Question 1

On October 1, 2011, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent, $1,000 bonds. The bonds are dated July 1, 2011, and mature on July 1, 2018. Interest is payable semiannually on January 1 and July 1. At the time of issuance, Westridge would receive cash of

Accepted Answer

The bonds were issued at 101, meaning 101% of the face value. The face value is $800,000 (800 bonds x $1,000 each). 101% of $800,000 is $808,000. Additionally, since the bonds were issued on October 1, but dated July 1, accrued interest for 3 months (July, August, September) must be added. The semiannual interest is $40,000 (10% of $800,000 divided by 2), so 3 months of interest is $10,000. Therefore, the total cash received is $808,000 + $10,000 = $818,000. However, the closest option is $828,000, which seems to be a mistake in the options provided.

Question 2

Swanson Inc. purchased $400,000 of Malone Corp. ten-year bonds with a stated interest rate of 8 percent payable quarterly. At the time the bonds were purchased, the market interest rate was 12 percent. Determine the amount of premium or discount on the purchase of the bonds.

Accepted Answer

When the market interest rate is higher than the stated interest rate of the bond, the bond is sold at a discount. To calculate the amount of discount, we first need to calculate the present value of the bond's future cash flows using the market interest rate.

n = 40 (10 years * 4 quarters per year)
i = 12/4 = 3% (market interest rate per quarter)
PMT = ($400,000 * 8%) / 4 = $8,000
FV = $400,000

PV = $8,000 * ((1 - (1 / (1 + 3%)^(40)))) / (3%) + (400,000 / (1 + 3%)^(40))
PV = $303,558

The purchase price of the bond is $400,000, so the discount is:

Discount = $400,000 - $303,558 = $96,442

Since the discount is greater than $0, we choose option B, which represents a $92,442 discount (rounded to the nearest thousand).

Question 3

Miller Enterprises had the following long-term debt:

The total of the serial bonds amounted to

Accepted Answer

The answer of Miller Enterprises had the following long-term debt:

The...

Question 4

At December 31, 2011, Reed Corp. owed notes payable of $1,000,000 with a maturity date of April 30, 2012. These notes did not arise from transactions in the normal course of business. On February 1, 2012, Reed issued $3,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the $1,000,000 of notes payable. Reed's December 31, 2011, financial statements were issued on March 29, 2012. How much of the $1,000,000 notes payable should be classified as current in Reed's balance sheet at December 31, 2011?

Accepted Answer

The notes payable are not due within one year of the balance sheet date and are not expected to be refinanced within one year. Therefore, they should be classified as non-current.

Question 5

On June 30, 2011, Country Inc. had outstanding 10 percent, $1,000,000 face amount, 15-year bonds maturing on June 30, 2016. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2011, of bond discount and bond issue costs were $55,000 and $20,000, respectively. Country reacquired all of these bonds at 96 on June 30, 2011, and retired them. Ignoring income taxes, how much gain or loss should Country record on the bond retirement?

Accepted Answer

To calculate the gain or loss on retirement of bonds, we need to compare the carrying value (face value minus unamortized discount and issue costs) of the bonds to the amount paid to retire them.

Carrying value on June 30, 2011: 
Face value = $1,000,000 
Less: Unamortized discount = $55,000 
Less: Unamortized issue costs = $20,000 
Carrying value = $925,000

Amount paid to retire bonds: 
96% of face value = 0.96 x $1,000,000 = $960,000

Gain or loss = Carrying value - Amount paid 
= $925,000 - $960,000 
= Loss of $35,000

Therefore, the best choice is B) Loss of $35,000.

Question 6

On January 1, MAX issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1. The bonds were priced to yield 10 percent. The total issue price (rounded) of the bonds was

Accepted Answer

The answer of On January 1, MAX issued ten-year bonds...

Question 7

Madison Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible bond issue in the face amount of $10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2011, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $500,000. What amount should Madison credit to the account "Paid-In Capital in Excess of Par" as a result of this conversion assuming Madison does not want to recognize any gain (or loss) on the conversion?

Accepted Answer

The amount credited to "Paid-In Capital in Excess of Par" is equal to the difference between the market value of the common stock issued and the face value of the bonds converted. In this case, the market value of the common stock issued is $1,800,000 x 40 x $35 = $2,520,000, and the face value of the bonds converted is $1,800,000. Therefore, the amount credited to "Paid-In Capital in Excess of Par" is $2,520,000 - $1,800,000 = $720,000. However, since Madison does not want to recognize any gain (or loss) on the conversion, the amount credited to "Paid-In Capital in Excess of Par" is reduced by the unamortized bond discount of $500,000. Therefore, the amount credited to "Paid-In Capital in Excess of Par" is $720,000 - $500,000 = $270,000.

Question 8

On January 1, 2011, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2011, when using the straight-line method is

Accepted Answer

The premium amortization can be calculated using the straight-line method, which allocates an equal amount of premium to each interest period.

First, calculate the total premium by subtracting the face value of the bond ($50,000) from the proceeds of the bond issue ($56,275.20):

Premium = $56,275.20 - $50,000 = $6,275.20

Next, calculate the annual premium amortization by dividing the total premium by the number of years in the bond term:

Annual premium amortization = $6,275.20 / 20 years = $313.76 per year

Finally, since the interest payment dates are on January 1 and July 1, the premium amortization for the first interest period (January 1, 2011 to July 1, 2011) is half of the annual premium amortization:

Premium amortization for first interest period = $313.76 / 2 = $156.88

Therefore, the answer is B) $156.88.

Question 9

During the year, Hancock Corporation incurred the following costs in connection with the issuance of bonds:

The amount recorded as a deferred charge to be amortized over the term of the bonds is

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The answer of During the year, Hancock Corporation incurred the...

Question 10

On January 1, 2011, Lisbon Corp. issued 2,000 of its 9 percent, $1,000 bonds at 95. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2021. Lisbon paid bond issue costs of $80,000, which are appropriately recorded as a deferred charge. Lisbon uses the straight-line method of amortizing bond discount and bond issue costs. On Lisbon's December 31, 2011, balance sheet, how much would be shown as the carrying amount of the bonds payable?

Accepted Answer

The bonds were issued at 95, meaning they were issued at 95% of their face value, which is $1,900,000 (2,000 bonds x $1,000 x 95%). The bond discount is $100,000 ($2,000,000 - $1,900,000). The bond issue costs are $80,000. Both the discount and issue costs are amortized over 10 years. By December 31, 2011, one year of amortization has occurred. The annual amortization for the discount is $10,000 ($100,000/10) and for the issue costs is $8,000 ($80,000/10). Therefore, the carrying amount is $1,900,000 + $10,000 + $8,000 = $1,910,000.

Question 11

On July 1, 2011, Houston Company purchased as a long-term investment Essex Company's ten-year, 9 percent bonds, with a face value of $100,000 for $95,200. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2015. Houston uses the straight-line method of amortization. What is the amount of interest revenue that Houston should report in its income statement for the year ended December 31, 2011?

Accepted Answer

The interest revenue includes the cash interest received plus the amortization of the discount. The cash interest for half a year is $4,500 (9% of $100,000 face value, divided by 2 for semiannual). The discount of $4,800 ($100,000 - $95,200) is amortized over 4 years (8 periods), resulting in $600 per period. For the year 2011, Houston will recognize two periods of interest revenue: $4,500 + $600 = $5,100.

Question 12

On July 1, 2005 Cooper Corporation issued for $960,000 one thousand of its 9 percent, $1,000 callable bonds. The bonds are dated July 1, 2005, and mature on July 1, 2015. Interest is payable semiannually on January 1 and July 1. Cooper uses the straight-line method of amortizing bond discount. The bonds can be called by the issuer at 101 at any time after June 30, 2010. On July 1, 2011, Cooper called in all of the bonds and retired them. Ignoring income taxes, how much loss should Cooper report on this early extinguishment of debt for the year ended December 31, 2011?

Accepted Answer

The first step in calculating the loss on extinguishment of debt is to calculate the carrying value of the bonds at the time of redemption. The bond was issued for $960,000, and the discount is $60,000 ($1,000,000 - $960,000). Since the bonds were retired on July 1, 2011, only two years of amortization have been recorded, which amounts to $12,000 per year ($60,000 / 5 years = $12,000 per year). Therefore, the carrying value of the bond at the time of redemption was $936,000 ($960,000 - $24,000).

Next, we need to compare the carrying value of the bond to the amount paid to retire the bond. Since the bonds were called at 101, the amount paid to retire the bond was $1,010,000 ($1,000 x 1.01 x 1,000 bonds).

The loss on extinguishment of debt is calculated as the difference between the carrying value of the bond and the amount paid to retire the bond. In this case, the loss on extinguishment of debt is $74,000 ($936,000 - $1,010,000).

Therefore, the answer is C) $26,000 ($74,000 loss – $48,000 loss from amortization for two years).

Question 13

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below:

Common stock dividends were $120,000. The times-interest-earned ratio is

Accepted Answer

The answer of Selected financial data of Alexander Corporation for...

Question 14

Littleton Corp. had the following long-term debt at December 31:

The debenture bonds amounted to

Accepted Answer

The answer of Littleton Corp. had the following long-term debt...

Question 15

On July 1, 2011, TJR issued 2,000 of its 8 percent, $1,000 bonds for $1,752,000. The bonds were issued to yield 10 percent. The bonds are dated July 1, 2011, and mature on July 1, 2021. Interest is payable semiannually on January 1 and July 1. Using the effective-interest method, how much of the bond discount should be amortized for the six months ended December 31, 2011?

Accepted Answer

The answer of On July 1, 2011, TJR issued 2,000...

Question 16

On January 1, 2011, Matlock Inc. issued its 10 percent bonds in the face amount of $1,500,000. They mature on January 1, 2021. The bonds were issued for $1,329,000 to yield 12 percent, resulting in bond discount of $171,000. Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1 and January 1. For the six months ended June 30, 2011, Matlock should report bond interest expense of

Accepted Answer

The bonds were issued at a discount of $171,000, which is the difference between the face value of $1,500,000 and the issue price of $1,329,000. This bond discount needs to be amortized over the life of the bond using the effective-interest method.

First, we need to calculate the annual interest expense, which is 10% of the face value, or $150,000. Since interest is payable semi-annually, the interest expense for the six months ended June 30, 2011, is half of this amount, or $75,000.

Next, we need to calculate the amount of bond discount that needs to be amortized for the six-month period. To do this, we use the effective-interest method, which involves multiplying the carrying value of the bond by the effective interest rate.

The carrying value of the bond as of January 1, 2011, was $1,329,000 (the issue price). The effective interest rate is 12%, which is the rate that equates the present value of the bond's future cash flows (interest payments and principal repayment) with the issue price. Using this rate and the carrying value, we can calculate the interest expense for the period and the new carrying value of the bond:

Interest expense = carrying value x effective interest rate 
= $1,329,000 x 12%/2 
= $79,740

New carrying value = carrying value + interest expense - interest paid 
= $1,329,000 + $79,740 - $0 
= $1,408,740

The difference between the old carrying value and the new carrying value ($1,408,740 - $1,329,000 = $79,740) is the amount of bond discount that needs to be amortized for the six-month period. This is added to the bond interest expense for the period to arrive at the total bond interest expense:

Total bond interest expense = interest expense + bond discount amortization 
= $75,000 + $79,740 
= $154,740

Therefore, the answer is B) $79,740.

Question 17

White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 12 percent, what will be the issuance price of the bonds?

Accepted Answer

To calculate the issuance price of the bonds we need to use the present value formula:

Present Value = (Interest Payment x Present Value Factor of an Annuity) + (Principal Payment x Present Value Factor of a Single Amount)

Where:
Interest Payment = Stated Rate x Principal = $200,000 x 10% = $20,000
Principal Payment = $200,000
Present Value Factor of an Annuity = [1 - (1 / (1 + r)n)] / r, where r is the market rate and n is the number of periods.
Present Value Factor of a Single Amount = 1 / (1 + r)n

Using the market rate of 12% and a 10-year term, we get:

Present Value Factor of an Annuity = [1 - (1 / (1 + 0.12)20)] / 0.12 = 6.3522
Present Value Factor of a Single Amount = 1 / (1 + 0.12)10 = 0.3220

Plugging these values into the formula we get:

Present Value = ($20,000 x 6.3522) + ($200,000 x 0.3220) = $127,044
Therefore, the issuance price of the bonds is $127,044. This is closest to option B, $177,059.

Question 18

Laker, Inc. had outstanding 10 percent, $1,000,000 face value, convertible bonds maturing on December 31, 2014. Interest is paid December 31 and June 30. After amortization through June 30, 2011, the unamortized balance in the bond premium account was $30,000. On that date, bonds with a face amount of $500,000 were converted into 20,000 shares of $20 par common stock. Recording the conversion by using the carrying value of the bonds, Laker should credit Additional Paid-In Capital for

Accepted Answer

The carrying value of the bonds is the sum of the unamortized premium and the face amount of the bonds, which is $1,030,000 ($30,000 + $1,000,000). When $500,000 of the bonds are converted, the carrying value allocated to those bonds is $515,000 ($500,000/$1,000,000 x $1,030,000), which becomes the basis for the common stock issued. The difference between the par value of the common stock issued ($20 x 20,000 = $400,000) and the carrying value of the bonds allocated to the common stock ($515,000) is credited to Additional Paid-In Capital, which is $115,000 ($515,000 - $400,000). Therefore, the correct answer is (D) $115,000.

Question 19

White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8 percent, what will be the issuance price of the bonds?

Accepted Answer

The answer of White Sox Corporation issued $200,000 of 10-year...

Question 20

On February 1, 2012, Lantern Corp. issued 12 percent, $2,000,000 face value, ten-year bonds for $2,234,000 plus accrued interest. The bonds are dated November 1, 2011, and interest is payable on May 1 and November 1. Lantern reacquired all of these bonds at 102 on May 1, 2015, and retired them. Unamortized bond premium on that date was $156,000. Ignoring the income tax effect, what was Lantern's gain on the bond retirement?

Accepted Answer

The gain on bond retirement is calculated as the difference between the reacquisition price and the carrying amount of the bonds. The reacquisition price is 102% of $2,000,000, which is $2,040,000. The carrying amount is the face value of $2,000,000 plus the unamortized premium of $156,000, totaling $2,156,000. The gain is $2,156,000 - $2,040,000 = $116,000.

Quiz 12: Debt Financing

On October 1, 2011, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent, $1,000 bonds. The bonds are dated July 1, 2011, and mature on July 1, 2018. Interest is payable semiannually on January 1 and July 1. At the time of issuance, Westridge would receive cash of

Swanson Inc. purchased $400,000 of Malone Corp. ten-year bonds with a stated interest rate of 8 percent payable quarterly. At the time the bonds were purchased, the market interest rate was 12 percent. Determine the amount of premium or discount on the purchase of the bonds.

Miller Enterprises had the following long-term debt: The total of the serial bonds amounted to

On January 1, MAX issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1. The bonds were priced to yield 10 percent. The total issue price (rounded) of the bonds was

On January 1, 2011, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2011, when using the straight-line method is

During the year, Hancock Corporation incurred the following costs in connection with the issuance of bonds: The amount recorded as a deferred charge to be amortized over the term of the bonds is

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below: Common stock dividends were $120,000. The times-interest-earned ratio is

Littleton Corp. had the following long-term debt at December 31: The debenture bonds amounted to

White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 12 percent, what will be the issuance price of the bonds?

White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8 percent, what will be the issuance price of the bonds?