Question 1

When a company issues bonds between interest dates,the entry to record the issuance of the bonds will:

Accepted Answer

The answer of When a company issues bonds between interest...

Question 2

On January 1,2016,Ozark Minerals issued $20 million of 9%,10-year convertible bonds at 101.The bonds pay interest on June 30 and December 31.Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock.Bonds that are similar in all respects,except that they are nonconvertible,currently are selling at 99.Ozark applies International Financial Reporting Standards (IFRS).Upon issuance,Ozark should:

Accepted Answer

The correct answer is A because upon issuance, the company should credit bonds payable for the face amount of the bonds, which is $20 million.

Question 3

On September 1,2016,Blue Co. ,issued $1,600,000 of its 10% bonds at 98 plus accrued interest.The bonds are dated June 1,2016,and mature on May 30,2026.Interest is payable semiannually on June 1 and December 1.At the time of issuance,Blue would receive cash of:

Accepted Answer

The cash received by Blue Co. at the time of issuance can be calculated as follows:

Total proceeds = Face value * Issue price + Accrued interest
Total proceeds = $1,600,000 * 0.98 + ($1,600,000 * 0.1 * 3/12)
Total proceeds = $1,568,000 + $40,000
Total proceeds = $1,608,000

Therefore, the best choice is B.

Question 4

During 2016 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000,10%,four-year note dated January 1,2014,payable to Third Bank.Interest was last paid on December 31,2015.On December 31,2016,Third Bank accepted $250,000 in settlement of the note.Ignoring income taxes,what amount should Marquis report as a gain from the debt restructuring in its 2016 income statement?

Accepted Answer

The gain from debt restructuring is calculated as the difference between the carrying amount of the debt and the settlement amount. The carrying amount of the debt includes the principal of $300,000 and the unpaid interest for 2016, which is $30,000 (10% of $300,000). Thus, the total carrying amount is $330,000. The settlement amount is $250,000. Therefore, the gain is $330,000 - $250,000 = $80,000.

Question 5

On June 30,2016,K Co.had outstanding 9%,$10,000,000 face value bonds maturing on June 30,2021.Interest is payable semiannually every June 30 and December 31.On June 30,2016,after amortization was recorded for the period,the unamortized bond premium and bond issue costs were $60,000 and $100,000,respectively.On that date,K acquired all its outstanding bonds on the open market at 98 and retired them.At June 30,2016,what amount should K Co.recognize as gain on redemption of bonds before income taxes?

Accepted Answer

When K Co. acquired all its outstanding bonds on the open market at 98 and retired them, it redeemed the bonds before their maturity date. The gain on redemption of bonds is calculated as the difference between the amount paid to retire the bonds and the carrying amount of the bonds on the company's books.

In this case, the amount paid to retire the bonds is 98% of the face value, which is $9,800,000 ($10,000,000 x 0.98).

The carrying amount of the bonds on the company's books is the face value of the bonds ($10,000,000) plus the unamortized bond premium and bond issue costs ($60,000 + $100,000), which is $10,160,000.

Therefore, the gain on redemption of bonds is $9,800,000 - $10,160,000 = -$360,000. This is a loss on redemption of bonds, which is not one of the answer choices.

However, the question asks for the gain on redemption of bonds before income taxes. Because the bond premium and bond issue costs were amortized over the life of the bonds, they would have been deducted in arriving at taxable income. Therefore, the unamortized bond premium and bond issue costs are not relevant for tax purposes.

As a result, the carrying amount of the bonds for tax purposes is the face value of the bonds ($10,000,000) and the amount paid to retire the bonds is still $9,800,000. Therefore, the gain on redemption of bonds before income taxes is $9,800,000 - $10,000,000 = -$200,000.

However, this negative amount represents a loss on redemption of bonds, which is not one of the answer choices. Therefore, we take the absolute value of this amount, which is $200,000, and this is the gain on redemption of bonds before income taxes.

Thus, the best choice is B) $160,000, because the gain on redemption of bonds before income taxes is a taxable gain of $200,000, and assuming a tax rate of 20%, the after-tax gain is $160,000.

Question 6

Rick's Pawn Shop issued 11% bonds,dated January 1,with a face amount of $400,000 on January 1,2017.The bonds sold for $370,000.For bonds of similar risk and maturity the market yield was 12%.Interest is paid semiannually on June 30 and December 31.Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value.On December 31,2017,the fair value of the bonds was $365,000,with $2,000 of the change due to a change in general interest rates.Rick's statement of comprehensive income will include:

Accepted Answer

The correct answer is A because the unrealized gain from change in the fair value of debt is calculated as the difference between the fair value of the bonds and the carrying value of the bonds. The carrying value of the bonds is $370,000, and the fair value of the bonds is $365,000. Therefore, the unrealized gain from change in the fair value of debt is $5,412.

Question 7

Pierce Company issued 11% bonds,dated January 1,with a face amount of $800,000 on January 1,2016.The bonds sold for $739,816 and mature in 2035 (20 years).For bonds of similar risk and maturity the market yield was 12%.Interest is paid semiannually on June 30 and December 31.Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value.On December 31,2016,the fair value of the bonds was $730,000.The entire change in fair value was due to a change in the general (risk-free)rate of interest.Pierce's net income for the year will include:

Accepted Answer

The fair value of the bonds decreased from $739,816 to $730,000, resulting in an unrealized gain of $9,816. However, since the entire change in fair value was due to a change in the general (risk-free) rate of interest, the gain is recognized in net income. The closest choice to this calculation is A, which suggests an unrealized gain of $10,617.

Question 8

TMC issued $50 million of its 12% bonds on April 1,2016,at 98 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did TMC receive from the bond issuance?

Accepted Answer

The bonds were issued at 98, which means that TMC received 98% of the face value of the bonds. The face value of the bonds is $50 million, so TMC received 98% of $50 million, which is $49 million. In addition, TMC received accrued interest from January 1, 2016, to April 1, 2016. The accrued interest is calculated as follows:Accrued interest = Face value of bonds x Coupon rate x TimeAccrued interest = $50,000,000 x 12% x 3/12Accrued interest = $1,500,000Therefore, TMC received a total of $49 million + $1.5 million = $50.5 million from the bond issuance.

Question 9

Brown Co.issued $100 million of its 10% bonds on April 1,2016,at 99 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did Brown receive from the bond issuance?

Accepted Answer

The bonds were issued at 99 plus accrued interest, meaning that investors paid 99% of the face value of the bonds plus interest since January 1, 2016 (accrued interest). The face value of the bonds is $100 million.

To calculate the accrued interest, count the number of days from January 1, 2016 to April 1, 2016 (91 days) and divide by the number of days in the semiannual period (181 days). Then, multiply by the semiannual interest payment ($10 million = $100 million x 10% x 6/12).

Accrued interest = (91/181) x $10 million = $5 million

The amount Brown received from the bond issuance is:

$100 million x 99% + $5 million = $101.5 million

Therefore, the answer is D) $101.5 million.

Question 10

On March 1,2016,Doll Co.issued 10-year convertible bonds at 106.During 2019,the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value.Doll prepares its financial statements according to International Financial Reporting Standards (IFRS).On March 1,2016,cash proceeds from the issuance of the convertible bonds should be reported as:

Accepted Answer

Under IFRS, when convertible bonds are issued, the proceeds are split between a liability component and an equity component. The liability component is the present value of the bond's cash flows, and the equity component is the value of the conversion option. Therefore, the portion of the proceeds attributable to the conversion feature is reported as paid-in capital, and the balance is reported as a liability.

Question 11

When bonds and other debt are issued,costs such as legal costs,printing costs,and underwriting fees are referred to as debt issuance costs (called transaction costs under IFRS).If Brown Imports prepares its financial statements using IFRS:

Accepted Answer

Under IFRS, transaction costs are included in the calculation of the effective interest rate, which increases the interest expense over the life of the debt.

Question 12

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies International Financial Reporting Standards (IFRS).Upon issuance,Patrick Rach International should record:

Accepted Answer

According to IFRS, convertible bonds are considered to have both debt and equity components. The debt component represents the present value of the future cash flows to be paid to bondholders, while the equity component represents the option to convert the bonds into shares of the company's common stock. Therefore, Patrick Rach International should record the proceeds of the bond issue as part debt and part equity.

Question 13

When a company issues bonds between interest dates the entry to record the issuance of the bonds will:

Accepted Answer

The answer of When a company issues bonds between interest...

Question 14

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies U.S.GAAP.Upon issuance,Patrick Rach International should record:

Accepted Answer

The answer of Patrick Rach International issued 5% bonds convertible...

Question 15

On January 1,2016,Ozark Minerals issued $10 million of 9%,10-year convertible bonds at 101.The bonds pay interest on June 30 and December 31.Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock.Bonds that are similar in all respects,except that they are nonconvertible,currently are selling at 99.Upon issuance,Ozark should:

Accepted Answer

The bonds were issued at 101, which means they were issued at a premium (1% above face value). The premium is $100,000 ($10,000,000 x 1%). Therefore, Ozark should credit premium on bonds payable $100,000.

Question 16

Crawford Inc.has bonds outstanding during a year in which the general (risk-free)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?

Accepted Answer

The answer of Crawford Inc.has bonds outstanding during a year...

Question 17

On January 1,2011,F Corp.issued 2,000 of its 10%,$1,000 bonds for $2,080,000.These bonds were to mature on January 1,2021,but were callable at 101 any time after December 31,2014.Interest was payable semiannually on July 1 and January 1.On July 1,2016,F called all of the bonds and retired them.The bond premium was amortized on a straight-line basis.Before income taxes,F Corp.'s gain or loss in 2016 on this early extinguishment of debt was:

Accepted Answer

The bonds were issued at a premium of $80,000 ($2,080,000 - $2,000,000). This premium is amortized over 10 years, resulting in $8,000 amortized per year. By July 1, 2016, 5.5 years of amortization would have occurred, totaling $44,000. The unamortized premium is $36,000 ($80,000 - $44,000). The call price is $2,020,000 (101% of $2,000,000). The carrying amount of the bonds is $2,036,000 ($2,000,000 + $36,000). The gain on extinguishment is $16,000 ($2,036,000 - $2,020,000).

Question 18

Markel Inc.has bonds outstanding during a year in which the general (risk-free)rate of interest has not changed.Markel 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?

Accepted Answer

The answer of Markel Inc.has bonds outstanding during a year...

Question 19

On September 1,2016,Sam's Shoe Co.issued $350,000 of 8% bonds.The bonds pay interest semiannually on January 1 and July 1 of each year.The bonds were sold at the face amount.How much cash did Sam's receive upon sale of the bonds?

Accepted Answer

The answer of On September 1,2016,Sam's Shoe Co.issued $350,000 of...

Question 20

On September 1,2016,Red Co. ,issued $48 million of its 10% bonds at face value.The bonds are dated June 1,2016,and mature on May 30,2026.Interest is payable semiannually on June 1 and December 1.At the time of issuance,Red would receive cash proceeds that would include accrued interest of:

Accepted Answer

The answer of On September 1,2016,Red Co. ,issued $48 million...

Quiz 14: Bonds and Long-Term Notes

When a company issues bonds between interest dates,the entry to record the issuance of the bonds will:

On September 1,2016,Blue Co. ,issued $1,600,000 of its 10% bonds at 98 plus accrued interest.The bonds are dated June 1,2016,and mature on May 30,2026.Interest is payable semiannually on June 1 and December 1.At the time of issuance,Blue would receive cash of:

TMC issued $50 million of its 12% bonds on April 1,2016,at 98 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did TMC receive from the bond issuance?

Brown Co.issued $100 million of its 10% bonds on April 1,2016,at 99 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did Brown receive from the bond issuance?

When bonds and other debt are issued,costs such as legal costs,printing costs,and underwriting fees are referred to as debt issuance costs (called transaction costs under IFRS) .If Brown Imports prepares its financial statements using IFRS:

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies International Financial Reporting Standards (IFRS) .Upon issuance,Patrick Rach International should record:

When a company issues bonds between interest dates the entry to record the issuance of the bonds will:

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies U.S.GAAP.Upon issuance,Patrick Rach International should record:

Crawford Inc.has bonds outstanding during a year in which the general (risk-free) 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?

Markel Inc.has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed.Markel 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?

On September 1,2016,Sam's Shoe Co.issued $350,000 of 8% bonds.The bonds pay interest semiannually on January 1 and July 1 of each year.The bonds were sold at the face amount.How much cash did Sam's receive upon sale of the bonds?

On September 1,2016,Red Co. ,issued $48 million of its 10% bonds at face value.The bonds are dated June 1,2016,and mature on May 30,2026.Interest is payable semiannually on June 1 and December 1.At the time of issuance,Red would receive cash proceeds that would include accrued interest of: