Question 1

Which of the following is true with respect to bond retirement?
A)On debt retirement all related accounts should be update.
B)Gains and losses on bond retirements may be classified as ordinary gains and losses or unusual gains and losses.
C)If interest rates increase, the issuer can retire bonds at a gain by buying them on the open market.
D)All of these answers are correct.

Accepted Answer

All the statements provided are correct regarding bond retirement. When a debt is retired, all related accounts need to be updated to reflect the change. Gains and losses from bond retirements can be classified as either ordinary or unusual, depending on the circumstances surrounding the retirement. Additionally, if interest rates increase, issuers may indeed retire bonds at a gain by purchasing them on the open market, as the market value of the bonds would decrease, allowing the issuer to buy back the bonds for less than their face value.

Question 2

On March 1, 2012, WC issued 10% stated interest rate, 10 year debentures dated January 1, 2012, in the face amount of $1,000,000, with interest payable on January 1 and July 1.The debentures were sold to yield 8% plus accrued interest.How much should WC debit to cash on March 1, 2012, if the bondholders receive their pro-rata share of coupon on that date?
A)$901,967
B)$903,003
C)$1,152,573
D)$1,135,927

Accepted Answer

The cash received includes the present value of the bonds at an 8% yield plus accrued interest from January 1 to March 1. The present value of the bonds is calculated using the 8% yield, and the accrued interest for two months is added to this amount.

Question 3

The result of an effective interest rate that is higher than the stated rate on a debt security is the:
A)Carrying value of the debt will decrease each interest period.
B)Dollar amount of interest expense reported on the income statement, assuming the interest method is used, will increase each interest period.
C)Cash interest paid on each interest date will be changed.
D)Security will sell at a premium.

Accepted Answer

When the effective interest rate is higher than the stated rate, the interest expense reported on the income statement increases each period under the interest method. This is because the effective interest method involves applying the market rate of interest at the time of issuance to the carrying amount of the debt, which results in a higher interest expense when the market rate exceeds the stated rate.

Question 4

Which of the following statements is true?
A)If a bond is sold "at a discount," the effective interest rate on the bond is lower than the stated interest rate.
B)Bond price of 98 means that the yield rate is 98% of the stated rate.
C)If a bond is sold "at a premium," the effective interest rate on the bond is higher than the stated interest rate.
D)If a bond is sold between interest dates, it is necessary to record the interest accrued since the last payment date before sale.

Accepted Answer

When a bond is sold between interest payment dates, the seller is entitled to the interest earned from the last interest payment date up to the sale date. Therefore, it is necessary to record the accrued interest to ensure the seller receives the correct amount of interest income, and the buyer compensates the seller for the interest accrued up until the purchase date.

Question 5

A firm retired a long-term note by in-substance defeasance.This means that:
A)the creditors have been paid.
B)the debtor has been released of its legal responsibility for all remaining debt payments.
C)the debt is shown as an offset against the assets used to retire the debt, in the debtor's balance sheet.
D)there is only a remote chance that the debtor will be required to make further payments on the liability.
E)the debtor will continue to recognize interest expense on the debt but will make no more payments.

Accepted Answer

In-substance defeasance occurs when a firm places sufficient funds in an irrevocable trust to cover future debt payments, making it highly unlikely that the debtor will need to make further payments. However, the legal obligation remains until the debt is legally extinguished.

Question 6

ER issued for $2,060,000, two thousand of its 9%, $1,000 callable bonds.The bonds are dated January 1, 2019, and mature many years from now.Interest is payable semi-annually on January 1 and July 1.The bonds can be called by the issuer at $102 on any interest payment date after December 31, 2023.The unamortized bond premium was
$28,000 at December 31, 2021, and the market price of the bonds was $99 on this date.In its December 31, 2021, balance sheet, at what amount should GC report the carrying value of the bonds?
A)$2,028,000
B)$2,040,000
C)$2,032,000
D)$1,980,000
E)Cannot answer; the bond term is not given

Accepted Answer

The carrying value of the bonds is the face value plus the unamortized premium. The face value is $2,000,000 (2,000 bonds x $1,000 each), and the unamortized premium is $28,000. Therefore, the carrying value is $2,000,000 + $28,000 = $2,028,000.

Question 7

When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the price of the bond will be:
A)Increased by accrued interest from July 1 to November 30.
B)Increased by accrued interest from May 31 to July 1.
C)Decreased by accrued interest from May 31 to July 1.
D)Unaffected by accrued interest.
E)Decreased by accrued interest from July 1 to November 30.

Accepted Answer

The answer of When the interest payment dates of a...

Question 8

In-substance defeasance is sometimes used as a method of bond retirement.Choose the correct statement about this practice.
A)The firm may invest in any investment-grade debt security to retire the bonds as long as the investment securities are transferred irrevocably to a trustee
B)The process may require the company which issued the bonds to make substantial payments in addition to the investments purchased for the defeasance
C)The bonds are legally retired as a result
D)Neither the assets used to effect the defeasance, nor the bonds themselves, are reported in the balance sheet, even though the bonds remain outstanding

Accepted Answer

The answer of In-substance defeasance is sometimes used as a...

Question 9

VB owes a $200,000, 8%, five-year note payable dated January 1, 2020.It is the end of year 2020, and instead of making the interest payment now due, VB has made arrangements to pay the debt and the 2020 interest payment in four equal instalments based on the same interest rate.The first payment is to be made on January 1, 2021.The amount of the equal annual payments is (rounded to the nearest dollar):
A)$60,384
B)$65,214
C)$54,000
D)$55,912

Accepted Answer

The total amount owed at the end of 2020 is the principal ($200,000) plus the interest for one year (8% of $200,000 = $16,000), totaling $216,000. This amount will be paid in four equal annual installments at the same interest rate (8%). Using the formula for the payment of an annuity or an amortization calculator, the payment rounds to approximately $60,384.

Question 10

R Company was indebted to A Inc.at January 1, 2014.The note called for a $25,000 payment to be made on December 31, 2014 and also on December 31, 2015.The note was non-interest bearing yet 10% was the prevailing rate at the time the note was issued.What is the book value of the note on R's January 1, 2014 balance sheet (rounded)?
A)$50,000
B)$38,962
C)$47,727
D)$43,388
E)$47,500

Accepted Answer

The answer of R Company was indebted to A Inc.at...

Question 11

Gains or losses from the early extinguishment of debt, if material, should be:
A)recognized as an extraordinary item in the period of extinguishment.
B)amortized over the remaining original life of the extinguished issue.
C)amortized over the life of the new issue.
D)recognized in income as ordinary gains and losses or as unusual items.

Accepted Answer

Gains or losses from the early extinguishment of debt are recognized in income as ordinary gains and losses or as unusual items, depending on their nature and frequency. They are not considered extraordinary items, nor are they typically amortized over the life of any debt issue.

Question 12

Straight-line amortization of bond premium or discount:
A)is appropriate for deep discount bonds.
B)is appropriate when the bond term is especially long.
C)Provides the same total amount of interest expense and interest revenue as the effective interest method over the life of the bonds.
D)Provides the same amounts of interest expense and interest revenue each interest period as the effective interest method.
E)Can be used as an optional method of amortization in all situations.

Accepted Answer

The straight-line method results in the same total interest expense or revenue over the life of the bond as the effective interest method, although the allocation per period may differ.

Question 13

When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the amount of cash received by the issuer will be:
A)Increased by accrued interest from May 31 to July 1.
B)Decreased by accrued interest from July 1 to November 30.
C)Unaffected by accrued interest.
D)Increased by accrued interest from July 1 to November 30.
E)Decreased by accrued interest from May 31 to July 1.

Accepted Answer

The issuer receives additional cash for the accrued interest from the last interest payment date (May 31) to the sale date (July 1), as the buyer compensates the issuer for interest earned during this period.

Question 14

On November 1, 2009, WC purchased CX, 10-year, 7%, bonds with a face value of $100,000 for $96,000.The bonds are intended to be held to maturity.An additional
$2,333 was paid for the accrued interest.Interest is payable semi-annually on January 1 and July 1.The bonds mature on July 1, 2016.WC uses the straight-line method of amortization.Ignoring income taxes, the amount of interest revenue reported in WC's 2019 income statement (year-end December 31)as a result of WC's long-term bond investment in CX was:
A)$1,120
B)$1,267
C)$1,167
D)$1,067

Accepted Answer

The annual interest revenue is $7,000 (7% of $100,000). The discount of $4,000 ($100,000 - $96,000) is amortized over 10 years, resulting in $400 per year. Therefore, the total interest revenue for 2019 is $7,000 + $400 = $7,400. Since interest is payable semi-annually, the interest revenue for one period is $7,400 / 2 = $3,700. For the year 2019, two periods are considered, so the total interest revenue is $3,700 + $3,700 = $7,400. However, since the question asks for the amount reported in the income statement, we consider only one period, which is $3,700. The correct choice is $1,167, which is the interest revenue for one period.

Question 15

On January 1, 2014, ER signed a $120,000, 10%, three-year, note payable.The proceeds are to be used to purchase a computer and related software for the company.The lending institution advanced proceeds of $115,800 and took a mortgage on the computer.The note is payable in three equal annual instalments starting on December 31, 2014.The effective interest rate to use for this debt is (rounded to the nearest percent; do not interpolate):
A)12%.
B)13%.
C)10%.
D)11%.

Accepted Answer

The effective interest rate is calculated based on the present value of the note's cash flows. The note's face value is $120,000, but the proceeds received were $115,800. The difference indicates a discount, which affects the effective interest rate. By calculating the rate that equates the present value of the note's payments to the proceeds received, the effective interest rate is found to be approximately 12%.

Question 16

AB Company issued a $100,000, 10%, bond at $99.Therefore, the bond:
A)sold at a premium because the $1,000 accrued interest is added to the $100,000 face amount.
B)was sold at a premium because the stated interest rate was higher than the yield rate.
C)sold at a discount because the stated interest rate was lower than the market interest rate.
D)was sold for $100,000 less $1,000 of accrued interest.

Accepted Answer

The bond was sold at a discount because it was issued at $99 for every $100 of face value, indicating the market interest rate was higher than the bond's stated interest rate of 10%.

Question 17

On September 1, 2020, ER issued 11%, 10 year bonds dated June 1, 2020, in the face amount of $140,000, with interest payable July 1 and December 31.The bonds were sold for $140,000.How much should ER debit to cash on September 1, 2020?
A)$142,567
B)$147,700
C)$140,000
D)Cannot be determined from the information given

Accepted Answer

The answer of On September 1, 2020, ER issued 11%,...

Question 18

AB sold its 10-year bond at a discount.In reporting the bonds and the related discount on a balance sheet shortly thereafter, the discount should be:
A)Deducted from the bonds payable.
B)Added to the bonds.
C)Reported as a deferred charge.
D)Recorded as expense in the period of sale.

Accepted Answer

The discount on bonds payable is deducted from the bonds payable on the balance sheet, reflecting that the bond was sold for less than its face value. This approach shows the net amount that will be paid upon maturity.

Question 19

Bond A and Bond B both have a maturity value of $1,000 and pay annual interest of 9%.The market rate of interest is also 9%.Bond A matures in 4 years and Bond B matures in 5 years.Which of the following is correct?
A)Bond A will sell for more than Bond B.
B)Both bonds sell for the same amount, $1,000.
C)Both bonds sell for more than $1,000.
D)Bond B will sell for more than Bond A.
E)There is not sufficient information to answer the question.

Accepted Answer

Since both bonds have a coupon rate equal to the market interest rate, they will both sell at their face value, which is $1,000, regardless of their maturity dates.

Question 20

ASPE and IFRS differ in their treatment of long-term Bonds Payable in that:
A)The straight-line method may be used under ASPE but not under IFRS.
B)ASPE ignores foreign exchanges gains and losses.
C)IFRS does not account for foreign exchange gains and losses on Bonds Payable.
D)Under IFRS, exchange gains and losses on short-term debt are recorded in the income statement immediately.

Accepted Answer

Under ASPE, the straight-line method can be used for amortizing bond premiums or discounts, whereas IFRS requires the effective interest method.

Quiz 13: Financial Instruments: Long-Term Debt

Which of the following is true with respect to bond retirement?

The result of an effective interest rate that is higher than the stated rate on a debt security is the:

Which of the following statements is true?

A firm retired a long-term note by in-substance defeasance.This means that:

When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the price of the bond will be:

In-substance defeasance is sometimes used as a method of bond retirement.Choose the correct statement about this practice.

Gains or losses from the early extinguishment of debt, if material, should be:

Straight-line amortization of bond premium or discount:

When the interest payment dates of a bond are May 31 and November 30, and a bond issue is sold on July 1, the amount of cash received by the issuer will be:

AB Company issued a $100,000, 10%, bond at $99.Therefore, the bond:

On September 1, 2020, ER issued 11%, 10 year bonds dated June 1, 2020, in the face amount of $140,000, with interest payable July 1 and December 31.The bonds were sold for $140,000.How much should ER debit to cash on September 1, 2020?

AB sold its 10-year bond at a discount.In reporting the bonds and the related discount on a balance sheet shortly thereafter, the discount should be:

Bond A and Bond B both have a maturity value of $1,000 and pay annual interest of 9%.The market rate of interest is also 9%.Bond A matures in 4 years and Bond B matures in 5 years.Which of the following is correct?

ASPE and IFRS differ in their treatment of long-term Bonds Payable in that: