Question 1

In 2012,H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80.Which of the following statements is false?

Accepted Answer

All the statements accurately describe the implications of the times interest earned ratios for H Co and T Co.

Question 2

On December 31,20A,Dive Company sold $100,000,ten-year,8% bonds at 104.5.The bonds were dated January 1,20A,and interest is payable each June 30 and December 31.The company uses the straight-line amortization method.The company should report the long-term liability (carrying value)for the bonds on the December 31,20A,statement of financial position as which of the following?

Accepted Answer

The answer of On December 31,20A,Dive Company sold $100,000,ten-year,8% bonds...

Question 3

Deany Company issued $100,000 bonds.The stated rate of interest was 8% and the market rate 9%.Which of the following statements is true?

Accepted Answer

Since the market rate is higher than the stated rate, it means the bonds were issued at a discount. As such, the annual interest expense will exceed the company's actual cash payments for interest. The exact amount will need to be calculated using the effective interest method. Option A is incorrect as the bonds were issued at a discount, not a premium. Option C is incorrect as the annual interest expense will be higher than $8,000 due to the discount. Option D is incorrect as the company can still issue bonds even if the market rate is higher than the stated rate, it just means the bonds will be issued at a discount.

Question 4

In 2012,C Co.reported a times interest earned ratio of 12.33 times while P Co.reported a ratio of 11.07 times.Which of the following statements is false?

Accepted Answer

The question does not provide any information on the liquidity of the two companies, so it cannot be concluded that one is more liquid than the other. Choices A, B, and D are all true based on the given information.

Question 5

Safeway Company issued $100,000 of fixed interest rate bonds payable at 98.At year-end,the bonds were selling in the bond market at 99.What entry would Safeway make at year-end to record the change in selling price?

Accepted Answer

The change in the market price of the bonds does not affect the accounting records of the issuer, Safeway Company. The bonds payable are recorded at their issuance price, and changes in market value are not recorded in the issuer's financial statements.

Question 6

When a bond investment is sold (issued)at a discount,subsequent amortization of the discount does which of the following?

Accepted Answer

When a bond investment is sold (issued) at a discount, the discount is amortized (spread out) over the life of the bond. This means that each year, a portion of the discount is recognized as interest expense. As a result, the amortization of the discount increases, rather than decreases, interest expense.

Question 7

Mace Corporation sold (issued)30 of its $1,000 bonds payable,5% annual interest,due in ten years.The bonds were sold at 98.Assume straight-line amortization.What would the interest expense be each full year?

Accepted Answer

The company sold 30 bonds, each with a face value of $1,000 and a coupon rate of 5%, which means that the annual interest paid is 5% x $1,000 = $50 per bond. The bonds were sold at 98, which means that the company received 98% x $1,000 = $980 per bond.

The total amount of money the company received from the bond issuance is $980 x 30 = $29,400.

To calculate the interest expense each year, we need to first calculate the total interest expense over the life of the bond. The total interest expense is:

$50 x 30 = $1,500

Since the bonds are being amortized using straight-line amortization, we can divide the total interest expense by the number of years the bonds are outstanding (10 years) to get the annual interest expense:

$1,500 ÷ 10 = $150

However, since the bonds were sold at a discount, we need to also account for the amortization of the discount over the life of the bond. The amount of discount is:

($1,000 - $980) x 30 = $600

Again, using straight-line amortization, we can divide the total discount by the number of years the bonds are outstanding (10 years) to get the annual amortization of the discount:

$600 ÷ 10 = $60

Therefore, the total interest expense each full year is:

$150 + $60 = $210

However, since the question asks for the interest expense each full year, and the bonds were issued for the full year, we can simply say that the interest expense each year is $210.

The closest answer choice is D) $1,560, which is the total interest expense ($1,500) plus the first year's amortization of the discount ($60).

Question 8

On November 1,20A,Duval Company sold (issued)300,$1,000,ten-year,7% bonds at 97.The bonds were dated November 1,20A,and interest is payable each November 1 and May 1.What would be the amount of discount amortization at each semi-annual interest date (assume straight-line amortization)?

Accepted Answer

The total discount on the bonds is calculated as follows:
300 bonds x $1,000 face value x (100% - 97%) = $90,000

Since the discount is being amortized straight-line over the 10-year life of the bonds, we can calculate the amount of discount amortized each year and then divide by 2 for the semi-annual interest periods.

Discount amortization per year = $90,000 / 10 years = $9,000
Discount amortization per semi-annual period = $9,000 / 2 = $4,500

Therefore, the correct answer is C) $450.

Question 9

On July 1,20B,WildWorld Inc.sold (issued)300,$1,000,ten-year,7% bonds at 101.The bonds were dated July 1,20B,and semi-annual interest will be paid each December 31 and June 30.WildWorld uses straight-line amortization.What is the bond liability that would be reported on the statement of financial positionat December 31,20B?

Accepted Answer

The bonds were issued at 101, meaning they were sold at 101% of their face value. The face value is $300,000 (300 bonds x $1,000 each), so the issue price is $303,000. The premium is $3,000 ($303,000 - $300,000). Using straight-line amortization over 10 years (20 periods), the semi-annual amortization is $150 ($3,000 / 20). By December 31, 20B, one period of amortization has occurred, reducing the premium by $150. Therefore, the bond liability is $303,000 - $150 = $302,850.

Question 10

The amortization of bond premium by the issuer will do which of the following?

Accepted Answer

The amortization of bond premium by the issuer will decrease interest expense. This is because bond premium represents the difference between the bond's par value and the price paid by investors. As a result, the issuer receives more cash upfront than the par value of the bond, resulting in a lower effective interest rate on the bond. To reflect this lower interest rate, the issuer amortizes the bond premium as a reduction to interest expense over the life of the bond.

Question 11

On January 1,20A,A-Ace Corp.issued $3,000,000 par value 12%,10 year bonds which pay interest each December 31.If the market rate of interest was 14%,what should the issue price of the bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697.The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

Accepted Answer

The issue price of the bonds is calculated by finding the present value of the principal and the present value of the interest payments, both discounted at the market rate of 14%. The present value of the principal is $3,000,000 * 0.2697 = $809,100. The annual interest payment is $3,000,000 * 12% = $360,000. The present value of the annuity of interest payments is $360,000 * 5.2161 = $1,877,796. Adding these gives the issue price: $809,100 + $1,877,796 = $2,686,896.

Question 12

On January 1,20A,Washer Company sold (issued)600,$1,000,five-year,8% bonds at 95.The bonds were dated January 1,20A,and interest is payable each June 30 and December 31.The company uses the straight-line method of amortization.What is the amount of the net liability for bonds payable that would be reported on the December 31,20A,statement of financial position?

Accepted Answer

The face value of 600 bonds of $1,000 each is 600 x $1,000 = $600,000
The bonds were issued at 95, so the cash proceeds were 600 x $1,000 x 0.95 = $570,000
The discount on bonds payable is the difference between the cash proceeds and the face value, which is $30,000 ($600,000-$570,000).
Since the company uses straight-line method of amortization, the annual amortization of the discount is $6,000 ($30,000/5).
As of December 31, 20A, two semiannual interest payments have been made, so the bond discount amortized is $6,000 x 2 = $12,000.

Therefore, the net liability for bonds payable on December 31, 20A will be:
Bonds Payable: $600,000 (face value) - $12,000 (amortized discount) = $588,000
Less: Current portion of bonds payable (600 x $1,000 x 8%/2) = $24,000
Net Liability for Bonds Payable = $564,000

However, since none of the options match this result, the closest option to this value is B, which is $576,000.

Question 13

The times interest earned ratio is calculated by dividing

Accepted Answer

The times interest earned ratio is calculated by dividing profit before interest expense and income taxes by interest expense. This measures a company's ability to meet its interest obligations.

Question 14

Johnson Company issued $50,000 bonds payable,9% annual interest,maturity in ten years.The bonds were sold at 96.Johnson uses straight-line amortization.What would the amount of interest expense be each full year?

Accepted Answer

The answer of Johnson Company issued $50,000 bonds payable,9% annual...

Question 15

When a bond is issued at a premium,the amount of interest expense for an interest period is calculated by

Accepted Answer

When a bond is issued at a premium, the interest expense is calculated by multiplying the carrying amount of the bond by the market interest rate, which reflects the effective interest method.

Question 16

If a bond payable is sold (issued)at a premium,the amount of the carrying value (the long-term liability)reported on the subsequent statements of financial position does which of the following?

Accepted Answer

When a bond is issued at a premium, the carrying value decreases each year as the premium is amortized over the life of the bond.

Question 17

One thousand bonds with a face value of $1,000 each,are sold at 104.The entry to record the issue is

Accepted Answer

The answer of One thousand bonds with a face value...

Question 18

If a bond is sold at 98,its stated rate of interest would be which of the following?

Accepted Answer

When a bond is sold below par value (such as 98), it means that its yield or effective interest rate is higher than its stated interest rate. This is because the buyer is paying less than the face value for the bond but will still receive interest payments based on the face value. Therefore, the stated rate of interest would be lower than the market rate.

Question 19

On July 1,20A,Wilson Company issued $300,000,five-year,9% bonds at 103.The reason Wilson issued the bonds at a premium was which of the following?

Accepted Answer

The bonds were issued at a premium because the stated interest rate (9%) was higher than the market rate for similar risk investments, making them more attractive to investors.

Question 20

In 2012,P Co reported profit of $1,933 million,interest expense of $395 million and income taxes of $270 million.In 2011,they reported profit of $2,142 million,interest expense of $478 million and income taxes of $818 million.Calculate the times interest earned ratio for 2012 and 2011,respectively.

Accepted Answer

Times interest earned ratio is calculated as follows:

Times interest earned ratio = (Profit before interest and taxes) / Interest expense

For 2012:
Profit before interest and taxes = $1,933 million + $395 million + $270 million = $2,598 million
Times interest earned ratio = $2,598 million / $395 million = 6.58 times

For 2011:
Profit before interest and taxes = $2,142 million + $478 million + $818 million = $3,438 million
Times interest earned ratio = $3,438 million / $478 million = 7.19 times

Therefore, the best choice is B.

Quiz 11: Reporting and Interpreting Stockholders Equity