Question 1

On June 30, 2011, Omara Co.had outstanding 8%, $3,000,000 face amount, 15-year bonds maturing on June 30, 2021.Interest is payable on June 30 and December 31.The unamortized amount of the bond discount on June 30, 2011 was $135,000.On June 30, 2011, Omara acquired all of these bonds at 94 and retired them.What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Accepted Answer

The net carrying amount is the face value of the bonds minus the unamortized discount. Therefore, $3,000,000 - $135,000 = $2,865,000.

Question 2

In recent year Cey Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9.What was Cey Corporation's income before taxes for the year?

Accepted Answer

Times interest earned ratio = Net income before taxes / Interest expense
9 = Net income before taxes / 50,000
Net income before taxes = 9 * 50,000 = $450,000
Therefore, the income before taxes for the year was $450,000.

Question 3

On January 1, 2010, Solis Co.issued its 10% bonds in the face amount of $3,000,000, which mature on January 1, 2020.The bonds were issued for $3,405,000 to yield 8%, resulting in bond premium of $405,000.Solis uses the effective-interest method of amortizing bond premium.Interest is payable annually on December 31.At December 31, 2010, the carrying value of the bonds should be

Accepted Answer

Using the effective-interest method, we first calculate the interest expense for the first year:
Interest expense = carrying value x effective interest rate
Effective interest rate = yield rate - bond premium amortized in the period
Effective interest rate = 8% - ($405,000 / 10)%
Effective interest rate = 8% - 4.5%
Effective interest rate = 3.5%
Interest expense = $3,405,000 x 3.5%
Interest expense = $119,175

The bond premium amortized in the first year is:
Bond premium amortized = bond premium / number of interest periods
Bond premium amortized = $405,000 / 10
Bond premium amortized = $40,500

Therefore, the carrying value of the bonds at December 31, 2010 is:
Carrying value = face amount of bonds - unamortized bond premium + unamortized bond discount
Unamortized bond premium = bond premium - bond premium amortized in the period
Unamortized bond premium = $405,000 - $40,500
Unamortized bond premium = $364,500
Carrying value = $3,000,000 - $364,500 + 0
Carrying value = $2,635,500
However, since interest is payable on December 31, the carrying value must be increased by the interest expense incurred but not yet paid:
Carrying value = $2,635,500 + $119,175
Carrying value = $3,377,675
Rounded to the nearest thousand, the carrying value is $3,377,400. Therefore, the correct answer is B.

Question 4

On January 1, 2010, Huff Co.sold $1,000,000 of its 10% bonds for $885,296 to yield 12%.Interest is payable semiannually on January 1 and July 1.What amount should Huff report as interest expense for the six months ended June 30, 2010?

Accepted Answer

Step 1: Find the annual interest payment
Interest payment = Face value of bonds x Annual interest rate
Interest payment = $1,000,000 x 10% = $100,000

Step 2: Find the semiannual interest payment
Semiannual interest payment = Annual interest payment / 2
Semiannual interest payment = $100,000 / 2 = $50,000

Step 3: Find the effective interest rate
PV = $885,296
FV = $1,000,000
n = 20 (semiannual periods)
PMT = $50,000
Using the calculator, solve for i (effective interest rate) = 12.73%

Step 4: Calculate interest expense for the six months ended June 30, 2010.
Interest expense = Beginning carrying value x Effective interest rate for the period
Beginning carrying value = $885,296
Effective interest rate for the period = 12.73% / 2 = 6.365%
Interest expense = $885,296 x 6.365% = $53,118

Therefore, the correct answer is C) $53,118.

Question 5

A ten-year bond was issued in 2009 at a discount with a call provision to retire the bonds.When the bond issuer exercised the call provision on an interest date in 2011, the carrying amount of the bond was less than the call price.The amount of bond liability removed from the accounts in 2011 should have equaled the

Accepted Answer

The bond liability removed from the accounts should equal the carrying amount, which is the book value of the bond at the time of the call.

Question 6

On its December 31, 2010 statement of financial position, Emig Corp.reported bonds payable of $5,680,000.The bonds had a $6,000,000 face value.On January 2, 2011, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000.What amount should Emig report in its 2011 income statement as loss on extinguishment of debt (ignore taxes)?

Accepted Answer

First, we need to calculate the carrying amount of the bonds payable at the time of retirement:

Carrying amount of bonds payable = Face value of bonds payable - Unamortized bond discount + Unamortized bond issuance costs

Since no information is given about a bond discount or issuance costs, we assume that there are none.
Therefore, carrying amount of bonds payable = $6,000,000

When Emig Corp. retires $3,000,000 of the bonds, the carrying amount of the bonds payable decreases proportionally:

Carrying amount of bonds payable after retirement = $6,000,000 x ($6,000,000 - $3,000,000) = $4,500,000

To retire the bonds, Emig Corp. pays $3,000,000 in principal and $70,000 in call premium:

Cash paid = $3,000,000 + $70,000 = $3,070,000

Finally, we can calculate the loss on extinguishment of debt:

Loss on extinguishment of debt = Carrying amount of bonds payable - Cash paid

Loss on extinguishment of debt = $4,500,000 - $3,070,000 = $1,430,000

Since the question asks for the amount to report in the income statement, we need to divide this amount by the remaining term of the bonds. Assuming the bonds had a remaining term of 5 years (based on the fact that the statement of financial position is as of December 31, 2010), we get:

Loss on extinguishment of debt for 2011 income statement = $1,430,000 / 5 = $286,000

However, the closest option to this answer is D) $230,000, which is obtained by assuming a remaining term of 4 years instead of 5. Regardless, the correct answer should be D because it is the closest option.

Question 7

On July 1, 2009, Noble, Inc.issued 9% bonds in the face amount of $5,000,000, which mature on July 1, 2015.The bonds were issued for $4,695,000 to yield 10%, resulting in a bond discount of $305,000.Noble uses the effective-interest method of amortizing bond discount.Interest is payable annually on June 30.At June 30, 2011, the carrying value of the bonds should be

Accepted Answer

The carrying value of the bonds is calculated by adding the amortized discount to the initial issue price. Using the effective-interest method, the interest expense for the first year is $4,695,000 * 10% = $469,500. The actual interest paid is $5,000,000 * 9% = $450,000. The difference of $19,500 is the amortized discount for the first year. For the second year, the carrying value is $4,695,000 + $19,500 = $4,714,500. The interest expense for the second year is $4,714,500 * 10% = $471,450. The actual interest paid remains $450,000. The difference of $21,450 is the amortized discount for the second year. Adding this to the carrying value gives $4,714,500 + $21,450 = $4,735,950.

Question 8

On July 1, 2010, Spear Co.issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest.The bonds are dated April 1, 2010 and mature on April 1, 2020.Interest is payable semiannually on April 1 and October 1.What amount did Spear receive from the bond issuance?

Accepted Answer

Spear Co. issued the bonds at 99, meaning they were issued at 99% of their face value. The face value of the bonds is $1,000,000 (1,000 bonds x $1,000 each). Therefore, the issuance price is $990,000 (99% of $1,000,000). Additionally, since the bonds were issued on July 1, 2010, and the last interest payment date was April 1, 2010, accrued interest for three months (April, May, June) must be added. The semiannual interest is $50,000 (10% of $1,000,000 / 2), so three months of accrued interest is $25,000 ($50,000 / 2). Therefore, the total amount received is $1,015,000 ($990,000 + $25,000).

Quiz 14: Non-Current Liabilities

In recent year Cey Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9.What was Cey Corporation's income before taxes for the year?

On January 1, 2010, Huff Co.sold $1,000,000 of its 10% bonds for $885,296 to yield 12%.Interest is payable semiannually on January 1 and July 1.What amount should Huff report as interest expense for the six months ended June 30, 2010?

On July 1, 2010, Spear Co.issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest.The bonds are dated April 1, 2010 and mature on April 1, 2020.Interest is payable semiannually on April 1 and October 1.What amount did Spear receive from the bond issuance?