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Chapter 14 - Intermediate Accounting
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the A. bond indenture. B. bond debenture. C. registered bond. D. bond coupon. - correct answer A. bond indenture. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the bond indenture. The interest rate written in the terms of the bond indenture is known as the A. effective rate. B. market rate. C. yield rate. D. coupon rate, nominal rate, or stated rate. - correct answer D. coupon rate, nominal rate, or stated rate. The interest rate written in the terms of the bond indenture is known as the coupon rate, nominal rate, or stated rate. A bond for which the issuer has the right to call and retire the bonds prior to maturity is a A. convertible bond. B. callable bond. C. retirable bond. D. debenture bond. - correct answer B. callable bond.
Callable bonds give the issuer the right to call and retire the bonds prior to maturity. A bond issued in the name of the owner is a: A. bearer bond. B. convertible bond. C. income bond. D. registered bond. - correct answer D. registered bond. Registered bonds are issued in the name of the owner. When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. - correct answer False. A bond sells at a premium when the stated rate is higher than the effective rate. If a bond sold at 97, the market rate was: A. equal to the stated rate. B. less than the stated rate. C. greater than the stated rate. D. equal to the coupon rate. - correct answer C. greater than the stated rate. If a bond was sold at 97, it sold at a discount (97% of face value), which occurs when the market rate is greater than the stated rate. On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include A. a credit to Bonds Payable for $102,000,000. B. a credit to Premium on Bonds Payable for $2,000,000. C. a debit to Cash for $100,000,000. D. a credit to Interest Expense for $2,000,000. - correct answer B. a credit to Premium on Bonds Payable for $2,000,000.
Ferrone Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective-interest amortization. What amount of interest expense will Ferrone record for the June 30 payment? A. $390, B. $392, C. $400, D. $784,164 - correct answer B. $392, Interest expense for the first six months is ($9,802,072X .04) =$392,082. Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement. - correct answer True. FASB Statement No. 145 changed the reporting of gains and losses on early extinguishment of debt from extraordinary item treatment to other gains and losses on the income statement. On June 30, 2014, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2024. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $210,000 and $60,000, respectively. On June 30, 2014, Baker acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt? A. $5,940,000. B. $5,790,000. C. $5,730,000. D. $5,640,000. - correct answer C. $5,730,000. The bonds' net carrying amount used to calculate the gain or loss on extinguishment is ($6,000,000 - $210,000 - $60,000) = $5,730,000. All of the following statements are true regarding IFRS treatment of reporting and recognition of liabilities except:
A. IFRS allows the recognition of liabilities for future losses. B. IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity. C. For contingencies, IFRS requires insurance recoveries be "virtually certain" before recognition of an asset is permitted. D. The recognition criteria for asset retirement obligations is less stringent under IFRS than it is under U.S. GAAP - correct answer A. IFRS allows the recognition of liabilities for future losses. Both U.S.GAAP and IFRS prohibit the recognition of liabilities for future losses. On January 1, 2014, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2014 with regard to the note will include A. a credit to Discount on Notes Payable for $90,160. B. a debit to Interest Expense for $120,000. C. a credit to Interest Payable for $60,000. D. a debit to Interest Expense for $29,850. - correct answer A. a credit to Discount on Notes Payable for $90,160. The adjusting entry made at December 31, 2014 debits Interest Expense and credits Discount on Notes Payable for ($901,560 X .10) = $90,160. If a company elects the fair value option for its long-term liabilities, a decrease in the fair value of a bond payable will result in an unrealized holding loss. - correct answer False. When the fair value of a bond decreases, the cost to settle the debt at that point has decreased, resulting in an unrealized holding gain to the issuing company.
Under IFRS, if no amount within a range is a better estimate than any other amount, a loss contingency is accrued for the mid-point of the range. Best-efforts underwriting means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. - correct answer False. Firm underwriting means that the investment bank guarantees the proceeds of the bond issue will be a certain amount. Bonds that are not recorded in the name of the bondholder are called unsecured bonds. - correct answer False. Bonds not recorded in the name of the bondholder are called coupon bonds. A bond that matures in installments is called a: A. term bond. B. serial bond. C. callable bond. D. bearer bond. - correct answer B. serial bond. Bonds that mature in installments are referred to as serial bonds. Bonds which do not pay interest unless the issuing company is profitable are called A. income bonds. B. term bonds. C. debenture bonds. D. secured bonds. - correct answer A. income bonds.
Income bonds are bonds which do not pay interest unless the issuing company is profitable. The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the A. stated rate. B. nominal rate. C. coupon rate. D. market rate. - correct answer D. market rate. The market rate is used to discount the cash flows in determining the selling price (proceeds) of a bond. The printing costs and legal fees associated with the issuance of bonds should A. be expensed when incurred. B. be reported as a deduction from the face amount of bonds payable. C. be accumulated in a deferred charge account and amortized over the life of the bonds. D. not be reported as an expense until the period the bonds mature or are retired. - correct answer C. be accumulated in a deferred charge account and amortized over the life of the bonds. The printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amortized over the life of the bonds. Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that A. the market rate of interest exceeded the stated rate. B. the stated rate of interest exceeded the market rate. C. the market and stated rates coincided. D. no necessary relationship exists between the two rates. - correct answer B. the stated rate of interest exceeded the market rate.
D. None of these answer choices are correct. - correct answer C. less than the bond interest payment. Selling a bond at a premium results in interest expense being less than the interest payment because of the amortized premium. On January 1, 2014, Kimbrough Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Kimbrough uses the effective-interest method of amortizing bond discount. At December 31, 2014, Kimbrough should report unamortized bond discount of A. $274,500. B. $285,500. C. $258,050. D. $255,000. - correct answer B. $285,500. The discount on bonds payable is recorded at ($5,000,000 - $4,695,000) = $305,000 at issuance. The amortization of discount in 2014 is [$450,000 - ($4,695,000 X .10)] =$19,500 leaving a balance of $305,000 - $19,500 = $285,500. On June 30, 2014, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2014 were $200,000 and $50,000, respectively. On June 30, 2014, Prouty acquired all of these bonds at 101 and retired them. What amount of gain or loss would Prouty record on this early extinguishment of debt? A. $505,000 gain. B. $300,000 loss. C. $200,000 gain. D. $250,000 loss. - correct answer B. $300,000 loss. The bonds' net carrying amount is ($5,000,000 - $200,000 - $50,000) = $4,750,000. The loss on extinguishment is ($5,000,000 X 1.01) - $4,750,000 = $300,000.
A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place A. the present value of the debt instrument must be approximated using an imputed interest rate. B. it should not be recorded on the books of either party until the fair market value of the property becomes evident. C. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. D. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. - correct answer A. the present value of the debt instrument must be approximated using an imputed interest rate. When such a transaction takes place the present value of the debt instrument must be approximated using an imputed interest rate. When a note is exchanged for property in a bargained transaction, the stated interest rate is presumed to be fair unless: A. no interest rate is stated. B. the stated interest rate is unreasonable. C. the stated face amount of the note is materially different from the current cash sales price for similar items. D. All of these answer choices are correct. - correct answer D. All of these answer choices are correct. All of the options would challenge the presumption that the stated interest rate is fair. Which one of the following statements relating to mortgage notes payable is not correct? A. Mortgage notes payable are the most common form of long-term notes payable. B. A mortgage note payable is a promissory note secured by a document that pledges title to property as security for the loan. C. Mortgage notes payable are payable in full at maturity or in installments.
When a business enterprise enters into what is referred to as off-balance-sheet financing, the company can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. The numerator in the times interest earned ratio is: A. net income. B. income before interest and taxes. C. income before interest. D. income before taxes. - correct answer B. income before interest and taxes. The times interest earned ratio is equal to income before interest and taxes divided by interest expense. When assets such as buildings and equipment are transferred in a troubled debt restructuring, the creditor should record a gain or loss for the difference between the fair value and the debtor's book value. - correct answer False. Assets transferred to a creditor in connection with a troubled debt restructuring are recorded on the books of the creditor at fair value. Any gain or loss on the transfer would be recognized by the debtor. Under IFRS, bond issuance costs, including the printing costs and legal fees associated with the issuance, should be: A. accumulated in a deferred charge account and amortized over the life of the bonds. B. reported as an expense in the period the bonds mature or are redeemed. C. expensed in the period when the debt is issued. D. recorded as a reduction in the carrying value of bonds payable. - correct answer D. recorded as a reduction in the carrying value of bonds payable. Under IFRS, bond issuance costs should be recorded as a reduction in the carrying value of bonds payable.
