Full Test Bank Ch14 Bonds And Long-Term Notes

Intermediate Accounting, 10e (Spiceland)

Chapter 14 Bonds and Long-Term Notes

1) The specific provisions of a bond issue are described in a document called a bond indenture.

Difficulty: 1 Easy

Topic: Bond indenture

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal / Keyboard Navigation

2) Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

3) The outstanding balance (book value) of zero-coupon bonds increases by the periodic amount of interest recognized.

Difficulty: 1 Easy

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

4) Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

Difficulty: 1 Easy

Topic: Determining the selling price of bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management / Keyboard Navigation

5) The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

6) Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

7) Premium on bonds payable is a contra liability account.

Difficulty: 1 Easy

Topic: Bonds at issuance; Financial statement disclosures

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

8) An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest.

Difficulty: 2 Medium

Topic: Long-term notes‒General concepts

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

9) The interest expense on an installment note decreases with each periodic payment.

Difficulty: 2 Medium

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

10) Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

Difficulty: 2 Medium

Topic: Bonds with detachable warrants

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

11) Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

Difficulty: 1 Easy

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

12) If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement unless the changes are attributable to changes in credit risk.

Difficulty: 2 Medium

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

13) The interest rate that is printed on the bond certificate is referred to as any of the following except:

A) Stated rate.

B) Contract rate.

C) Nominal rate.

D) Effective rate.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

14) Most corporate bonds are:

A) Mortgage bonds.

B) Debenture bonds.

C) Secured bonds.

D) Collateral bonds.

Difficulty: 1 Easy

Topic: Bond indenture

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

15) The method used to pay interest depends on whether the bonds are:

A) Registered or coupon.

B) Mortgaged or unmortgaged.

C) Indentured or debentured.

D) Callable or redeemable.

Difficulty: 2 Medium

Topic: Bond indenture

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

16) The rate of interest that actually is incurred on a bond payable is called the:

A) Face rate.

B) Contract rate.

C) Effective rate.

D) Stated rate.

Difficulty: 1 Easy

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

17) An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $828.

B) $893.

C) $1,000.

D) $1,686.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

18) For a bond issue that sells for more than the bond face amount, the effective interest rate is:

A) The rate printed on the face of the bond.

B) The Wall Street Journal prime rate.

C) More than the rate stated on the face of the bond.

D) Less than the rate stated on the face of the bond.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds; Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

19) Bonds usually sell at their:

A) Maturity value.

B) Face value.

C) Present value.

D) Statistical expected value.

Difficulty: 1 Easy

Topic: Determining the selling price of bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

20) Ordinarily, the proceeds from the sale of a bond issue will be equal to:

A) The face amount of the bond.

B) The total of the face amount plus all interest payments.

C) The present value of the face amount plus the present value of the stream of interest payments.

D) The face amount of the bond plus the present value of the stream of interest payments.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management / Keyboard Navigation

21) The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest:

A) Less the present value of all future interest payments at the rate of interest stated on the bond.

B) Plus the present value of all future interest payments at the rate of interest stated on the bond.

C) Plus the present value of all future interest payments at the market (effective) rate of interest.

D) Less the present value of all future interest payments at the market (effective) rate of interest.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

22) 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? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $83,920.

B) $46,320.

C) $53,605.

D) $50,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

23) 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.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

24) On January 1, 2021, 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? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $85,666.

B) $86,711.

C) $87,538.

D) $87,711.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

25) Kelly Industries issued 11% bonds, dated January 1, with a face value of $100,000 on January 1, 2021. The bonds mature in 2031 (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? FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $62,256.

B) $63,273.

C) $94,265.

D) $94,349.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) Scottie Adams Bird Supplies issued 10% bonds, dated January 1, with a face amount of $240,000 on January 1, 2021. The bonds mature in 2031 (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, 2021? 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.

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

27) Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using a financial calculator or Excel, calculate the issue price of the bonds.

A) $537,194.

B) $464,469.

C) $359,528.

D) $500,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

28) Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using a financial calculator or Excel, what is the issue price of the bonds?

A) $537,194.

B) $464,469.

C) $538,973.

D) $500,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

29) Mountain Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using a financial calculator or Excel, calculate the issue price of the bonds.

A) $139,609.

B) $186,410.

C) $214,877.

D) $200,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

30) Hillside Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using a financial calculator or Excel, calculate the issue price of the bonds.

A) $163,200.

B) $186,410.

C) $214,877.

D) $200,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

31) Air Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $537,194.

B) $464,471.

C) $359,528.

D) $500,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) Roman Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $537,194.

B) $464,469.

C) $538,972.

D) $500,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

33) Sand Explorers issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $139,609.

B) $186,410.

C) $214,877.

D) $200,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

34) Mind Explorers issues bonds with a stated interest rate of 7%, face value of $200,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $163,200.

B) $186,410.

C) $214,878.

D) $200,000.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

35) 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.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) Straight-line amortization of bond discount or premium:

A) Can be used for amortization of discount or premium in all cases and circumstances.

B) Provides the same amount of interest expense each period as does the effective interest method.

C) Is appropriate for deep discount bonds.

D) Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

37) An amortization schedule for bonds issued at a premium:

A) Summarizes the amortization of the premium, a contra-asset account with a credit balance.

B) Is reported in the balance sheet.

C) Is a schedule that reflects the changes in the debt over its term to maturity.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

38) 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 outstanding balance (book value).

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

39) Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

LPC issued the bonds:

A) At par.

B) At a premium.

C) At a discount.

D) Cannot be determined from the given information.

Difficulty: 1 Easy

Topic: Bonds at issuance; Effective interest method–Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

40) Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

What is the annual stated interest rate on the bonds?

A) 3.5%

B) 6%

C) 7%

D) None of the answer choices is correct.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

41) Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

What is the annual effective interest rate on the bonds?

A) 3%

B) 3.5%

C) 6%

D) 7%

Difficulty: 3 Hard

Topic: Determining interest and amortization; Effective interest method–Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

42) Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2021. LPC's accountant has projected the following amortization schedule from issuance until maturity:

LPC calls the bonds at 103 immediately after the interest payment on 12/31/2022 and retires them. What gain or loss, if any, would LPC record on this date?

A) No gain or loss

B) $3,717 gain

C) $6,000 loss

D) $2,283 loss

Difficulty: 3 Hard

Topic: Early extinguishment of debt

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

43) A $500,000 bond issue sold at 98. Therefore, the bonds:

A) Sold at a discount because the stated rate of interest was lower than the effective rate.

B) Sold for the $500,000 face amount less $10,000 of accrued interest.

C) Sold at a premium because the stated rate of interest was higher than the yield rate.

D) Sold at a discount because the effective interest rate was lower than the face rate.

Difficulty: 2 Medium

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

44) Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

Auerbach issued the bonds:

A) At par.

B) At a premium.

C) At a discount.

D) Cannot be determined from the given information.

Difficulty: 2 Medium

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) 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.

Difficulty: 2 Medium

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

46) 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.

Difficulty: 3 Hard

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

47) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:

A) Equal to $500,000.

B) More than $500,000.

C) Less than $500,000.

D) The answer cannot be determined from the information provided.

Difficulty: 2 Medium

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

48) A bond is issued with a face amount of $500,000 and a stated interest rate of 10%. The current market rate of interest is 8%. These bonds will sell at a price that is:

A) Equal to $500,000.

B) More than $500,000.

C) Less than $500,000.

D) The answer cannot be determined from the information provided.

Difficulty: 2 Medium

Topic: Bonds at issuance

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

49) 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.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) How would the outstanding balance (book value) of bonds payable be affected by the amortization of each of the following?

A) Option A

B) Option B

C) Option C

D) Option D   

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

51) For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Bonds were issued at a discount. In the bond amortization schedule:

A) The interest expense is less with each successive interest payment.

B) The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.

C) The outstanding balance (book value) of the bonds declines eventually to face value.

D) The reduction in the discount is less with each successive interest payment.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) 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.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) 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.

Difficulty: 1 Easy

Topic: Determining interest and amortization

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

55) 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:

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

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

56) When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A) Less than the effective interest.

B) Equal to the effective interest.

C) Greater than the effective interest.

D) More than if the bonds had been sold at a discount.

Difficulty: 2 Medium

Topic: Effective interest method-Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

57) When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A) More than the effective interest.

B) Less than the effective interest.

C) Equal to the effective interest.

D) More than if the bonds had been sold at a premium.

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

58) When bonds are sold at a discount 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.

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

59) When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

A) Remains constant.

B) Is equal to the change in outstanding balance (book value).

C) Increases.

D) Decreases.

Difficulty: 2 Medium

Topic: Effective interest method-Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

60) 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.

Difficulty: 2 Medium

Topic: Effective interest method-Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

61) When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:

A) Higher than the effective interest amount every year.

B) Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

C) Less than the effective interest amount in the early years and more than the effective interest amount in the later years.

D) Less than the effective interest amount every year.

Difficulty: 3 Hard

Topic: Straight-line method‒Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

62) When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

A) Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

B) Less than the effective interest amount in the early years and more than the effective interest amount in the later years.

C) Higher than the effective interest amount every year.

D) Less than the effective interest amount every year.

Difficulty: 3 Hard

Topic: Straight-line method‒Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

63) Cramer Company sold five-year, 8% bonds on October 1, 2021. 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, 2021, income statement (assume straight-line amortization)?

A) $2,000.

B) $1,900.

C) $1,778.

D) $2,040.

Difficulty: 3 Hard

Topic: Straight-line method‒Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

64) On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.

Legion should report bond interest expense for the six months ended June 30, 2021, in the amount of:

A) $8,850.

B) $10,000.

C) $10,620.

D) $12,000.

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

65) On January 1, 2021, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate.

Legion should pay cash interest for the six months ended June 30, 2021, in the amount of:

A) $8,850.

B) $10,000.

C) $10,620.

D) $12,000.

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

66) On January 1, 2021, 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 2022 (assume annual interest payments and amortization)?

A) $23,280.

B) $25,140.

C) $29,100.

D) $29,610.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

67) On June 30, 2021, 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, 2021?

A) $400,000

B) $420,000

C) $450,000

D) $500,000

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

68) On January 1, 2021, an investor paid $291,000 for bonds with a face amount of $300,000. The stated 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 2021 (assume annual interest payments and amortization)?

A) $23,280.

B) $29,100.

C) $24,000.

D) $30,000.

Difficulty: 1 Easy

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

69) Shaq Corporation issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds? 

A) 4.0%.

B) 4.5%.

C) 8.0%.

D) 9.0%.

Difficulty: 2 Medium

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

70) DeKay Dental Supplies issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

What is the stated annual rate of interest on the bonds?

A) 4.0%.

B) 4.5%.

C) 8.0%.

D) 9.0%.

Difficulty: 2 Medium

Topic: Determining interest and amortization; Effective interest method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

71) Ferris Wheeler Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

What is the interest expense on the bonds for the year ended December 31, 2022?

A) $800.

B) $809.

C) $818.

D) $819.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

72) Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.

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.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

73) Gene Poole Co. issued $10,000 of bonds on January 1, 2021. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. (Round your answer to nearest whole dollar amount.)

What is the book value of the bonds on December 31, 2022?

A) $9,116.

B) $9,117.

C) $9,407.

D) $9,416.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

74) On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31.

What amount of accrued interest payable should B report in its September 30, 2021, balance sheet?

A) $18,000.

B) $36,000.

C) $54,000.

D) $48,000.

Difficulty: 2 Medium

Topic: Determining interest-Between interest dates

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

75) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the stated annual rate of interest on the bonds?

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

76) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds?

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Difficulty: 2 Medium

Topic: Determining interest and amortization; Effective interest method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

77) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the interest expense on the bonds for the year ended December 31, 2022?

A) $700,700.

B) $600,000.

C) $347,464.

D) $100,700.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the book value of the bonds as of December 31, 2022?

A) $8,834,770.

B) $8,686,606.

C) $8,734,070.

D) $8,783,433.

Difficulty: 3 Hard

Topic: Financial statement disclosures; Effective interest method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

79) Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What would be the total interest cost of the bonds over their full term?

A) $1,359,033.

B) $4,640,967.

C) $6,000,000.

D) $7,359,033.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

80) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the stated annual rate of interest on the bonds?

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

81) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the effective annual rate of interest on the bonds?

A) 3%.

B) 4%.

C) 6%.

D) 8%.

Difficulty: 2 Medium

Topic: Determining interest and amortization; Effective interest method–Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) 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 outstanding balance (book value), respectively?

A) Understated, understated.

B) Understated, overstated.

C) Overstated, understated.

D) Overstated, overstated.

Difficulty: 3 Hard

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

83) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the interest expense on the bonds for the year 2022?

A) $800,000.

B) $680,759.

C) $342,971.

D) $119,241.

Difficulty: 3 Hard

Topic: Effective interest method-Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

84) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What is the book value of the bonds as of December 31, 2022?

A) $11,432,379.

B) $11,375,350.

C) $11,316,611.

D) $11,256,109.

Difficulty: 3 Hard

Topic: Financial statement disclosures; Effective interest method–Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

85) Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

What would be the total interest expense recognized for the bond issue over its full term?

A) $6,512,253.

B) $8,000,000.

C) $9,487,747.

D) $11,487,747.

Difficulty: 3 Hard

Topic: Effective interest method-Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

86) 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 outstanding balance (book value).

Difficulty: 2 Medium

Topic: Determining interest and amortization; Straight-line method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

87) Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

How much cash interest does Auerbach pay on March 31, 2022?

A) $6.0 million.

B) $12.0 million.

C) $9.0 million.

D) $18.0 million.

Difficulty: 2 Medium

Topic: Determining interest and amortization

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

88) Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2021 income statement?

A) $0.

B) $3,830,535.

C) $5,107,380.

D) $7,661,070.

Difficulty: 3 Hard

Topic: Determining interest-Between interest dates

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2021, rounded up to the nearest thousand?

A) $252,369,000.

B) $256,369,000.

C) $256,200,000.

D) $257,030,070.

Difficulty: 3 Hard

Topic: Financial statement disclosures; Determining interest–Between interest dates

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

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, 2022, rounded up to the nearest thousand?

A) $252,369,000.

B) $256,369,000.

C) $256,300,000.

D) $257,030,000.

Difficulty: 3 Hard

Topic: Financial statement disclosures; Determining interest–Between interest dates

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) 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.

Difficulty: 1 Easy

Topic: Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

92) When issuing bonds or notes, Papaya Company incurs costs, such as legal and accounting fees, printing costs, and registration and underwriting fees. Papaya records these costs by combining them with any discount (or subtracting them from any premium) on the debt. Which of the following is an accurate statement regarding the company's policy?

A) The policy is inappropriate because these costs should be expensed in the period the debt is issued.

B) The policy is inappropriate because these costs should be recorded in a Debt Issue Costs account and amortized over the term to maturity of the debt.

C) This approach has the appeal of reflecting the effect that debt issue costs have on the effective interest rate because deducting debt issue costs lowers the carrying amount of the debt, which effectively increases the interest rate on that debt.

D) This approach is conceptually correct because the net amount borrowed is higher, but interest payments are the same, so the effective rate of borrowing is lower.

Difficulty: 2 Medium

Topic: Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

93) 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.

Difficulty: 2 Medium

Topic: Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

94) Zero-coupon bonds:

A) Offer a return in the form of a deep discount off the face value.

B) Result in zero interest expense for the issuer.

C) Result in zero interest revenue for the investor.

D) Are reported as shareholders' equity by the issuer.

Difficulty: 2 Medium

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

95) On June 30, 2021, Moran Corporation issued $4 million of its 8% bonds for $3.5 million. The bonds were priced to yield 9.4%. The bonds are dated June 30, 2021. 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, 2021?

A) $3,500.

B) $4,500.

C) $4,800.

D) $9,000.

Difficulty: 3 Hard

Topic: Effective interest method-Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

96) On January 1, 2021, Solo Inc. 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, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization.

The amount of interest expense for 2021 is:

A) $80,000.

B) $82,000.

C) $87,000.

D) $89,000.

Difficulty: 2 Medium

Topic: Straight-line method‒Discount; Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

97) On January 1, 2021, Solo Inc. 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, 2031. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization.

What is the carrying value of the bonds reported in the December 31, 2021, balance sheet?

A) $1,045,000.

B) $1,040,000.

C) $987,000.

D) $937,000.

Difficulty: 3 Hard

Topic: Straight-line method‒Discount; Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

98) Mango Corporation issues new long-term bond offerings several times a year. The company follows a policy of using straight-line amortization for all of those issues. Which of the following is an accurate statement regarding the company's policy?

A) The policy is appropriate if management typically prices its bond issues at a discount.

B) The policy is inappropriate because using the straight-line method is acceptable only when doing so produces results that are not materially different from the effective interest method.

C) The policy is appropriate if management typically prices its bond issues at a premium.

D) The policy is inappropriate because Mango issues new long-term bond offerings more than once a year.

Difficulty: 2 Medium

Topic: Straight-line method‒Discount; Straight-line method‒Premium

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

99) 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.

Difficulty: 2 Medium

Topic: Long-term notes‒General concepts

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

100) 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.

Difficulty: 1 Easy

Topic: Note exchanged for assets

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

101) 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.

Difficulty: 2 Medium

Topic: Note exchanged for assets

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

102) 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.

Difficulty: 2 Medium

Topic: Note exchanged for assets

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) 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.

Difficulty: 2 Medium

Topic: Note exchanged for assets

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) 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.

Difficulty: 1 Easy

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

105) Green Industries purchased a machine from Cyan Corporation on October 1, 2021. 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: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

A) $12,000.

B) $12,445.

C) $12,668.

D) $12,794.

Difficulty: 3 Hard

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) Magenta Company purchased a machine from Pink Corporation on October 31, 2021. 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, 2021, is:

A) $2,559.

B) $2,880.

C) $5,533.

D) $5,760.

Difficulty: 3 Hard

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

107) On January 1, 2021, 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, 2021, 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.

Difficulty: 2 Medium

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

108) 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.

Difficulty: 2 Medium

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

109) 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:

What formula should Mann use in cell E8 to calculate the outstanding balance (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)

Difficulty: 2 Medium

Topic: Installment notes

Learning Objective: 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

110) 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.

Difficulty: 1 Easy

Topic: Financial statement disclosures

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

111) 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.

Difficulty: 1 Easy

Topic: Financial statement disclosures

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

112) 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.

Difficulty: 1 Easy

Topic: Financial statement disclosures

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

113) 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.

Difficulty: 1 Easy

Topic: Financial statement disclosures

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

114) 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.

Difficulty: 1 Easy

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

115) 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.

Difficulty: 1 Easy

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

116) 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):

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

117) Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow's:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

118) 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.

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

119) 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.

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

120) 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.

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

121) 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.

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Risk Analysis / Keyboard Navigation

122) 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.

Difficulty: 2 Medium

Topic: Early extinguishment of debt

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

123) On February 1, 2020, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2021, 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.

Difficulty: 2 Medium

Topic: Early extinguishment of debt

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

124) MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2020 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2021, $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.

Difficulty: 3 Hard

Topic: Early extinguishment of debt; Straight-line method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: / Keyboard Navigation

125) Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2020 for $106,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2021, 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.

Difficulty: 3 Hard

Topic: Early extinguishment of debt; Straight-line method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

126) On January 1, 2021, 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, 2021. What is the amount of the loss on early extinguishment?

A) $0.

B) $6,932.

C) $7,241.

D) $7,629.

Difficulty: 3 Hard

Topic: Early extinguishment of debt; Effective interest method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

127) On March 1, 2021, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2031. 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, 2021, 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.

Difficulty: 3 Hard

Topic: Bonds with detachable warrants

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

128) On June 30, 2021, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2026. Interest is payable semiannually every June 30 and December 31. On June 30, 2021, 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, 2021, 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.

Difficulty: 2 Medium

Topic: Early extinguishment of debt; Debt issue costs

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

129) On January 1, 2016, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2026, but were callable at 101 any time after December 31, 2019. Interest was payable semiannually on July 1 and January 1. On July 1, 2021, 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 2021 on this early extinguishment of debt was:

A) $16,000 gain.

B) $20,000 loss.

C) $24,000 gain.

D) $60,000 gain.

Difficulty: 3 Hard

Topic: Early extinguishment of debt; Straight-line method–Discount

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

130) On June 30, 2021, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2022. 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, 2021, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2021, 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

131) On March 31, 2021, 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

132) On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, 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, 2021, 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

133) 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:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

134) On January 1, 2021, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2026, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

135) On January 1, 2021, 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

136) 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

137) 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.

Difficulty: 2 Medium

Topic: Convertible bonds

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

138) On March 1, 2021, Doll Co. issued 10-year convertible bonds at 106. During 2024, 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, 2021, 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.

Difficulty: 2 Medium

Topic: IFRS‒Convertible bonds

Learning Objective: 14-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for bonds and long-term notes.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

139) On January 1, 2021, 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.

Difficulty: 2 Medium

Topic: IFRS‒Convertible bonds

Learning Objective: 14-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for bonds and long-term notes.

Bloom's: Apply

AACSB: Knowledge Application; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

140) 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.

Difficulty: 1 Easy

Topic: IFRS‒Convertible bonds

Learning Objective: 14-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for bonds and long-term notes.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

141) 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.

Difficulty: 2 Medium

Topic: IFRS‒Convertible bonds

Learning Objective: 14-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for bonds and long-term notes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

142) 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.

Difficulty: 2 Medium

Topic: Bonds with detachable warrants

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

143) On April 1, 2021, 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.

Difficulty: 3 Hard

Topic: Bonds with detachable warrants

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

144) 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.

Difficulty: 2 Medium

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

145) Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2021. The bonds sold for $739,816 and mature in 2040 (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, 2021, 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.

Difficulty: 3 Hard

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

146) 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.

Difficulty: 2 Medium

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

147) Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2022. 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, 2022, 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.

Difficulty: 3 Hard

Topic: Option to report liabilities at fair value

Learning Objective: 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

148) On January 31, 2021, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2020, and mature on December 31, 2030. Interest will be paid semiannually on June 30 and December 31.

For how many months will there be interest expense for the year ended September, 30, 2021?

A) 6 months.

B) 8 months.

C) 9 months.

D) 12 months.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

149) When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

A) Six months.

B) Four months.

C) 10 months.

D) 12 months.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

150) Bonds are issued on June 1, 2021 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2021, is for a period of:

A) Three months.

B) Four months.

C) Six months.

D) Seven months.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

151) 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.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

152) TMC issued $50 million of its 12% bonds on April 1, 2021 at 96, reflecting a market rate of interest of 14%, plus accrued interest. The bonds are dated January 1, 2021, and mature on December 31, 2040. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance? (Round your final answer to 2 decimal places.)

A) $51.75 million.

B) $50.5 million.

C) $49.5 million.

D) $49.0 million.

Difficulty: 3 Hard

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

153) On September 1, 2021, 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.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

154) 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 interest payable.

C) Include a debit to interest expense.

D) Be unaffected by the timing of issue.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

155) Brown Co. issued $100 million of its 11% bonds on April 1, 2021 at 90 ($90 million) plus accrued interest. The bonds are dated January 1, 2021 and have an effective interest rate of 12%. Interest is payable semiannually on June 30 and December 31. What amount did Brown receive from the bond issuance? (Round your final answer to 2 decimal places.)

A) $89.25 million.

B) $92.25 million.

C) $92.75 million.

D) $93.0 million.

Difficulty: 3 Hard

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

156) On September 1, 2021, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 11%. 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.

Difficulty: 3 Hard

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

157) On September 1, 2021, Red Co., issued $48 million of its 10% bonds at face value. The bonds are dated June 1, 2021, and mature on May 30, 2031. 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.

Difficulty: 2 Medium

Topic: Bonds issued between interest dates-App 14A

Learning Objective: Appendix 14A Bonds Issued Between Interest Dates.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

158) During 2021, Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2019, payable to Third Bank. Interest was last paid on December 31, 2020. On December 31, 2021, 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 2021 income statement?

A) $20,000.

B) $50,000.

C) $80,000.

D) $0.

Difficulty: 3 Hard

Topic: Troubled debt restructuring‒App 14B

Learning Objective: Appendix 14B Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

159) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 3 Hard

Topic: Determining interest and amortization; Bond indenture

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal

160) Listed below are 4 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 3 Hard

Topic: Early extinguishment of debt; Bonds with detachable warrants; Option to report liabilities at fair value

Learning Objective: 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.; 14-06 Understand the option to report liabilities at their fair values.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

161) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 3 Hard

Topic: Bond indenture; Decision-makers' perspective

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; BB Legal; FN Measurement

162) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 3 Hard

Topic: Bond indenture; Bonds at issuance; Debt issue costs; Long-term notes ‒ General concepts

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.; 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-03 Characterize the accounting treatment of notes, including installment notes, issued for cash or for noncash consideration.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource management; FN Measurement

163) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 3 Hard

Topic: Determining interest and amortization; Zero coupon bonds; Convertible bonds; Bonds with detachable warrants

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

164) Listed below are several terms and phrases associated with long-term debt. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.

List A List B

____ Materiality concept A. Bond price

____ Convertible bonds B. Discount

____ Present value of interest plus C. Liquidation payments after

present value of principal other claims satisfied

____ Call feature D. Name of owner not registered

____ Debt issue costs E. Premium

____ Market rate higher than stated rate F. Checks are mailed directly

____ Coupon bonds G. No specific assets pledged

____ Promises made to bondholders H. Bond indenture

____ Stated rate higher than market rate I. Backed by a lien

____ Face amount times stated rate J. Interest expense

____ Registered bonds K. May become stock

____ Debenture bond L. Legal, accounting, printing

____ Mortgage bond M. Protection against falling rates

____ Balance times effective rate N. Periodic cash payments

____ Subordinated debenture O. Straight-line method

Difficulty: 3 Hard

Topic: Bond indenture; Bonds at issuance; Determining interest and amortization; Debt issue costs; Convertible bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.; 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-05 Record the early extinguishment of debt, its conversion into equity securities, and bond issues with warrants.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

165) On May 1, 2021, Joe purchased $200,000 in zero-coupon bonds that mature on May 1, 2041. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually.

Required: Calculate the price Joe paid for the bonds.

Difficulty: 2 Medium

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

166) On February 1, 2021, Nell purchased $600,000 in zero-coupon bonds that mature on February 1, 2041. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%.

Required: Calculate the price Nell paid for the bonds.

Difficulty: 2 Medium

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

167) On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: How much interest will Morton Sales Co. pay on these bonds in 2021?

Difficulty: 2 Medium

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

168) On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: What was the annual effective interest rate in the market when the bonds were issued?

Difficulty: 3 Hard

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

169) On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: What amount of interest expense on these bonds would Morton Sales Co. report in its 2021 income statement?

Difficulty: 3 Hard

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

170) On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: What will Morton Sales Co. report on these bonds in its December 31, 2021, balance sheet?

Difficulty: 3 Hard

Topic: Financial statement disclosures

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.; 14-04 Describe the disclosures appropriate to long-term debt in its various forms and calculate related financial ratios.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

171) On January 1, 2021, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

Required: What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?

Difficulty: 3 Hard

Topic: Zero coupon bonds

Learning Objective: 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

172) Determine the price of a $200,000 bond issue under each of the following independent assumptions:

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

173) Determine the price of a $500,000 bond issue under each of the following independent assumptions:

Difficulty: 2 Medium

Topic: Determining the selling price of bonds

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

174) On January 1, 2021, Bishop Company issued 10% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2021.

2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2021.

3. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.

Difficulty: 3 Hard

Topic: Determining the selling price of bonds; Effective interest method ‒ Discount

Learning Objective: 14-01 Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt.; 14-02 Account for bonds issued at face value, at a discount, or at a premium, recording interest using the effective interest method or using the straight-line method.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

175) On January 1, 2021, Mania Enterprises issued 12% bonds dated January 1, 2021, with a face amount of $20 million. The bonds mature in 2030 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Required:

1. Determine the price of the bonds at January 1, 2021.

2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2021.

3. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.

4. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.