Professional Documents
Culture Documents
LONG-TERM LIABILITIES
TRUE-FALSEConceptual
Answer
T
F
T
F
F
T
F
F
F
T
T
F
T
T
T
T
F
F
F
F
No.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
*19.
*20.
MULTIPLE CHOICEConceptual
Answer
a
a
b
a
d
a
d
d
d
d
b
a
d
d
c
d
d
c
No.
Description
21.
22.
23.
P
24.
S
25.
S
26.
S
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
Liability identification.
Bond terms.
Definition of "debenture bonds."
Definition of bearer bonds.
Definition of income bonds.
Effective-interest vs. straight-line method.
Interest rate of the bond indenture.
Rate of interest earned by the bondholders.
Calculating the issue price of bonds.
Calculating the issue price of bonds.
Premium and interest rates.
Interest and discount amortization.
Effective-interest amortization method.
Impact of effective-interest method.
Recording bonds issued between interest dates.
Bonds issued at other than an interest date.
Classification of bond issuance costs.
Bond issuance costs.
14 - 2
No.
Description
39.
40.
41.
P
42.
P
43.
S
44.
45.
46.
47.
48.
S
49.
S
50.
51.
52.
53.
54.
*55.
*56.
*57.
*58.
*59.
MULTIPLE CHOICEComputational
Answer
a
b
a
c
c
c
c
c
a
d
d
c
a
d
d
b
c
c
b
No.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
Description
Calculate the present value of bond principal.
Calculate the present value of bond interest.
Determine the issue price of bonds.
Proceeds from bond issuance.
Bonds issued between interest dates.
Proceeds from bond issuance.
Bonds issued between interest dates.
Effective-interest method interest expense.
Effective-interest method carrying value.
Straight-line method carrying value.
Straight-line amortization/interest expense.
Effective-interest method interest expense.
Effective-interest method carrying value.
Straight-line method carrying value.
Straight-line method amortization/interest expense.
Interest expense using effective-interest method.
Interest expense using effective-interest method.
Calculate gain on retirement of bonds.
Calculate gain on retirement of bonds.
Long-Term Liabilities
No.
79.
80.
81.
82.
83.
84.
85.
86.
87.
*88.
*89.
*90.
Description
Calculate loss on retirement of bonds.
Bond retirement with call premium.
Calculate loss on retirement of bonds.
Early extinguishment of debt.
Early extinguishment of debt.
Interest on noninterest-bearing note.
Interest on installment note payable.
Determine balance of discount on notes payable.
Calculate times interest earned ratio.
Transfer of equipment in debt settlement.
Recognizing gain on debt restructure.
Interest and troubled debt restructuring.
No.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
*101.
Description
Determine proceeds from bond issue.
Determine unamortized bond premium.
Determine unamortized bond discount.
Calculate bond interest expense.
Calculate loss on retirement of bonds.
Calculate loss on retirement of bonds.
Calculate gain on retirement of bonds.
Determine carrying value of bonds to be retired.
Carrying value of bonds with call provision.
Classification of gain from debt refunding.
Classification of gain from troubled debt restructuring.
EXERCISES
Item
E14-102
E14-103
E14-104
E14-105
E14-106
E14-107
*E14-108
*E14-109
*E14-110
Description
Terms related to long-term debt.
Bond issue price and premium amortization.
Amortization of discount or premium.
Entries for bonds payable.
Retirement of bonds.
Early extinguishment of debt.
Accounting for a troubled debt settlement.
Accounting for troubled debt restructuring.
Accounting for troubled debt.
14 - 3
14 - 4
PROBLEMS
Item
P14-111
P14-112
P14-113
P14-114
*P14-115
Description
Bond discount amortization.
Bond interest and discount amortization.
Entries for bonds payable.
Entries for bonds payable.
Accounting for a troubled debt settlement.
2.
3.
4.
5.
6.
7.
8.
*9.
*10.
Long-Term Liabilities
14 - 5
Type
Item
Type
Item
1.
TF
21.
MC
22.
2.
TF
3.
TF
23.
4.
5.
6.
TF
TF
TF
26.
27.
28.
MC
MC
MC
29.
30.
60.
7.
8.
9.
10.
31.
TF
TF
TF
TF
MC
32.
33.
34.
35.
36.
MC
MC
MC
MC
MC
37.
38.
39.
67.
68.
11.
40.
41.
P
42.
TF
MC
MC
MC
77.
78.
79.
80.
MC
MC
MC
MC
81.
82.
83.
95.
12.
13.
TF
TF
14.
43.
TF
MC
15.
TF
48.
MC
16.
17.
TF
TF
18.
50.
TF
MC
51.
52.
19.
20.
55.
TF
TF
MC
56.
57.
58.
MC
MC
MC
59.
88.
89.
Note:
44.
45.
TF = True-False
MC = Multiple Choice
49.
Type
Item
Type
Item
Learning Objective 1
MC
Learning Objective 2
P
S
MC
24. MC
25.
Learning Objective 3
MC
61. MC
64.
MC
62. MC
65.
MC
63. MC
66.
Learning Objective 4
MC
69. MC
74.
MC
70. MC
75.
MC
71. MC
76.
MC
72. MC
91.
MC
73. MC
92.
Learning Objective 5
MC
96. MC
100.
MC
97. MC
102.
MC
98. MC
105.
MC
99. MC
106.
Learning Objective 6
MC
46. MC
84.
MC
47. MC
85.
Learning Objective 7
MC
Learning Objective 8
MC
53. MC
87.
MC
54. MC
Learning Objective *10
MC
90. MC
109.
MC
101. MC
110.
MC
108.
E
115.
E = Exercise
P = Problem
Type
Item
Type
MC
MC
MC
102.
103.
111.
E
E
P
MC
MC
MC
MC
MC
93.
94.
102.
103.
104.
MC
MC
E
E
E
MC
E
E
E
107.
113.
E
P
MC
MC
86.
MC
Item
Type
105.
111.
112.
113.
114.
E
P
P
P
P
MC
MC
E
E
P
14 - 6
TRUE FALSEConceptual
1. Companies usually make bond interest payments semiannually, although the interest rate
is generally expressed as an annual rate.
2. A mortgage bond is referred to as a debenture bond.
3. Bond issues that mature in installments are called serial bonds.
4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.
5. The interest rate written in the terms of the bond indenture is called the effective yield or
market rate.
6. The stated rate is the same as the coupon rate.
7. Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense.
8. A bond may only be issued on an interest payment date.
9. The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond.
10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the
life of the bond issue.
11. The replacement of an existing bond issue with a new one is called refunding.
12. If a long-term note payable has a stated interest rate, that rate should be considered to be
the effective rate.
13. The implicit interest rate is the rate that equates the cash received with the amounts
received in the future.
14. The process of interest-rate approximation is called imputation, and the resulting interest
rate is called an imputed interest rate.
15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the
reporting of debt on the balance sheet.
16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are
added to the balance sheet.
17. If a company plans to refinance long-term debt or retire it from a bond retirement fund, it
should report the debt as current.
18. The times interest earned ratio is computed by dividing income before interest expense by
interest expense.
Long-Term Liabilities
14 - 7
*19. The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
Ans.
T
F
T
F
F
Item
6.
7.
8.
9.
10.
Ans.
T
F
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
T
F
T
T
T
Item
16.
17.
18.
19.
20.
Ans.
T
F
F
F
F
MULTIPLE CHOICEConceptual
21.
22.
The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23.
24.
Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
25.
Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
14 - 8
S
26.
If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27.
The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
28.
One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
30.
31.
Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
Long-Term Liabilities
14 - 9
32.
If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization
been used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortization been used.
d. be less than the stated (nominal) rate of interest.
33.
34.
When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35.
If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36.
When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
37.
38.
The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
40.
41.
The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.
42.
43.
A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security
for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay
the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
44.
A debt instrument with no ready market is exchanged for property whose fair market value
is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
Long-Term Liabilities
14 - 11
45.
When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46.
When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current market value of the note.
d. any of these.
47.
48.
49.
50.
Long-term debt that matures within one year and is to be converted into stock should be
reported
a. as a current liability.
b. in a special section between liabilities and stockholders equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation.
Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term
debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of
the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
52.
Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53.
54.
*55.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*56.
*57.
In a troubled debt restructuring in which the debt is settled by a transfer of assets with a
fair market value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.
Long-Term Liabilities
14 - 13
*58.
In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future
cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.
*59.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
21.
22.
23.
24.
25.
26.
Ans.
a
a
b
a
d
a
Item
27.
28.
29.
30.
31.
32.
Ans.
d
d
d
d
b
a
Item
33.
34.
35.
36.
37.
38.
Ans.
d
d
c
d
d
c
Item
39.
40.
41.
42.
43.
44.
Ans.
Item
b
d
d
c
c
a
45.
46.
47.
48.
49.
50.
Ans.
Item
Ans.
Item
Ans.
d
d
c
d
c
d
51.
52.
53.
54.
*55.
*56.
d
d
c
c
c
d
*57.
*58.
*59.
B
b
c
Solutions to those Multiple Choice questions for which the answer is none of these.
30.
multiply $5,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
MULTIPLE CHOICEComputational
Use the following information for questions 60 through 62:
On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of $1,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6%..........................................
Present value of 1 for 8 periods at 8%..........................................
Present value of 1 for 16 periods at 3%........................................
Present value of 1 for 16 periods at 4%........................................
Present value of annuity for 8 periods at 6%................................
Present value of annuity for 8 periods at 8%................................
Present value of annuity for 16 periods at 3%..............................
Present value of annuity for 16 periods at 4%..............................
.627
.540
.623
.534
6.210
5.747
12.561
11.652
61.
62.
63.
Limeway Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pay interest semiannually on June 30 and December 31. The
bonds are issued to yield 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
a.
b.
c.
d.
2.5%
.88385
.78120
4.64583
8.75206
3.0%
.86261
.74409
4.57971
8.53020
5.0%
.78353
.61391
4.32948
7.72173
6.0%
.74726
.55839
4.21236
7.36009
$5,000,000
$5,216,494
$5,218,809
$5,217,308
64. Amstop Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus
accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $19,400,000
b. $20,450,000
c. $19,700,000
d. $19,100,000
65. Houghton Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pays interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
2.5%
.88385
.78120
4.64583
8.75206
3.0%
.86261
.74409
4.57971
8.53020
5.0%
.78353
.61391
4.32948
7.72173
6.0%
.74726
.55839
4.21236
7.36009
Long-Term Liabilities
a.
b.
c.
d.
14 - 15
$10,000,000
$10,432,988
$10,437,618
$10,434,616
66.
67.
68.
69.
70.
72.
73.
74.
75.
On January 1, 2007, Foley Co. sold 12% bonds with a face value of $600,000. The bonds
mature in five years, and interest is paid semiannually on June 30 and December 31. The
bonds were sold for $646,200 to yield 10%. Using the effective-interest method of
amortization, interest expense for 2007 is
a. $60,000.
b. $64,436.
c. $64,620.
d. $72,000.
76.
Long-Term Liabilities
77.
14 - 17
The December 31, 2006, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2015
Unamortized premium on bonds payable
$1,000,000
27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1
and December 31 of each year. Eddy uses straight-line amortization. On March 1, 2007,
Eddy retired $400,000 of these bonds at 98 plus accrued interest. What should Eddy
record as a gain on retirement of these bonds? Ignore taxes.
a. $18,800.
b. $10,800.
c. $18,600.
d. $20,000.
78.
79.
The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on
December 31, 2006. The bonds, which had a face value of $600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On July
2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest
payment on July 1, 2007 was made as scheduled. What is the loss that Klein should
record on the early retirement of the bonds on July 2, 2007? Ignore taxes.
a. $12,000.
b. $37,800.
c. $33,600.
d. $42,000.
80.
A corporation called an outstanding bond obligation four years before maturity. At that time
there was an unamortized discount of $300,000. To extinguish this debt, the company had
to pay a call premium of $100,000. Ignoring income tax considerations, how should these
amounts be treated for accounting purposes?
a. Amortize $400,000 over four years.
b. Charge $400,000 to a loss in the year of extinguishment.
c. Charge $100,000 to a loss in the year of extinguishment and amortize $300,000 over
four years.
d. Either amortize $400,000 over four years or charge $400,000 to a loss immediately,
whichever management selects.
The 12% bonds payable of Keane Co. had a carrying amount of $832,000 on December 31,
2006. The bonds, which had a face value of $800,000, were issued at a premium to yield
10%. Keane uses the effective-interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2007, several years before their maturity, Keane retired the
bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $6,400.
c. $9,920.
d. $32,000.
82.
Axlon Company issues $10,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2009, $6,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $600,000 loss
b. $272,000 loss
c. $360,000 loss
d. $453,333 loss
83.
Goebel Company issues $5,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2009, $3,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $300,000 loss
b. $136,000 loss
c. $180,000 loss
d. $226,667 loss
84.
85.
On January 1, 2007, Garner Company sold property to Agler Company which originally
cost Garner $760,000. There was no established exchange price for this property. Agler
gave Garner a $1,200,000 zero-interest-bearing note payable in three equal annual
installments of $400,000 with the first payment due December 31, 2007. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present
value of a $1,200,000 note payable in three equal annual installments of $400,000 at a
10% rate of interest is $994,800. What is the amount of interest income that should be
recognized by Garner in 2007, using the effective-interest method?
Long-Term Liabilities
a.
b.
c.
d.
14 - 19
$0.
$40,000.
$99,480.
$120,000.
86.
On January 1, 2007, Glenn Company sold property to Henry Company. There was no
established exchange price for the property, and Henry gave Glenn a $2,000,000 zerointerest-bearing note payable in 5 equal annual installments of $400,000, with the first
payment due December 31, 2007. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $1,442,000 at January 1, 2007. What should
be the balance of the Discount on Notes Payable account on the books of Henry at
December 31, 2007 after adjusting entries are made, assuming that the effective-interest
method is used?
a. $0
b. $428,220
c. $446,400
d. $558,000
87.
Nyland Companys 2007 financial statements contain the following selected data:
Income taxes
Interest expense
Net income
$40,000
20,000
60,000
*89.
Reese should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $15,000.
c. $55,000.
d. $75,000.
60.
61.
62.
63.
64.
Ans.
a
b
a
c
c
Item
65.
66.
67.
68.
69.
Ans.
c
c
c
a
d
Item
70.
71.
72.
73.
74.
Ans.
d
c
a
d
d
Item
75.
76.
77.
78.
79.
Ans.
b
c
c
b
b
Item
80.
81.
82.
83.
84.
Ans.
Item
Ans.
Item
Ans.
b
b
b
b
a
85.
86.
87.
*88.
*89.
c
b
d
b
d
*90.
On July 1, 2007, Pryce Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2007 and mature on April 1, 2017. Interest is
payable semiannually on April 1 and October 1. What amount did Pryce receive from the
bond issuance?
a. $1,015,000
b. $1,000,000
c. $990,000
d. $965,000
92.
On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of $3,000,000,
which mature on January 1, 2017. The bonds were issued for $3,405,000 to yield 8%,
resulting in bond premium of $405,000. Gomez uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2007, Gomez's adjusted unamortized bond premium should be
a. $405,000.
b. $377,400.
c. $364,500.
d. $304,500.
93.
On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of $5,000,000, which
mature on July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in a
bond discount of $305,000. Kitel uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2007, Kitel's unamortized
bond discount should be
a. $264,050.
b. $255,000.
c. $244,000.
d. $215,000.
Long-Term Liabilities
14 - 21
94.
On January 1, 2007, Nott Co. sold $1,000,000 of its 10% bonds for $885,296 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should Nott
report as interest expense for the six months ended June 30, 2007?
a. $44,266
b. $50,000
c. $53,118
d. $60,000
95.
On January 1, 2007, Kite Co. redeemed its 15-year bonds of $2,500,000 par value for
102. They were originally issued on January 1, 1995 at 98 with a maturity date of January
1, 2010. The bond issue costs relating to this transaction were $150,000. Kite amortizes
discounts, premiums, and bond issue costs using the straight-line method. What amount
of loss should Kite recognize on the redemption of these bonds (ignore taxes)?
a. $90,000
b. $60,000
c. $50,000
d. $0
96.
On its December 31, 2006 balance sheet, Lane Corp. reported bonds payable of
$6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been
issued at par. On January 2, 2007, Lane retired $3,000,000 of the outstanding bonds at
par plus a call premium of $70,000. What amount should Lane report in its 2007 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $70,000
c. $160,000
d. $230,000
97.
On January 1, 2002, Pine Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000.
These bonds were to mature on January 1, 2012 but were callable at 101 any time after
December 31, 2005. Interest was payable semiannually on July 1 and January 1. On July
1, 2007, Pine called all of the bonds and retired them. Bond premium was amortized on a
straight-line basis. Before income taxes, Pine's gain or loss in 2007 on this early
extinguishment of debt was
a. $30,000 gain.
b. $12,000 gain.
c. $10,000 loss.
d. $8,000 gain.
98.
On June 30, 2007, Rosen Co. had outstanding 8%, $3,000,000 face amount, 15-year
bonds maturing on June 30, 2017. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on
June 30, 2007 were $105,000 and $30,000, respectively. On June 30, 2007, Rosen
acquired all of these bonds at 94 and retired them. What net carrying amount should be
used in computing gain or loss on this early extinguishment of debt?
a. $2,970,000.
b. $2,895,000.
c. $2,865,000.
d. $2,820,000.
A ten-year bond was issued in 2005 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2007, the carrying
amount of the bond was less than the call price. The amount of bond liability removed
from the accounts in 2007 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
100.
Starr Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Starr within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported
as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*101. Brye Co. is indebted to Dole under a $400,000, 12%, three-year note dated December 31,
2005. Because of Brye's financial difficulties developing in 2007, Brye owed accrued
interest of $48,000 on the note at December 31, 2007. Under a troubled debt
restructuring, on December 31, 2007, Dole agreed to settle the note and accrued interest
for a tract of land having a fair value of $360,000. Brye's acquisition cost of the land is
$290,000. Ignoring income taxes, on its 2007 income statement Brye should report as a
result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a.
$158,000
$0
b.
$110,000
$0
c.
$70,000
$40,000
d.
$70,000
$88,000
91.
92.
Ans.
a
b
Item
93.
94.
Ans.
a
c
Item
95.
96.
Ans.
a
d
Item
97.
98.
Ans.
Item
Ans.
Item
Ans.
d
c
99.
100.
c
a
*101.
Long-Term Liabilities
14 - 23
DERIVATIONS Computational
No.
Answer Derivation
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
$646,200 .05
[$646,200 ($36,000 $32,310)] .05
= $32,310
= 32,126
$64,436
76.
$553,600 .05
[$553,600 + ($27,680 $24,000)] .05
= $27,680
= 27,864
$55,544
77.
2
[$1,027,000 ( $27,000
)] .4 = $410,600 (CV of retired bonds)
18
6
$410,600 ($400,000 .98) = $18,600.
Derivation
79.
80.
81.
82.
83.
84.
85.
86.
87.
*88.
*89.
*90.
Derivation
91.
92.
93.
Long-Term Liabilities
Derivation
94.
95.
$200,000
($2,500,000 1.02) $2,300,000 + 12
15
96.
97.
$40,000
[$1,040,000 (
11)] ($1,000,000 1.01) = $8,000.
20
98.
99.
Conceptual.
100.
Conceptual.
*101.
)] = $90,000.
14 - 25
EXERCISES
Ex. 14-102Terms related to long-term debt.
Place the letter of the best matching phrase before each word.
_____ 1. Indenture
_____ 7. Mortgage
a. Requires that bond discount be reported in the balance sheet as a direct deduction from the
face of the bond.
b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f.
g. Bonds payable reacquired by the issuing corporation that have not been canceled.
h. Price paid by issuing corporation for its own bonds.
i.
j.
Indicates the companys ability to meet interest payments as they come due.
Solution 14-102
1. k
2. g
3.
4.
c
i
5.
6
b
l
7.
8
o
f
9.
10.
h
d
Long-Term Liabilities
14 - 27
Solution 14-103
(a) .312 $1,000,000 =
11.470 $50,000 =
(b) Date
1/1/07
6/30/07
12/31/07
$312,000
573,500
$885,500
Cash
Expense
Amortization
$50,000
50,000
$53,040
53,222
3,040
3,222
Carrying Amount
$884,000
887,040
890,262
Interest
Expense
Cash
Interest
Discount
Amortized
$266,179
267,488
$240,000
240,000
$26,179
27,488
$53,667
Total
Carrying
Value of Bonds
$5,323,577
5,349,756
5,377,244
Solution 14-105
(a) Cash..............................................................................................
Bonds Payable.....................................................................
Interest Expense ($500,000 9% 3/12)............................
Premium on Bonds Payable................................................
537,868
6,340
410
Bonds Payable...............................................................................
Premium on Bonds Payable ($26,618 .3 90/117).....................
Cash....................................................................................
Gain on Redemption of Bonds.............................................
150,000
6,142
500,000
11,250
26,618
6,750
153,000
3,142
$1,200,000
48,000
The bonds were issued on December 31, 2005 at 95, with interest payable on June 30 and
December 31. (Use straight-line amortization.)
On April 1, 2008, Marin retired $240,000 of these bonds at 101 plus accrued interest.
Solution 14-106
Interest Expense.............................................................................
Cash ($240,000 7.5% 3/12)...........................................
Discount on Bonds Payable ($48,000 1/5 1/8 3/12)....
4,800
Bonds Payable................................................................................
Loss on Redemption of Bonds........................................................
Discount on Bonds Payable [(1/5 $48,000) $300]..........
Cash....................................................................................
240,000
11,700
4,500
300
9,300
242,400
Long-Term Liabilities
14 - 29
$ 505,000
2,600,000
$3,105,000
2,969,400
$ 135,600
*Solution 14-108
(a) Note payable
Interest payable
Carrying amount of debt
Fair value of equipment
Gain on settlement of debt
$600,000
54,000
654,000
570,000
$ 84,000
(b) Cost
Accumulated depreciation
Book value
Fair value of plant assets
Loss on disposal of equipment
$840,000
195,000
645,000
570,000
$ 75,000
600,000
54,000
195,000
75,000
(d) Equipment......................................................................................
Allowance for Doubtful Accounts....................................................
Notes Receivable...............................................................
Interest Receivable.............................................................
570,000
84,000
840,000
84,000
600,000
54,000
*Solution 14-109
(a) Interest Payable.............................................................................
Notes Payable ($500,000 4% 2)...................................
Gain on Restructuring........................................................
50,000
20,000
122,000
40,000
10,000
20,000
72,000
50,000
Long-Term Liabilities
14 - 31
*Solution 14-110
(a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the
debtor as the difference between the fair value of the assets transferred and the carrying
amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on
the disposal of assets as the difference between the fair value of the assets transferred and
their book value.
(b) If the carrying amount of the payable is greater than the undiscounted total future cash flows,
the gain is measured by the debtor as the difference between the carrying amount and the
future cash flows. Future payments reduce the principal; no interest expense is recorded by
the debtor.
If the carrying amount of the payable is less than the future cash flows, no restructuring gain
is recognized by the debtor. A new effective-interest rate is calculated that equates the
present value of the future cash flows with the carrying amount of the debt. A part of the
future cash flows is recorded as interest expense by the debtor.
PROBLEMS
Pr. 14-111Bond discount amortization.
On June 1, 2006, Jansonbottle$Company sold $400,10 in long-term boNls fkr $351,040&!Te
bnds will mature in 10 years and have`a s4ated antebest ra4e of 8% and a yield rape of 10%f
Thg bonds pay interest anntadly on Ma} 31"of`%aa` yeav. The bgnds are to b% accounted for
under tje effdctive-interest mthod.
Instructions
(a)Construct a bond amortization table foR |his proble- to indicite the amount of31interest
expense and discoun| amortizaqion at each May 31. Hnclude only the0first"four years. Make
sure al columns ql rous ar%31properly labeled. (Round to the feaRest"$ollar.)
(b) THe sales price of $351,040 wa det%rlindd frnm xresent value tabler. Spmci&i#clly explain
hkw one would determine the price"using presUnt vahue tebles.
(c) Asuming that in4eRest and discou.t amortization are vecorded eaci May 31, prepare the
adjusting eltry to be made31on Decumber 31, 208.$(Round to the nearest dollar.)
Solution$14-11
(a)
D!te
6/1/0
5/31/07
5/31/08
Debit
Cradit Cash
$32,000
32
$3,104
of Bonds
$350,040
35<144
35,756
36,131
3,756
4,931
#63,314
365,445
(1)
(2)
18,667**
2l191
Long-Term Liabilities
Credit Cash
Debit
Interest Expensa
Credit
Bond Discount
14 - 33
Carrying AMouNt
!of Bonds
$738,2"4
(b)
(c
Prepare the adjusting entry"for Deaem@er 31, 2007. Use th en$ectIve-inverest method.
Com0uuE the interesu expenwe to be ruror4ed in thm iNaome stataMent for t(e year elded
ecamber 31, 2007.
Solution$1<-112
(a)
Debit
Interest Ezpense
Cbedit Cash
Octobr !, 26
Aprh 1, 2807)$32,000$36,911$4,911743,135
October 1, 20t7
02,000
37,157
Credit
Bond Discount
Carsying Amount
of Bonds
73:,224
7 8,292
5,157
18,72?
16,004
$18,$56
37,q17
18<707
$7,320
(1/2 of $#6,911)
2,707
Long-Term Liabilities
14 - 35
Solution$14,113
Mcrch 1: Cash....................................................................................
Bonds Rayable.........................................................
PreiuM0on Bonds Payable......................................
87r,160
800,000
56,60
1>,000
30,560
29,128
2,880
32,p00
32,00
Preeium on
17,928
5<7,40
24,360
Long-Term Liabilities
Bonls Payable....................................................................
Ijtepest Ex0ense ($600,000 6% 4/12)..........................
14 - 37
600, 0
12
18,000
420
18,000
I1,260
19,296
12,096
367,200
Long-Term Liabilities
14 - 39
*Solution 14-115
(a)
$610,000
450,000
$160,000
(b)
$800,000
610,000
$190,000
(c)
Notes Payable..............................................................................
Land..................................................................................
Gain on Disposition of Land..............................................
Gain on Settlement of Debt...............................................
(d)
(e)
Land.............................................................................................
Allowance for Doubtful Accounts..................................................
Notes Receivable..............................................................
800,000
450,000
160,000
190,000
$800,000
610,000
$190,000
610,000
190,000
800,000