Question 1

Which of the following is not a required disclosure for Bonds Payable under IFRS?

Accepted Answer

While interest rate risk, credit risk, and liquidity risk are all required disclosures for Bonds Payable under IFRS, transaction risk is not.

Question 2

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?

Accepted Answer

The answer of On September 1,2020,ER issued 11%,10 year bonds...

Question 3

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

Accepted Answer

ASPE allows the straight-line method for amortizing long-term Bonds Payable, but IFRS requires the effective interest method. The other options are incorrect as they either refer to short-term debt (A) or ignore foreign exchange gains and losses (C and D) which are not directly related to the treatment of long-term Bonds Payable.

Question 4

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

Accepted Answer

In in-substance defeasance, although the bonds remain outstanding, both the assets used to effect the defeasance and the bonds themselves are removed from the balance sheet. Choice A is incorrect, as the bonds are not legally retired. Choice B is incorrect, as the firm must invest in specifically designated securities to effect the defeasance. Choice D is incorrect, as the company usually does not need to make any additional payments beyond the investments made for the defeasance.

Question 5

A firm issued a 16%,$1,000 bond issued and dated Jan.1/2000 maturing Jan.1,2011 paying interest each June 30 and December 31,and yielding 14%.One bond is used for simplicity.
Required:
(a)Determine the price of the bond
(b)All Year 2000 entries and balance sheet presentations for the bond after each interest date in Year
A. Show the interest method and straight-line methods in parallel fashion.   Balance sheet disclosure Jan. 1/00 (both methods)   77.42 = $1,105.94(.07) 5.30 = $105.94/20
Balance sheet disclosure June 30/00   77.24 = $1,103.36(.07) 5.30 = $105.94/20
Balance sheet disclosure Dec. 31/00

Accepted Answer

The answer of A firm issued a 16%,$1,000 bond issued...

Question 6

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

Accepted Answer

When the effective interest rate is higher than the stated rate, the dollar amount of interest expense reported on the income statement will increase each interest period under the interest method. This is because the interest expense recognized on the income statement is based on the carrying value of the debt, which is adjusted each period to account for the effective interest rate. Choice A is incorrect because the carrying value of the debt will actually increase each period if the effective interest rate is higher than the stated rate. Choice B is incorrect because the security will sell at a discount, not a premium, if the effective interest rate is higher than the stated rate. Choice C is incorrect because the cash interest paid on each interest date will not be affected by the effective interest rate.

Question 7

There are two methods for amortizing premiums and discounts on the sale of bonds.The differences between the two methods are:

Accepted Answer

The differences between the two methods are that the effective interest method charges a different interest expense each year based on the current book value of the bond while the straight-line method results in a constant amount of expense each year. Therefore, B is the correct choice. A is incorrect because the effective interest method charges a larger total amount of interest expense only if the bond is sold at a premium. C and D are incorrect as they do not reflect the actual differences between the two methods.

Question 8

Which of the following is not one of the conditions that must be met to qualify as extinguishment of debt by in-substance defeasance?

Accepted Answer

The conditions that must be met to qualify as extinguishment of debt by in-substance defeasance are (1) trust must own monetary assets that are essentially risk free, (2) cash inflows into the trust must approximately coincide with required cash outflows, and (3) there is no reasonable possibility that the debtor will be called on to make additional payments on the debt. Option C states that there is a reasonable possibility that the debtor will be called on to make additional payments on the debt, which is not a condition for in-substance defeasance. Therefore, option C is the correct answer.

Question 9

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):

Accepted Answer

To calculate the effective interest rate, we need to first calculate the present value of the note payable. The present value of the note is $115,800 (the amount of proceeds received) since this is the amount that could be invested today to generate the future payments required by the note.

Next, we need to find the interest rate that equates the present value of the note payable with the principal amount of $120,000. This can be done using a financial calculator or spreadsheet program such as Excel.

Using Excel's RATE function, the effective interest rate is calculated as follows:
RATE(3, -120000, 115800) = 0.12 or 12%

Therefore, the best choice is C) 12%.

Question 10

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):

Accepted Answer

The total amount to be paid by VB will be the sum of the principal and the interest. Using the formula for a present value of an annuity, we can find the annual payment needed:

Annual payment = PV x (r / (1 - (1 + r)^-n))

Where PV is the present value of the note, r is the interest rate, and n is the number of periods (in this case, 4).

PV = $200,000 
r = 8% = 0.08 
n = 4

Annual payment = $200,000 x (0.08 / (1 - (1 + 0.08)^-4))
Annual payment = $60,384 (rounded to the nearest dollar)

Therefore, the correct answer is B, $60,384.

Question 11

If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount,interest expense in the early years will be:

Accepted Answer

The answer of If bonds are issued initially at a...

Question 12

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:

Accepted Answer

When a bond is issued, the purchaser pays a price that includes accrued interest up to the bond issue date. In this case, the bond was issued on July 1, which is after the May 31 interest payment date. Therefore, the issuer is entitled to the interest earned from May 31 to July 1, which is the accrued interest. This means that the issuer will receive an increased cash amount, as it will include the accrued interest from May 31 to July 1. Hence, the correct answer is C, "Increased by accrued interest from May 31 to July 1."

Question 13

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

Accepted Answer

In-substance defeasance means that the debtor has set aside sufficient resources to pay off the remaining debt, but the debtor retains the legal responsibility to make payments unless certain conditions are met. Therefore, there is only a remote chance that the debtor will be required to make further payments on the liability.

Question 14

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 12% plus accrued interest.How much should WC debit to cash on March 1,2012?

Accepted Answer

To calculate the amount to be debited to cash, we need to calculate the issue price of the debentures.

First, we need to calculate the annual interest payment:

Face value of debentures x Stated interest rate = $1,000,000 x 10% = $100,000

Next, we need to calculate the amount of interest accrued from January 1 to March 1 (the date of issuance):

Annual Interest Payment x Time elapsed since last interest payment / 365 = $100,000 x 59/365 = $16,438

Adding the accrued interest to the annual interest payment gives us the total amount of interest payable for the first interest period:

Total Interest Payable = Annual Interest Payment + Accrued Interest = $100,000 + $16,438 = $116,438

Now, we can use the information provided in the question to calculate the issue price:

Selling Price - Accrued Interest = Face Value

Solving for the selling price:

Selling Price = Face Value + Accrued Interest = $1,000,000 + $16,438 = $1,016,438

Therefore, the amount to be debited to cash on March 1, 2012 is $901,967 ($1,016,438 x 0.88889).

Question 15

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

Accepted Answer

All the statements are correct: A) Bonds can be retired at a gain if interest rates rise, B) Gains/losses can be classified as ordinary or unusual, and C) All related accounts should be updated upon debt retirement.

Question 16

Which of the following statements is true?

Accepted Answer

When a bond is sold between interest dates, the buyer must pay the seller the interest accrued from the last payment date to the sale date.

Question 17

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:

Accepted Answer

WC purchased the bonds for $96,000 + $2,333 = $98,333 total cost.
The bonds have a face value of $100,000 and a 7% coupon rate, so they will pay $3,500 in interest annually ($100,000 x 7%/year).
WC uses the straight-line method of amortization, which means they will amortize the $2,333 of accrued interest over the remaining life of the bonds (6.5 years).
Each year, WC will record $360.15 of interest revenue (($100,000 - $98,333)/6.5). This is the amount of interest that is earned on the bonds, after deducting the amortized amount of the premium paid at purchase.
In 2019, WC will record 11 semi-annual interest payments of $175 each (=$3,500/2/yr) and record $360.15 of interest revenue for the amortization of the premium. The total interest revenue for 2019 is $1,925.15 (($175 x 11) + $360.15). 
However, in the question, it asks for the amount of interest revenue reported in WC's 2019 income statement (year-end December 31). As the bonds mature on July 1, 2016, there would not be any interest revenue reported on the income statement for 2019. Therefore, we need to calculate the interest revenue for the period of July 1 to December 31, 2016. 
In this period, there would be only one semi-annual interest payment of $175 and the amortization of premium would be for a period of 0.5 years. Therefore, the interest revenue for the period July 1 to December 31, 2016 would be $292.28 ((($175 x 1)/2) + (($100,000 - $98,333)/6.5/2)).
Hence, the correct amount of interest revenue reported in WC's 2019 income statement is $1,167 ($292.28 x 4). Therefore, the correct answer is B) $1,167.

Question 18

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:

Accepted Answer

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

Question 19

JV issued $10,000,10% bonds payable (interest payable annually),which mature at the end of six years from issue date.The effective rate of interest at issue date was 12%.The sale price of the bonds was: $_________________.

Accepted Answer

The answer of JV issued $10,000,10% bonds payable (interest payable...

Question 20

RX issued $1,000,000,10% bonds payable (interest payable annually),which mature at the end of five years from issue date.The effective rate of interest at issuance was 8%.The sale price of the bonds was: $_________________.

Accepted Answer

The answer of RX issued $1,000,000,10% bonds payable (interest payable...

Quiz 2: Accounting Judgements