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Exam 14: Bonds and Long-Term Notes

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Question 81

Multiple Choice

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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 the above are correct.

E) A) and D)
F) A) and B)

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Question 82

Multiple Choice

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Cramer Company sold five-year, 8% bonds on October 1, 2013. 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, 2013, income statement (assume straight-line amortization) ?

A) $2,000.
B) $1,900.
C) $1,778.
D) $2,040.

E) B) and C)
F) None of the above

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Question 83

Multiple Choice

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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:

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

On January 1, 2013, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a carrying amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2013. What is the amount of the loss on early extinguishment?

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:

On January 1, 2013, 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 2014 (assume annual interest payments and amortization) ?

Compute accrued interest. $1,000,000 x 12% x 4/12 = $40,000

On February 1, 2013, Sanford & Son issued 10% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Sanford & Son's fiscal year is the calendar year. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2013. 2. Prepare the entry to record interest on July 31, 2013, using the straight-line method. 3. Prepare the necessary journal entry on December 31, 2013. 4. Prepare the necessary journal entry on January 31, 2014.

Premium on bonds payable is a contra liability account.

Crawford Inc. has bonds outstanding during a year in which the market 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?

At January 1, 2013, ICN, Inc., was indebted to First Bank under a $480,000, 10% unsecured note. The note was signed January 1, 2009, and was due December 31, 2014. Annual interest was last paid on December 31, 2011. ICN was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Bank agreed to reduce last year's interest and the remaining two years' interest payments to $23,110 each and delay all payments until December 31, 2014, the maturity date. Required: Prepare the journal entries by ICN, Inc., necessitated by the restructuring of the debt at (A) January 1, 2013, (B) December 31, 2013, and (C) December 31, 2014.

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

On August 1, 2014, United Corporation issued $10 million of 8% convertible bonds at 105. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5 par common stock. World Company purchased 10% of the bond issue. On August 1, 2014, the market value per share for United stock was $56 and the market value of each warrant was $6. In March 2020, when United common stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held. Required: 1. Prepare the journal entries on August 1, 2014, to record (A) the issuance of the bonds by United and (B) the investment by World. 2. Prepare the journal entries for both companies in March 2020 to record the exercise of the warrants.

On January 1, 2013, Mania Enterprises issued 12% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (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, 2013. 2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2013. 3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method.

Required: How much interest will Morton Sales Co. pay on these bonds in 2013?

Red Corp. has a rate of return on assets of 10% and a debt/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)

The unamortized balance of discount on bonds payable is reported in the balance sheet as:

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

LPC issued the bonds: