value plus accrued
interest on April 1, 2010. Interest is paid on January 1 and July 1. Mara uses the most common method to record
the sale of the bonds between interest payment periods.
Refer to Exhibit 14-2. The amount of bond interest expense reported on the year-end 2010 income statement
would be
32. Interest expense recognized each period on zero-coupon bonds sold at a discount is equal to the
33. Under the straight-line amortization method, interest expense on a bond sold at a premium is equal to the
34. The assumption of a stable interest expense per year is inherent under which of the following amortization
methods?
35. Exhibit 14-3
Nazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2010, on May 1, 2010, for $393,000 plus
accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-3. The net liability for the bonds after recording the sale would be
36. Exhibit 14-3
Nazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2010, on May 1, 2010, for $393,000 plus
accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-3. Interest expense after the July 1, 2010, interest payment has been posted is
37. Exhibit 14-3
Nazzi, Inc. sold $400,000 of its 9%, five-year bonds dated January 1, 2010, on May 1, 2010, for $393,000 plus
accrued interest. Interest is paid on January 1 and July 1 and straight-line amortization is used.
Refer to Exhibit 14-3. The balance of Discount on Bonds Payable after the December 31, 2010, adjusting entry
has been posted would be
38. Bonds with a face value of $100,000 that are issued for $102,400 have a stated interest rate
39. Under the straight-line amortization method, interest expense on a bond sold at a discount is equal to the
40. The straight-line method of amortization assumes a stable
41. Which statement is true?
42. Bond issue costs are reported on the financial statements as
43. On May 1, 2010, Potter, Inc., issued $30,000 of ten-year, 12% bonds payable dated January 1, 2010. The
cash received amounted to $29,808. The bonds pay interest semiannually. Potter’s fiscal year ends on June 30,
2010. What amount of interest expense should be reported on the income statement prepared on June 30, 2010,
assuming straight-line amortization?
44. A $900,000, ten-year, 12% bond issue was sold to yield 10%. Interest was payable annually. Actuarial
information for ten periods follows:
10%
12%
Present value of 1
0.38554
0.32197
Present value of annuity of 1
6.14457
5.65022
How much cash was received when the bonds were issued?
45. The proper procedure for computing the issuance price of a bond includes adding the
46. Exhibit 14-4
A $300,000, ten-year, 6% bond issue was sold to yield 7% interest payable annually. Actuarial information for
10 periods is as follows:
6%
7%
Present value of 1
.558
.508
Present value of an annuity of 1
7.360
7.024
Refer to Exhibit 14-4. These bonds sold at
47. Exhibit 14-4
A $300,000, ten-year, 6% bond issue was sold to yield 7% interest payable annually. Actuarial information for
10 periods is as follows:
6%
7%
Present value of 1
.558
.508
Present value of an annuity of 1
7.360
7.024
Refer to Exhibit 14-4. At date of issuance cash received would be
48. Exhibit 14-4
A $300,000, ten-year, 6% bond issue was sold to yield 7% interest payable annually. Actuarial information for
10 periods is as follows:
6%
7%
Present value of 1
.558
.508
Present value of an annuity of 1
7.360
7.024
Refer to Exhibit 14-4. The discount at the date of bond issuance would be
49. Exhibit 14-4
A $300,000, ten-year, 6% bond issue was sold to yield 7% interest payable annually. Actuarial information for
10 periods is as follows:
6%
7%
Present value of 1
.558
.508
Present value of an annuity of 1
7.360
7.024
Refer to Exhibit 14-4. Using the effective interest method interest expense at the end of the first year is
50. A theoretical difference between the effective interest method and the straight-line amortization method is
that
51. The bond interest expense reflected on the income statement should reflect an amount based on the
52. The effective interest method of amortization assumes a stable
53. Exhibit 14-5
Quail issued $200,000 of its ten-year 12% bonds for $224,924 on October 1, 2010. The effective rate on the
bonds was 10% and interest is paid each October 1 and April 1.
Refer to Exhibit 14-5. Assuming Quail uses the effective interest method, the adjusting entry on December 31,
2010, would include a
54. Exhibit 14-5
Quail issued $200,000 of its ten-year 12% bonds for $224,924 on October 1, 2010. The effective rate on the
bonds was 10% and interest is paid each October 1 and April 1.
Refer to Exhibit 14-5. Assuming Quail uses the effective interest method and reversing entries, the entry to
record the payment of interest on April 1, 2011, would include a
55. Which statement is true?
56. Bond issue costs
57. On January 1, 2010, Saldano, Inc. issued $50,000 of ten-year 8% bonds for $43,800. Interest was payable
semiannually. The effective yield was 10%. The effective interest method of discount amortization was used.
What amount of interest expense should be recorded for the six-month period ending December 31, 2010?
58. The proper procedure for computing the amortization of a premium using the effective interest method
includes multiplying
59. On January 1, 2010, the Krueger Co. issued $140,000 of 20-year 8% bonds for $172,000. Interest was
payable annually. The effective yield was 6%. The effective interest method was used to amortize the premium.
What amount of premium would be amortized for the year ended December 31, 2011?
60. The theoretical justification in support of the effective interest method of amortizing a discount is that it
represents
61. On July 1, 2010, Navarre Corporation issued bonds with a face value of $100,000 and 12% interest payable
semiannually. The bonds mature on June 30, 2015. The market rate of interest at the time of issuance was 14%,
so the bonds were issued at a discount of $7,054. Using the effective interest method, the amount of discount
that should be amortized by Navarre on December 31, 2010, is
62. On January 2, 2010, Laura Co. issued 8% bonds with a face amount of $1,000,000 maturing on January 2,
2020. The bonds were issued to yield 12%, resulting in a discount. Laura incorrectly used the straight-line
method instead of the effective interest method to amortize the discount. How is the carrying amount of the
bonds affected by this error as of December 31, 2011?
63. A material gain earned when retiring bonds before their maturity date is recognized by
64. Exhibit 14-6
Alpha, Inc. issued $100,000 of its 7% five-year bonds on January 1, 2010, at 98. Interest is paid on January 1
and July 1. The bonds are callable at 103 and straight-line amortization is used. The bonds are recalled on April
1, 2012.
Refer to Exhibit 14-6. Interest expense for 2012 will be
65. Exhibit 14-6
Alpha, Inc. issued $100,000 of its 7% five-year bonds on January 1, 2010, at 98. Interest is paid on January 1
and July 1. The bonds are callable at 103 and straight-line amortization is used. The bonds are recalled on April
1, 2012.
Refer to Exhibit 14-6. The journal entry to record the reacquisition of the bonds will include a
66. Gains or losses from refunding are recognized
67. Exhibit 14-7
On January 1, 2010, Bubbles, Inc. sold $200,000 of its 12% five-year bonds to yield 10%. Interest is paid each
January 1 and July 1, and effective interest amortization is used. On May 1, 2012, Bubbles, retired $100,000 of
the bonds at 104. The book value of the bonds on December 31, 2011, was $212,926.
Refer to Exhibit 14-7. Which of the following would be included in the interest accrual entry?
68. Exhibit 14-7
On January 1, 2010, Bubbles, Inc. sold $200,000 of its 12% five-year bonds to yield 10%. Interest is paid each
January 1 and July 1, and effective interest amortization is used. On May 1, 2012, Bubbles, retired $100,000 of
the bonds at 104. The book value of the bonds on December 31, 2011, was $212,926.
Refer to Exhibit 14-7. The entry to record the retirement would include a
69. Exhibit 14-7
On January 1, 2010, Bubbles, Inc. sold $200,000 of its 12% five-year bonds to yield 10%. Interest is paid each
January 1 and July 1, and effective interest amortization is used. On May 1, 2012, Bubbles, retired $100,000 of
the bonds at 104. The book value of the bonds on December 31, 2011, was $212,926.
Refer to Exhibit 14-7. The book value of the remaining bonds outstanding on May 1, 2012, after the retirement
entry has been posted would be
70. On January 1, 2010, Lisa Co. issued $50,000 of 9% ten-year bonds at 98. Issuance costs amounted to
$2,000. On July 1, 2015, all of the bonds were called at 103. What was the loss on bond retirement, assuming
the use of straight-line amortization?
71. On January 1, 2010, Newberg issued $200,000 of ten-year 8% bonds at 98. These bonds were callable at
102 anytime after three years. Straight-line amortization was used. On January 1, 2014, a new bond issue was
sold and the old bonds were called. What was the loss on bond retirement?
72. A material gain or loss from debt refunding should be
73. In 2010, Tame Co. took advantage of market conditions to refund its outstanding debt. Wild should report
the excess of the carrying amount of the old debt over the amount paid to extinguish it as a(n)
74. On April 1, 2010, the bondholders of Vick, Inc. exchanged convertible bonds for common stock. Vick’s
carrying amount of these bonds was less than the market value but greater than the par value of the common
stock issued upon conversion. If Vick used the book value method of accounting for the conversion, which of
the following occurred as a result of recording this conversion?
75. When the conversion of bonds payable to common stock is recorded under the market value method and the
market value of the common stock exceeds the book value of the bonds at date of conversion, the difference is
recorded as a
76. The portion of proceeds from the sale of bonds with detachable stock warrants attributable to the warrants is
accounted for as a(n)
77. Exhibit 14-8
Marvin Corp. issued $500,000 of its ten-year 6% bonds at 104. Each $1,000 bond carries ten warrants. Each
warrant allows the holder to purchase one share of $10 par common stock for $50. Following the sale, relevant
market values were:
Bonds
$980 (ex rights)
Warrants
$14 each
Common stock
$60 each
Refer to Exhibit 14-8. The entry to record the sale of the bonds would include a
78. Exhibit 14-8
Marvin Corp. issued $500,000 of its ten-year 6% bonds at 104. Each $1,000 bond carries ten warrants. Each
warrant allows the holder to purchase one share of $10 par common stock for $50. Following the sale, relevant
market values were:
Bonds
$980 (ex rights)
Warrants
$14 each
Common stock
$60 each
Refer to Exhibit 14-8. The entry to record the exercise of 1,000 warrants would include a
79. Exhibit 14-8
Marvin Corp. issued $500,000 of its ten-year 6% bonds at 104. Each $1,000 bond carries ten warrants. Each
warrant allows the holder to purchase one share of $10 par common stock for $50. Following the sale, relevant
market values were:
Bonds
$980 (ex rights)
Warrants
$14 each
Common stock
$60 each
Refer to Exhibit 14-8. After a total of 2,000 warrants were exercised, the remaining warrants expired. The entry to record the expiration of the
warrants would include a credit to Additional Paid-in Capital from Expired Warrants for
80. Exhibit 14-9
Mayne, Inc. sold $500,000 of its ten-year 8% bonds at 96 on January 1, 2009. Interest is paid each January 1
and July 1 and straight-line amortization is used. Each $1,000 bond is convertible into 100 shares of $10 par
common stock. One-half of the bonds were converted on January 1, 2014, when the market value of the stock
was $14 per share.
Refer to Exhibit 14-9. The entry to record the conversion using the book value method would include a
81. Exhibit 14-9
Mayne, Inc. sold $500,000 of its ten-year 8% bonds at 96 on January 1, 2009. Interest is paid each January 1
and July 1 and straight-line amortization is used. Each $1,000 bond is convertible into 100 shares of $10 par
common stock. One-half of the bonds were converted on January 1, 2014, when the market value of the stock
was $14 per share.
Refer to Exhibit 14-9. The entry to record the conversion using the market value method would include a
82. Bonds payable with a conversion privilege are accounted for as
83. When the conversion of bonds payable to common stock is recorded under the book value method and the
par value of the common stock exceeds the book value of the bonds, the difference is recorded as a
84. When a company offers bondholders a sweetener to induce them to convert their bonds to common stock,
85. A gain or loss on the conversion of bonds payable to common stock would be recognized when using the
Market Value Method
I.
No
II.
Yes
III.
No
IV.
Yes
86. When bonds are converted to common stock
87. Current GAAP requires companies
88. On January 1, 2010, Leffler, Inc. sold $200,000 of its convertible bonds at par. Conversion terms allow each
$1,000 bond to be converted into 40 common shares. On April 1, 2012, the company increases the conversion
terms to 55 shares per bond if conversion takes place within 180 days. The conversion of all of the bonds took
place on May 1, 2012. Fair market values of the common stock were as follows: January 1, $20; April 1, $30;
and May 1, $25. The bond conversion expense would be recorded at
89. Singer Corporation sold $200,000 of 12% bonds at par. Each $1,000 bond carried ten warrants, each of
which allows the holder to acquire one share of $10 par common stock for $30 per share. After issuance, the
bonds were quoted at 99 ex rights, and the warrants were quoted at $4 each. Singer Corporation should have
assigned to the rights a value of
90. On January 1, 2010, Aguilar Products issued $24,000 of ten-year bonds at 98. These bonds were each
convertible into ten shares of $100 par common stock. On January 1, 2017, Lee converted two-thirds of these
bonds when the common stock was selling at $130 a share. What would be the loss on bond conversion?
Market Value Method
Book Value Method
I.
$4,896
$ 0
II.
$5,088
$ 0
III.
$ 0
$4,896
IV.
$ 0
$5,088
91. Barkley, Inc. sold $30,000 of 8% bonds for $40,200. Each $1,000 bond carried eight rights and each right
allowed the holder to acquire one share of $10 par stock for $16 a share. After the issuance of the securities, the
bonds were quoted at 104 and the rights were quoted at $4 each. Later, one-half of the rights were exercised. At
date of exercise, how much should be credited to Additional Paid-in Capital?