CHAPTER 14 LONG-TERM LIABILITIES IFRS questions are available at the end of this chapter. Includes Solutions and Derivations for all Exercises.

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CHAPTER 14 LONG-TERM LIABILITIES IFRS questions are available at the end of this chapter. TRUE-FALSE—Conceptual ... 1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate. 2. A mortgage bond is referred to as a debenture bond. : Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 3. Bond issues that mature in installments are called serial bonds. : Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 4. If the market rate is greater than the coupon rate, bonds will be sold at a premium. : Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate. : Easy, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 6. The stated rate is the same as the coupon rate. 7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense. , Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 8. A bond may only be issued on an interest payment date. : Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 9. The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond. , Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 10. Companies report bond discounts as a direct deduction from the face amount of the bond. : Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 11. The replacement of an existing bond issue with a new one is called refunding. LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 13. The interest rate of variable-rate mortgages is tied to changes in the fluctuating market rate. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 14. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded. LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None 15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet. LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 16. The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet. LO: 5, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, FSA, IFRS: None 17. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current. , LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 18. The times interest earned is computed by dividing income before interest expense by interest expense. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None *19. The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected undiscounted future cash flows from the loan. , LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None *20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor. , LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, IFRS: None True False Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. T 11. T 16. T 2. F 7. F 12. F 17. F 3. T 8. F 13. T 18. F 4. F 9. F 14. T 19. F 5. F 10. T 15. T 20. F MULTIPLE CHOICE—Conceptual 21. An example of an item which is not a liability is a. dividends payable in stock. b. advances from customers on contracts. c. accrued estimated warranty costs. d. the portion of long-term debt due within one year. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 22. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a. bond indenture. b. bond debenture. c. registered bond. d. bond coupon. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 23. The term used for bonds that are unsecured as to principal is a. mortgage bonds. b. debenture bonds. c. indenture bonds. d. callable bonds. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None P24. Bonds for which the owners' names are not registered with the issuing corporation are called a. bearer bonds. b. term bonds. c. debenture bonds. d. secured bonds. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S25. Bonds that pay no interest unless the issuing company is profitable are called a. collateral trust bonds. b. debenture bonds. c. revenue bonds. d. income bonds. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S26. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be a. greater than if the straight-line method were used. b. greater than the amount of the interest payments. c the same as if the straight-line method were used. d. less than if the straight-line method were used. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 27. The interest rate written in the terms of the bond indenture is known as the a. coupon rate. b. nominal rate. c. stated rate. d. coupon rate, nominal rate, or stated rate. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 28. The rate of interest actually earned by bondholders is called the a. stated rate. b. coupon rate. c. nominal rate. d. effective rate. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29. One step in calculating the issue price of the bonds is to multiply the face value by the table value for a. 10 periods and 10% from the present value of 1 table. b. 20 periods and 5% from the present value of 1 table. c. 10 periods and 8% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table. : K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 30. Another step in calculating the issue price of the bonds is to a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. d. None of these answers is correct. : K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 32. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will a. exceed what it would have been had the effective-interest method of amortization been used. b. be less than what it would have been had the effective-interest method of amortization been used. c. be the same as what it would have been had the effective-interest method of amortiza-tion been used. d. be less than the stated (nominal) rate of interest. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d. the market rate multiplied by the beginning-of-period carrying amount of the bonds. : K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 34. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will a. increase only if the bonds were issued at a discount. b. decrease only if the bonds were issued at a premium. c. increase only if the bonds were issued at a premium. d. increase if the bonds were issued at either a discount or a premium. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 35. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a a. debit to Interest Payable. b. credit to Interest Receivable. c. credit to Interest Expense. d. credit to Unearned Interest. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be a. decreased by accrued interest from June 1 to November 1. b. decreased by accrued interest from May 1 to June 1. c. increased by accrued interest from June 1 to November 1. d. increased by accrued interest from May 1 to June 1. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 37. Premium on bonds payable is a. a contra account. b. reported as a reduction of the bond liability. c. debited to a deferred charge account and amortized over the life of the bonds. d. an adjunct account. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 38. Bond interest paid is equal to the a. carrying value of the bonds multiplied by the effective-interest rate. b. carrying value of the bonds multiplied by the stated interest rate. c. face amount of the bonds multiplied by the stated interest rate. d. face amount of the bonds multiplied by the effective-interest rate. : K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 39. The face value of bonds is also called each of the following except a. maturity value. b. stated value. c. par value. d. principal. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 40. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition a. any costs of issuing the bonds must be amortized up to the purchase date. b. the premium must be amortized up to the purchase date. c. interest must be accrued from the last interest date to the purchase date. d. All of these answers are correct. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 41. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue. b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. : K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA, IFRS: None P42. "In-substance defeasance" is a term used to refer to an arrangement whereby a. a company gets another company to cover its payments due on long-term debt. b. a governmental unit issues debt instruments to corporations. c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust. d. a company legally extinguishes debt before its due date. : K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None P43. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. b. The balance of mortgage payable will remain a constant amount over the 10-year period. c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. d. The amount of interest expense will remain constant over the 10-year period. : C, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None S44. A debt instrument with no ready market is exchanged for property whose fair 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 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. , LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 45. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note. d. any of these answers are correct. , LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 46. Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse? a. The shareholders’ loss is the debtholders’ gain. b. The income of the company will increase as the amount of interest payment will reduce. c. The decrease in market rate will increase the value of equity shares. d. The debtholders’ loss is the shareholders’ gain. , LO: 4, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 47. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting a. Bonds Payable. b. Gain on Restructuring of Debt. c. Unrealized Holding Gain/Loss-Income. d. Realized Holding Gain. , LO: 4, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 48. A project financing arrangement refers to: a. an arrangement where a company creates a special-purpose entity to perform a special project. b. an arrangement where a company borrows from its subsidiary to finance a project. c. an arrangement where a company promises future repayment by placing purchased assets in an irrevocable trust. d. an arrangement where a company finances a project from a sinking fund established for bond repayments. , LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S49. When a company enters into what is referred to as off-balance-sheet financing, the company a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. b. wishes to confine all information related to the debt to the income statement and the statement of cash flow. c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost. d. is in violation of generally accepted accounting principles. , LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None S50. Long-term debt that matures within one year and is to be converted into stock should be reported a. as a current liability. b. in a special section between liabilities and stockholders’ equity. c. as noncurrent. d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation. , LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 51. Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements? a. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years. b. The present value of scheduled interest payments on long-term debt during each of the next five years. c. The amount of scheduled interest payments on long-term debt during each of the next five years. d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years. , LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 52. Note disclosures for long-term debt generally include all of the following except a. assets pledged as security. b. call provisions and conversion privileges. c. restrictions imposed by the creditor. d. names of specific creditors. , LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 53. The times interest earned is computed by dividing a. net income by interest expense. b. income before taxes by interest expense. c. income before income taxes and interest expense by interest expense. d. net income and interest expense by interest expense. , LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 54. The debt to assets ratio is computed by dividing a. current liabilities by total assets. b. long-term liabilities by total assets. c. total liabilities by total assets. d. total assets by total liabilities. , LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None *55. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a. a loss should be recognized by the debtor. b. a gain should be recognized by the debtor. c. a new effective-interest rate must be computed. d. no interest expense or revenue should be recognized in the future. , LO: 6, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None *56. A troubled debt restructuring will generally result in a a. loss by the debtor and a gain by the creditor. b. loss by both the debtor and the creditor. c. gain by both the debtor and the creditor. d. gain by the debtor and a loss by the creditor. , LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None *57. In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize a. no gain or loss on the restructuring. b. a gain on the restructuring. c. a loss on the restructuring. d. None of these answers are correct. , LO: 6, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None *58. In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the a. carrying amount of the pre-restructure debt is less than the total future cash flows. b. carrying amount of the pre-restructure debt is greater than the total future cash flows. c. present value of the pre-restructure debt is less than the present value of the future cash flows. d. present value of the pre-restructure debt is greater than the present value of the future cash flows. , LO: 6, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None *59. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a. compute a new effective-interest rate. b. not recognize a loss. c. calculate its loss using the historical effective rate of the loan. d. calculate its loss using the current effective rate of the loan. , LO: 6, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None Multiple Choice Answers—Conceptual Solutions to those Multiple Choice questions for which the answer is “none of these.” 30. multiply $5,000 by the table value for 20 periods and 4% from the present value of an annuity table. MULTIPLE CHOICE—Computational On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 60. The present value of the principal is a. $3,204,000. b. $3,240,000. c. $3,738,000. d. $3,762,000. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 61. The present value of the interest is a. $2,068,920. b. $2,097,360. c. $2,235,600. d. $2,260,980. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 62. The issue price of the bonds is a. $5,301,360. b. $5,308,920. c. $5,337,360. d. $5,997,600. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 63. Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 a. $5,000,000 b. $5,216,494 c. $5,218,809 d. $5,217,309 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 64. Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date? a. $19,400,000 b. $20,450,000 c. $19,700,000 d. $19,100,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 65. Everhart Company issues $25,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 a. $25,000,000 b. $26,082,470 c. $26,094,045 d. $26,086,540 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 66. Farmer Company issues $30,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date? a. $29,100,000 b. $30,675,000 c. $29,550,000 d. $28,650,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 67. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2017? a. $585,000 b. $1,170,000 c. $1,176,373 d. $1,176,249 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 68. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet? a. $14,709,481 b. $15,000,000 c. $14,718,844 d. $14,706,232 : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 69. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018? a. $14,752,672 b. $14,955,466 c. $14,725,374 d. $14,747,642 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 70. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. What is interest expense for 2018, using straight-line amortization? a. $1,540,208 b. $1,170,000 c. $1,176,894 d. $1,184,845 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 71. A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, how much interest expense will be recognized in 2017? a. $975,000 b. $1,950,000 c. $1,960,623 d. $1,960,415 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 72. A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet? a. $24,515,802 b. $25,000,000 c. $24,531,405 d. $24,510,385 : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 73. A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018? a. $24,587,790 b. $24,925,780 c. $24,545,290 d. $24,579,403 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 74. A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. What is interest expense for 2018, using straight-line amortization? a. $1,925,260 b. $1,950,000 c. $1,961,490 d. $1,974,741 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 75. On January 1, 2017, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2017 is a. $200,000. b. $214,836. c. $215,400. d. $240,000. : AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 76. On January 2, 2017, a calendar-year corporation sold 8% bonds with a face value of $3,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,768,000 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2017? a. $240,000. b. $276,800. c. $277,720. d. $300,000. : AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 77. The entry to record the issuance of the bonds would include a credit of a. $150,000 to Interest Payable. b. $240,000 to Discount on Bonds Payable. c. $5,760,000 to Bonds Payable. d. $240,000 to Premium on Bonds Payable. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 78. Bond interest expense reported on the December 31, 2017 income statement of Macklin Corporation would be a. $69,000 b. $75,000 c. $81,000 d. $138,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 79. The entry to record the issuance of the bonds would include a a. credit of $200,000 to Interest Payable. b. credit of $320,000 to Premium on Bonds Payable. c. credit of $7,680,000 to Bonds Payable. d. debit of $320,000 to Discount on Bonds Payable. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 80. Bond interest expense reported on the December 31, 2017 income statement of Bartley Corporation would be a. $108,000 b. $184,000 c. $92,000 d. $100,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 81. At the beginning of 2017, Wallace Corporation issued 10% bonds with a face value of $6,000,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5,558,400 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.) a. $688,320 b. $669,018 c. $667,000 d. $665,000 : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 82. On January 1, Patterson 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. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000. : AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 83. On January 1, Martinez Inc. issued $6,000,000, 11% bonds for $6,390,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of: a. $370,260 b. $369,000 c. $347,000 d. $330,000 : AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 84. At the beginning of 2017, Winston Corporation issued 10% bonds with a face value of $4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $3,705,600 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.) a. $443,334 b. $444,666 c. $446,012 d. $458,880 : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a a. credit of $18,750 to Loss on Bond Redemption. b. credit of $18,750 to Discount on Bonds Payable. c. debit of $28,750 to Gain on Bond Redemption. d. debit of $10,000 to Premium on Bonds Payable. , LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a a. credit of $18,725 to Loss on Bond Redemption. b. debit of $18,725 to Premium on Bonds Payable. c. credit of $6,275 to Gain on Bond Redemption. d. debit of $25,000 to Premium on Bonds Payable. , LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 87. At December 31, 2017 the following balances existed on the books of Foxworth Corporation: Bonds Payable $6,000,000 Discount on Bonds Payable 840,000 Interest Payable 150,000 If the bonds are retired on January 1, 2018, at 102, what will Foxworth report as a loss on redemption? a. $1,110,000 b. $960,000 c. $810,000 d. $600,000 , LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 88. At December 31, 2017 the following balances existed on the books of Rentro Corporation: Bonds Payable $7,000,000 Discount on Bonds Payable 980,000 Interest Payable 168,000 If the bonds are retired on January 1, 2018, at 102, what will Rentro report as a loss on redemption? a. $700,000 b. $945,000 c. $1,120,000 d. $1,288,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 89. The December 31, 2017, balance sheet of Hess Corporation includes the following items: 9% bonds payable due December 31, 2026 $5,000,000 Unamortized premium on bonds payable 135,000 The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2018, Hess retired $2,000,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes. a. $94,000. b. $54,000. c. $93,000. d. $100,000. : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 90. On January 1, 2012, Hernandez Corporation issued $18,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2018, when the fair value of the bonds was 96, Hernandez repurchased $4,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2018. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as a. a loss of $196,000. b. a gain of $196,000. c. a loss of $244,000. d. a gain of $244,000. , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 91. The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2017. The bonds, which had a face value of $3,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2018, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2018? Ignore taxes. a. $60,000. b. $189,000. c. $168,000. d. $210,000. , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 92. A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1,500,000. To extinguish this debt, the company had to pay a call premium of $500,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? a. Amortize $2,000,000 over four years. b. Charge $2,000,000 to a loss in the year of extinguishment. c. Charge $500,000 to a loss in the year of extinguishment and amortize $1,500,000 over four years. d. Either amortize $1,000,000 over four years or charge $1,000,000 to a loss immediately, whichever management selects. , LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 93. The 12% bonds payable of Nyman Co. had a carrying amount of $4,160,000 on December 31, 2017. The bonds, which had a face value of $4,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2018, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is a. $0. b. $32,000. c. $49,600. d. $160,000. , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 94. Didde Company issues $25,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2019, $15,000,000 of the bonds are called at 102 plus accrued interest. What loss would be recognized on the called bonds on September 1, 2019? a. $1,500,000 loss b. $680,000 loss c. $900,000 loss d. $1,133,750 loss , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 95. Cortez Company issues $6,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2019, $3,600,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2019? a. $360,000 loss b. $163,200 loss c. $216,000 loss d. $271,500 loss , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 96. On January 1, 2017, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2019. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest income should Ms. Price recognize in 2017? a. $18,783. b. $25,000. c. $75,000. d. $56,350. , LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 97. On January 1, 2018, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Danis gave Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments of $1,400,000 with the first payment due December 31, 2018. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of interest is $3,481,800. What is the amount of interest income that should be recognized by Jacobs in 2018, using the effective-interest method? a. $0. b. $140,000. c. $348,180. d. $420,000. : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 98. On January 1, 2018, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $5,000,000 zero-interest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2018. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,605,000 at January 1, 2018. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2018 after adjusting entries are made, assuming that the effective-interest method is used? a. $0 b. $1,070,550 c. $1,116,000 d. $1,395,000 , LO: 3, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 99. Putnam Company’s 2018 financial statements contain the following selected data: Income taxes $40,000 Interest expense 25,000 Net income 60,000 Putnam’s times interest earned for 2018 is a. 2.4 times b. 3.4 times. c. 4.0 times. d. 5.0 times. , LO: 5, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 100. In the recent year Hill Corporation had net income of $210,000, interest expense of $50,000, and tax expense of $90,000. What was Hill Corporation's times interest earned for the year? a. 7.0 b. 6.0 c. 5.2 d. 4.2 , LO: 5, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 101. In recent year Cey Corporation had net income of $750,000, interest expense of $150,000, and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year? a. $1,000,000 b. $1,350,000 c. $1,200,000 d. None of these answers are correct. , LO: 5, Bloom: AN, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 102. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2018, contained the following accounts. 5-year Bonds Payable 8% $3,000,000 Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 months.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries and Wages Payable 18,000 Income Taxes Payable (due 3/15 of 2019) 25,000 The total long-term liabilities reported on the balance sheet are a. $3,365,000. b. $3,350,000. c. $3,465,000. d. $3,450,000. , LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. *103. Nolte should recognize a gain or loss on the transfer of the equipment of a. $0. b. $200,000 gain. c. $300,000 gain. d. $950,000 loss. , LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. *104. Nolte should recognize a gain on the partial settlement and restructure of the debt of a. $0. b. $75,000. c. $275,000. d. $375,000. , LO: 6, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. *105. Nolte should record interest expense for 2018 of a. $0. b. $75,000. c. $150,000. d. $225,000. , LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None Multiple Choice Answers—Computational MULTIPLE CHOICE—CPA Adapted 106. On July 1, 2018, Spear Co. issued 4,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2018 and mature on April 1, 2028. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance? a. $4,060,000 b. $4,000,000 c. $3,960,000 d. $3,860,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 107. On January 1, 2018, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2028. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2018, Solis's adjusted unamortized bond premium should be a. $1,080,000. b. $1,006,400. c. $972,000. d. $812,000. : AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 108. On July 1, 2016, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2022. The bonds were issued for $9,560,000 to yield 10%, resulting in a bond discount of $440,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2018, Noble's unamortized bond discount should be a. $322,400. b. $340,000. c. $352,000. d. $310,000. : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 109. On January 1, 2018, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2018? a. $221,330 b. $250,000 c. $265,589 d. $300,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 110. On January 1, 2018, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102. They were originally issued on January 1, 2006 at 92 with a maturity date of January 1, 2021. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)? a. $252,000 b. $168,000 c. $140,000 d. $0 , LO: 2, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 111. On its December 31, 2017 balance sheet, Emig Corp. reported bonds payable of $6,000,000 The bonds had been issued at par. On January 2, 2018, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amount should Emig report in its 2018 income statement as loss on extinguishment of debt (ignore taxes)? a. $0 b. $30,000 c. $35,000 d. $70,000 : AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, IFRS: None 112. On January 1, 2013, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000. These bonds were to mature on January 1, 2023 but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2018 on this early extinguishment of debt was a. $90,000 gain. b. $36,000 gain. c. $30,000 loss. d. $24,000 gain. : AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 113. On June 30, 2018, Omara Co. had outstanding 8%, $8,000,000 face amount, 15-year bonds maturing on June 30, 2028. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2018 was $360,000. On June 30, 2018, Omara 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. $7,920,000. b. $7,720,000. c. $7,640,000. d. $7,520,000. : AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None 114. A ten-year bond was issued in 2016 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2018, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2018 should have equaled the a. call price. b. call price less unamortized discount. c. face amount less unamortized discount. d. face amount plus unamortized discount. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None 115. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a a. gain, net of income taxes. b. loss, net of income taxes. c. part of continuing operations. d. deferred credit to be amortized over the life of the new debt. : C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, IFRS: None *116. Eddy Co. is indebted to Cole under a $1,000,000, 12%, three-year note dated December 31, 2016. Because of Eddy's financial difficulties developing in 2018, Eddy owed accrued interest of $120,000 on the note at December 31, 2018. Under a troubled debt restructuring, on December 31, 2018, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $900,000. Eddy's acquisition cost of the land is $725,000. Ignoring income taxes, on its 2018 income statement Eddy should report as a result of the troubled debt restructuring Gain on Disposal Restructuring Gain a. $395,000 $0 b. $275,000 $0 c. $175,000 $100,000 d. $175,000 $220,000 , LO: 6, Bloom: AP, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA BB: None, IFRS: None BE. 14-118—Bond issue price and premium amortization. On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: Present value of 1 for 10 periods at 10% .386 Present value of 1 for 10 periods at 12% .322 Present value of 1 for 20 periods at 5% .377 Present value of 1 for 20 periods at 6% .312 Present value of annuity for 10 periods at 10% 6.145 Present value of annuity for 10 periods at 12% 5.650 Present value of annuity for 20 periods at 5% 12.462 Present value of annuity for 20 periods at 6% 11.470 BE. 14-119—Amortization of discount or premium. Grider Industries, Inc. issued $15,000,000 of 8% debentures on May 1, 2017 and received cash totaling $13,308,942. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2025. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%. Instructions Calculate the total dollar amount of discount or premium amortization during the first year (5/1/17 through 4/30/18) these bonds were outstanding. (Show computations and round to the nearest dollar.) EXERCISES Ex. 14-120—Entries for Bonds Payable. Prepare journal entries to record the following transactions related to long-term bonds of Quirk Co. (a) On April 1, 2016, Quirk issued $2,000,000, 9% bonds for $2,151,472 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2026. (b) On July 1, 2018 Quirk retired $600,000 of the bonds at 102 plus accrued interest. Quirk uses straight-line amortization. Ans: NA, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 8-10, AACSB: Analytic, AICPA BB: None, IFRS: None Ex. 14-121—Retirement of bonds. Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.) The December 31, 2018 balance sheet of Wolfe Co. included the following items: 7.5% bonds payable due December 31, 2026 $3,000,000 Unamortized discount on bonds payable 120,000 The bonds were issued on December 31, 2016 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.) On April 1, 2016, Wolfe retired $600,000 of these bonds at 101 plus accrued interest. Ans: NA, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 6-8, AACSB: Analytic, AICPA BB: None, IFRS: None Ex. 14-122—Early extinguishment of debt. Hurst, Incorporated sold its 8% bonds with a maturity value of $9,000,000 on August 1, 2016 for $8,838,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2018. By October 1, 2018, the market rate of interest has declined and the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8% bonds in the market and is able to purchase $1,500,000 worth at 101. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line amortization.) Show calculations. Ans: NA, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5-7, AACSB: Analytic, AICPA BB: None, IFRS: None *Ex. 14-123—Accounting for a troubled debt settlement. Mann, Inc., which owes Doran Co. $1,200,000 in notes payable with accrued interest of $108,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $1,140,000, an original cost of $1,680,000, and accumulated depreciation of $390,000. Instructions (a) Compute the gain or loss to Mann on the settlement of the debt. (b) Compute the gain or loss to Mann on the transfer of the equipment. (c) Prepare the journal entry on Mann 's books to record the settlement of this debt. (d) Prepare the journal entry on Doran's books to record the settlement of the receivable. Ans: NA, LO: 6, Bloom: AP, Difficulty: Difficult, Min: 18-20, AACSB: Analytic, AICPA BB: None, IFRS: None *Ex. 14-124—Accounting for a troubled debt restructuring. On December 31, 2017, Short Co. is in financial difficulty and cannot pay a note due that day. It is a $2,000,000 note with $200,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued interest, extend the maturity date to December 31, 2019, and reduce the interest rate to 4%. The present value of the restructured cash flows is $1,712,000. Instructions Prepare entries for the following: (a) The restructure on Short’s books. (b) The payment of interest on December 31, 2018. (c) The restructure on Bryan’s books. Ans: NA, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 9-12, AACSB: Analytic, AICPA BB: None, IFRS: None *Ex. 14-125—Accounting for troubled debt. (a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a settlement of troubled debt which includes the transfer of noncash assets? (b) What are the general rules for measuring and recognizing a gain and for recording future payments by the debtor in a troubled debt restructuring? Ans: NA, LO: 6, Bloom: K, Difficulty: Moderate, Min: 10-15, AACSB: Analytic, AICPA BB: None, IFRS: None PROBLEMS Pr. 14-126—Bond discount amortization. On June 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of $2,631,300 was determined from present value tables. Specifically explain how one would determine the price using present value tables. (c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.) Ans: NA, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 10-15, AACSB Reflective, AICPA BB: None, IFRS: None 5/31/20 240,000 270,786 30,786 2,738,646 (b) (1) Find the present value of $3,000,000 due in 10 years at 10%. (2) Find the present value of 10 annual payments of $240,000 at 10%. Add (1) and (2) to obtain the present value of the principal and the interest payments. (c) Interest Expense 156,326* Interest Payable 140,000** Discount on Bonds Payable 16,326 *7/12  $267,987 (from Table) = $156,326 **7/12  8%  $3,000,000 = $140,000 Pr. 14-127—Bond interest and discount amortization. Grove Corporation issued $6,000,000 of 8% bonds on October 1, 2017, due on October 1, 2022. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31. Instructions (a) Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method. Debit Credit Carrying Amount Credit Cash Interest Expense Bond Discount of Bonds October 1, 2017 $5,536,676 April 1, 2018 October 1, 2018 (b) Prepare the adjusting entry for December 31, 2018. Use the effective-interest method. (c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2018. Ans: NA, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 10-15, AACSB Reflective, AICPA BB: None, IFRS: None Pr. 14-128—Entries for bonds payable. Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.: March 1 Issued $4,000,000 face value Pitts Co. second mortgage, 8% bonds for $4,360,800, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. June 1 Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.) December 1 Paid semiannual interest on Pitts Co. bonds and purchased $2,000,000 face value bonds at the call price in accordance with the provisions of the bond indenture. Ans: NA, LO: 1, 2 Bloom: AP, Difficulty: Moderate, Min: 10-15, AACSB: Analytic, AICPA BB: None, IFRS: None payable. Prepare journal entries to record the following transactions relating to long-term bonds of Kirby, Inc. (Show computations.) (a) On June 1, 2017, Kirby, Inc. issued $8,000,000, 6% bonds for $7,841,000, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2027. The bonds are callable at 102. (b) On August 1, 2017, Kirby paid interest on the bonds and recorded amortization. Kirby uses straight-line amortization. (c) On February 1, 2019, Kirby paid interest and recorded amortization on all of the bonds, and purchased $5,000,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2019. Pr. 14-130—Fair value option Harper Company commonly issues long-term notes payable to its various lenders. Harper has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Harper has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Carrying Value Fair Value December 31, 2017 $135,000 $135,000 December 31, 2018 112,000 107,000 December 31, 2019 90,000 97,000 Instructions (a) Prepare the journal entry at December 31 (Harper’s year-end) for 2017, 2018, and 2019 to record the fair value option for these notes. (b) At what amount will the note be reported on Harper’s 2018 balance sheet? (c) What is the effect of recording the fair value option on these notes on Harper’s 2019 income? Ans: NA, LO: 4, Bloom: AP, Difficulty: Difficult, Min: 8, AACSB: Analytic, AICPA BB: None, IFRS: None *Pr. 14-131—Accounting for a troubled debt restructuring. Ludwig, Inc., which owes Giffin Co. $4,000,000 in notes payable, is in financial difficulty. To eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $3,050,000 and a recorded cost of $2,250,000. Instructions (a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land. (b) Compute the amount of gain or loss to Ludwig, Inc. on the restructuring of the debt. (c) Prepare the journal entry on Ludwig 's books to record the restructuring of this debt. (d) Compute the gain or loss to Giffin Co. from restructuring of its receivable from Ludwig. (e) Prepare the journal entry on Giffin's books to record the restructuring of this receivable. Ans: NA, LO: 6, Bloom: AP, Difficulty: Difficult, Min: 10-15, AACSB: Analytic, AICPA BB: None, IFRS: None IFRS QUESTIONS True/False 1. IFRS requires the use of straight-line method for amortization of a discount or premium. , LO: 7, K Bloom:, Difficulty: Easy, Min: 1, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS 2. U.S. GAAP and IFRS have the same accounting guidelines for bond issue costs. LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS 3. Under IFRS, bond issue costs are recorded as an asset. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS 4. Under IFRS, all troubled-debt restructurings are accounted for as extinguishments. LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS 5. Under IFRS the required procedure for amortization of a discount or premium is the effective-interest method. LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS Multiple Choice Questions 6. IFRS generally assumes that all restructurings be accounted for as: a. extinguishments of debt. b. loss on debt. c. amortization expense. d. bad-debt expense. , LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS 7. All of the following are differences between IFRS and U.S. GAAP in accounting for liabilities except: a. When a bond is issued at a discount U.S. GAAP records the discount in a separate contra-liability account. IFRS records the bond net of the discount. b. Under IFRS, bond issuance costs reduces the carrying value of the debt. Under U.S. GAAP, these costs are recorded as an asset and amortized to expense over the term of the bond. c. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.” d. U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are accrued. , LO: 7, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, International Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS 8. IFRS requires bond issue costs: a. to be recorded as an asset. b. to be excluded while computing the interest expense. c. to be netted against the carrying amount of the bonds. d. to be considered when computing income tax payable. , LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, International Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS 9. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at a. present value discounted at the firm’s cost of capital. b. current market values of the obligations, based on changes in the discount rate with unrealized gains and losses reflected in a separate account in stockholders’ equity. c. fair value with gains and losses on changes in fair value recorded in income in certain situations. d. historic costs without reflecting changes in valuation as obligations will be retired at their maturity date. , LO: 7, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, International Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS IFRS Short Answer: 1. Briefly describe some of the differences between GAAP and IFRS with respect to the accounting for long-term liabilities. IFRS and GAAP have similar definitions for liabilities. Although the two standards are quite similar with respect to treatment of current liabilities, there are a few differences in the treatment of long-term liabilities: (1) Under GAAP and under IFRS, bond issue costs are netted against the carrying amount of the bonds. (2) GAAP has developed specific guidelines for debt restructuring and terms it as “trouble-debt restructurings” however IFRS assumes that all restructurings will be accounted for as extinguishments of debt. (3) Under IFRS, companies do not use premium or discount accounts but instead show the bond at its net amount. (4) GAAP permits the use of straight-line method of amortization for bond discount or premium in cases where the amount recorded is not materially different from effective-interest amortization. However IFRS allows only effective-interest method. Ans: NA, LO: 7, Bloom: K, Difficulty: Moderate, Min: 10, AICPA PC: Communication, International Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS [Show More]

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