Question 1

On July 1,2014,Chelsea Company purchased as a long-term investment Soho Company's ten-year,9 percent bonds,with a face value of $100,000 for $95,200.Interest is payable semiannually on January 1 and July 1.The bonds mature on July 1,2018.Chelsea uses the straight-line method of amortization.What is the amount of interest revenue that Chelsea should report in its income statement for the year ended December 31,2014?

Accepted Answer

Chelsea Company purchased the bonds at a discount ($95,200 instead of the face value of $100,000), which means the total discount is $4,800 ($100,000 - $95,200). The bonds have a 10-year term, but Chelsea will hold them for only 4 years (from July 1, 2014, to July 1, 2018). The straight-line method spreads the discount evenly over the bond's life. Therefore, the annual amortization of the discount is $480 ($4,800 discount / 10 years). However, since Chelsea will hold the bonds for only 4 years, it will recognize this amortization over its holding period, which affects the interest revenue recognized.The bonds have a 9% annual interest rate, so the annual interest payment is $9,000 (9% of $100,000). Since interest is paid semiannually, each payment is $4,500 ($9,000 / 2).For the year ended December 31, 2014, Chelsea will receive two interest payments (July 1 and January 1), totaling $9,000. Additionally, Chelsea will recognize part of the discount as interest revenue. Since the discount is amortized over the entire 10-year life of the bond, for half a year (July 1, 2014, to December 31, 2014), the amortization is $240 ($480 / 2).Therefore, the total interest revenue for 2014 is the sum of the interest payments received plus the amortization of the discount for the period: $9,000 + $240 = $9,240. However, none of the provided options match this calculation directly, indicating a misunderstanding in the calculation process. The correct approach should focus on the interest payments received and the amortization of the discount, but it seems there was a mistake in the final step of the explanation. Given the options and the typical approach to such a question, the correct answer should reflect the calculation of interest revenue including both the cash interest received and the amortization of the discount. However, the explanation provided does not accurately lead to any of the given choices due to a miscalculation in the final interest revenue for the year 2014. The correct calculation should involve determining the interest revenue recognized from the bond's coupon rate and adjusting for the amortization of the discount over the appropriate period, which was not correctly applied to the options provided.

Question 2

Conrad,Inc.has $2,000,000 of notes payable due June 15,2015.At the financial statement date of December 31,2014,Conrad signed an agreement to borrow up to $2,000,000 to refinance the notes payable on a long-term basis.The financing agreement called for borrowings not to exceed 80 percent of the value of the collateral Conrad was providing.At the date of issue of the December 31,2014,financial statements,the value of the collateral was $2,400,000 and was not expected to fall below this amount during 2015.In its December 31,2014,balance sheet,Conrad should classify notes payable as

Accepted Answer

The answer of Conrad,Inc.has $2,000,000 of notes payable due June...

Question 3

Gunther Inc.purchased $400,000 of Malone Corp.ten-year bonds with a stated interest rate of 8 percent payable quarterly.At the time the bonds were purchased,the market interest rate was 12 percent.Determine the amount of premium or discount on the purchase of the bonds.

Accepted Answer

When the market interest rate is higher than the stated interest rate, the bond is sold at a discount. The calculation for discount is as follows:
Yearly interest payment = $400,000 x 8% = $32,000
Quarterly interest payment = $32,000/4 = $8,000
Number of payments over 10 years = 10 x 4 = 40
Discount rate for quarterly payments at 12% = 1/(1+0.03)^40 = 0.243
Present value of payments = $8,000 x 0.243 x 40 = $77,568
Purchase price of bond = $400,000
Discount = $400,000 - $77,568 = $322,432
Since the purchase price is less than the face value of the bond, there is a discount of $322,432. Therefore, the answer is B.

Question 4

Included in Zollar Corporation's liability account balances at December 31,2014,were the following:

Zollar's December 31,2014,financial statements were issued on March 31,2015.On January 15,2015,the entire $400,000 balance of the 16 percent note was refinanced by issuance of a long-term obligation payable in a lump sum.In addition,on March 10,2015,Zollar consummated a noncancelable agreement with the lender to refinance the 14 percent,$250,000 note on a long-term basis,on readily determinable terms that have not yet been implemented.Both parties are financially capable of honoring the agreement,and there have been no violations of the agreement's provisions.On the December 31,2014,balance sheet,the amount of the notes payable that Zollar should classify as noncurrent obligations is

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Question 5

On January 1,2014,Roger Inc.issued its 10 percent bonds in the face amount of $1,500,000.They mature on January 1,2024.The bonds were issued for $1,329,000 to yield 12 percent,resulting in bond discount of $171,000.Roger uses the effective-interest method of amortizing bond discount.Interest is payable July 1 and January 1.For the six months ended June 30,2014,Roger should report bond interest expense of

Accepted Answer

The annual interest payment on the bonds is $150,000 ($1,500,000 face amount x 10% stated interest rate). Since interest is payable semi-annually, the interest payment for six months is $75,000 ($150,000 / 2). 
To calculate the bond interest expense, we need to first calculate the bond interest payable using the effective-interest method of amortization. Under this method, the bond interest payable is the product of the carrying value of the bond at the beginning of the period and the effective-interest rate. 
The effective-interest rate is the rate that equates the bond's future cash flows (interest payments and principal repayment) with the net proceeds from the bond issuance. In this case, the net proceeds are $1,329,000 and the future cash flows are $150,000 per year for 10 years plus the $1,500,000 principal repayment. 
Using a financial calculator or spreadsheet, we can determine that the effective-interest rate is approximately 13.39%. 
Therefore, the bond interest payable for the six months ended June 30, 2014 is: 
Carrying value at beginning of period = $1,329,000 + $171,000 (discount amortization) = $1,500,000 
Bond interest payable = $1,500,000 × 13.39% × 6/12 = $100,260

Since the bond interest payable is greater than the actual interest payment of $75,000, the difference ($25,260) reduces the carrying value of the bond at the end of the period. 
Therefore, the bond interest expense for the six months ended June 30, 2014 is: 
Bond interest expense = Bond interest payable - Interest payment 
Bond interest expense = $100,260 - $75,000 = $25,260 
Multiplying this by 2 (because interest is payable semi-annually) gives us the total bond interest expense for the year ended December 31, 2014: 
Bond interest expense = $25,260 × 2 = $50,520

Thus, the correct answer is B) $79,740 (($75,000 + $50,520).

Question 6

Tarpon Corp.had the following long-term debt at December 31:

The debenture bonds amounted to

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Question 7

On July 1,2014,Saunter issued 2,000 of its 8 percent,$1,000 bonds for $1,752,000.The bonds were issued to yield 10 percent.The bonds are dated July 1,2014,and mature on July 1,2024.Interest is payable semiannually on January 1 and July 1.Using the effective-interest method,how much of the bond discount should be amortized for the six months ended December 31,2014?

Accepted Answer

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Question 8

Arthur Enterprises had the following long-term debt:

The total of the serial bonds amounted to

Accepted Answer

The total long-term debt can be calculated by adding up the face value of each bond. From the given information, the face values of the serial bonds are:

- $500,000
- $750,000
- $750,000

Adding these up gives a total of $2,000,000. Therefore, the answer is (C) $2,000,000.

Question 9

Selected financial data of Rodham Corporation for the year ended December 31,2014,is presented below:

Common stock dividends were $120,000.The times-interest-earned ratio is

Accepted Answer

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Question 10

At December 31,2014,Strom Corp.owed notes payable of $1,000,000 with a maturity date of April 30,2015.These notes did not arise from transactions in the normal course of business.On February 1,2015,Strom issued $3,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the $1,000,000 of notes payable.Strom's December 31,2014,financial statements were issued on March 29,2015.How much of the $1,000,000 notes payable should be classified as current in Strom's balance sheet at December 31,2014?

Accepted Answer

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Question 11

During the year,Franklin Corporation incurred the following costs in connection with the issuance of bonds:

The amount recorded as a deferred charge to be amortized over the term of the bonds is

Accepted Answer

The amount recorded as a deferred charge to be amortized over the term of the bonds is equal to the sum of the legal and accounting fees, printing and engraving costs, and commissions paid on the issuance of the bonds, which is $510,000 in this case. These costs are recorded as a deferred charge and are amortized over the term of the bonds, reducing the effective interest rate on the bonds. Therefore, the correct answer is D.

Question 12

On July 1,2014,Martinez Manufacturing Co.issued a five-year note payable with a face amount of $250,000 and an interest rate of 10 percent.The terms of the note require Martinez to make five annual payments of $50,000 plus accrued interest,with the first payment due June 30,2015.With respect to the note,the current liabilities section of Martinez' December 31,2014,balance sheet should include

Accepted Answer

The note payable was issued on July 1, 2014, but no payments were due until the following year. Therefore, as of December 31, 2014, Martinez Manufacturing Co. would have accrued interest on the note payable for six months, which is calculated as follows: $250,000 x 10% x 6/12 = $12,500. In addition to the accrued interest, the first payment of $50,000 is due within the next 12 months, so the total current liability related to the note payable is $62,500 (i.e. $12,500 + $50,000).

Question 13

On January 1,SOMA issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1.The bonds were priced to yield 10 percent.The total issue price (rounded)of the bonds was

Accepted Answer

The total issue price of the bonds is calculated using the present value of the bond's future cash flows, which include the annual interest payments and the principal amount at maturity. The interest payments are $80,000 annually ($1,000,000 * 8%), and the principal amount is $1,000,000. Since the bonds were priced to yield 10%, we discount these cash flows at the 10% rate. The present value of the annual interest payments (an annuity) and the principal amount (a lump sum) at a 10% discount rate results in a total issue price closer to $880,000, which indicates the bonds were issued at a discount due to the higher market interest rate compared to the stated rate.

Question 14

In an effort to increase sales,Sharpy Razor Blade Company inaugurated a sales promotion campaign on June 30,2014,whereby Sharpy placed a coupon in each package of razor blades sold,the coupons being redeemable for a premium.Each premium costs Sharpy $0.75,and five coupons must be presented by a customer to receive a premium.Sharpy estimated that only 60 percent of the coupons issued will be redeemed.For the six months ended December 31,2014,the following information is available:

What is the estimated liability for premium claims outstanding at December 31,2014?

Accepted Answer

To calculate the estimated liability for premium claims outstanding at December 31,2014, we need to first find out the total number of coupons expected to be redeemed.

Total coupons issued = Number of razor blades sold = 400,000 
Expected redemption rate = 60% 
Total coupons expected to be redeemed = 400,000 x 60% = 240,000

Since 5 coupons are required to redeem a premium, the number of premiums expected to be claimed = 240,000 / 5 = 48,000

The cost of each premium = $0.75 
Therefore, the estimated liability for premium claims outstanding at December 31,2014 = 48,000 x $0.75 = $36,000

However, we need to subtract the value of premiums already claimed from the estimated liability to arrive at the correct answer. From the given information, we know that 10,000 premiums were claimed before December 31, 2014. Therefore, the estimated liability for premium claims outstanding at December 31,2014 = ($36,000 - $15,000) = $21,000.

Hence, the correct answer is option C.

Question 15

On July 1,2008 Magda Corporation issued for $960,000 one thousand of its 9 percent,$1,000 callable bonds.The bonds are dated July 1,2008,and mature on July 1,2018.Interest is payable semiannually on January 1 and July 1.Magda uses the straight-line method of amortizing bond discount.The bonds can be called by the issuer at 101 at any time after June 30,2013.On July 1,2014,Magda called in all of the bonds and retired them.Ignoring income taxes,how much loss should Magda report on this early extinguishment of debt for the year ended December 31,2014?

Accepted Answer

To calculate the loss on early extinguishment of debt, we need to compare the carrying value of the bonds on the date of redemption with the amount paid to retire them.

Carrying value of bonds on July 1, 2014 (date of redemption) will be calculated by taking the present value of remaining cash flows using the effective interest rate:

PV of interest payments (20 semiannual payments of $45 each, discounted at the semiannual effective interest rate of 4.49%): 
=$45 x ((1 - (1/1.0449^20)) / 0.0449) 
=$771.33

PV of principal payment (discounted at the semiannual effective interest rate of 4.49%): 
=$1,000 / 1.0449^14 
=$528.99

Therefore, carrying value of each bond on July 1, 2014: 
=$771.33 + $528.99 
=$1,300.32

Magda called in all of the bonds and retired them for $1,260,000 (1,000 x $1,260).

Thus, the loss on early extinguishment of debt: 
=Amount paid to retire the bonds - Carrying value of the bonds 
=$1,260,000 - (1,000 x $1,300.32) 
=$$26,680

Therefore, Magda should report a loss of $26,680 on this early extinguishment of debt for the year ended December 31, 2014.

The correct answer is C) $26,000.

Question 16

On October 1,2014,Southpark Inc.issued,at 101 plus accrued interest,800 of its 10 percent,$1,000 bonds.The bonds are dated July 1,2014,and mature on July 1,2021.Interest is payable semiannually on January 1 and July 1.At the time of issuance,Southpark would receive cash of

Accepted Answer

Southpark Inc. issued the bonds at 101% of the face value, which means they issued them at 101% of $800,000 (800 bonds * $1,000 each = $800,000). So, the initial amount is $808,000 (101% of $800,000). However, since the bonds were issued on October 1 and are dated July 1, there are three months of accrued interest that Southpark Inc. would receive because interest is payable semiannually on January 1 and July 1. The semiannual interest per bond is $50 (10% of $1,000 / 2). For 800 bonds, this is $40,000 every six months. For three months (half of a semiannual period), this is $20,000. Therefore, the total cash received is $808,000 + $20,000 = $828,000.

Question 17

Bridge Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible bond issue in the face amount of $10,000,000.Interest payment dates of the bond issue are June 30 and December 31.The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond.On June 30,2014,the holders of $1,800,000 face value bonds exercised the conversion privilege.The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35.The total unamortized bond discount at the date of conversion was $500,000.What amount should Bridge credit to the account "Paid-In Capital in Excess of Par" as a result of this conversion assuming Bridge does not want to recognize any gain (or loss)on the conversion?

Accepted Answer

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Question 18

On January 1,2014,Madrid Corp.issued 2,000 of its 9 percent,$1,000 bonds at 95.Interest is payable semiannually on July 1 and January 1.The bonds mature on January 1,2024.Madrid paid bond issue costs of $80,000,which are appropriately recorded as a deferred charge.Madrid uses the straight-line method of amortizing bond discount and bond issue costs.On Madrid's December 31,2014,balance sheet,how much would be shown as the carrying amount of the bonds payable?

Accepted Answer

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Question 19

On February 1,2015,Gaslight Corp.issued 12 percent,$2,000,000 face value,ten-year bonds for $2,234,000 plus accrued interest.The bonds are dated November 1,2014,and interest is payable on May 1 and November 1.Gaslight reacquired all of these bonds at 102 on May 1,2018,and retired them.Unamortized bond premium on that date was $156,000.Ignoring the income tax effect,what was Gaslight's gain on the bond retirement?

Accepted Answer

The answer of On February 1,2015,Gaslight Corp.issued 12 percent,$2,000,000 face...

Question 20

Freddy,Inc.had outstanding 10 percent,$1,000,000 face value,convertible bonds maturing on December 31,2017.Interest is paid December 31 and June 30.After amortization through June 30,2014,the unamortized balance in the bond premium account was $30,000.On that date,bonds with a face amount of $500,000 were converted into 20,000 shares of $20 par common stock.Recording the conversion by using the carrying value of the bonds,Freddy should credit Additional Paid-In Capital for

Accepted Answer

First, we need to find the carrying amount of the bonds at the time of conversion. The face value of the bonds that were converted is $500,000, but we need to take into account the unamortized premium of $30,000. Therefore, the carrying amount of the bonds at the time of conversion is $530,000.

Next, we need to determine how many shares of common stock were issued. Each bond is convertible into 20 shares of common stock (i.e. the conversion ratio is 20:1). Therefore, the 500 bonds that were converted would result in 10,000 shares of common stock (500 bonds x 20 shares/bond = 10,000 shares).

To record the conversion, we need to remove the bonds from the books and replace them with common stock. Here's the journal entry:
Debit Bonds Payable - 500,000
Debit Bond Premium - 30,000
Credit Common Stock - 10,000 shares x $20 par value = $200,000
Credit Additional Paid-In Capital - (500,000 + 30,000) carrying amount of bonds = $530,000 - $200,000 par value of stock = $330,000

Therefore, the answer is D) $115,000, which is calculated as follows: $330,000 - $215,000 (par value of stock received) = $115,000.

Quiz 12: Debt Financing

Gunther Inc.purchased $400,000 of Malone Corp.ten-year bonds with a stated interest rate of 8 percent payable quarterly.At the time the bonds were purchased,the market interest rate was 12 percent.Determine the amount of premium or discount on the purchase of the bonds.

Tarpon Corp.had the following long-term debt at December 31: The debenture bonds amounted to

Arthur Enterprises had the following long-term debt: The total of the serial bonds amounted to

Selected financial data of Rodham Corporation for the year ended December 31,2014,is presented below: Common stock dividends were $120,000.The times-interest-earned ratio is

During the year,Franklin Corporation incurred the following costs in connection with the issuance of bonds: The amount recorded as a deferred charge to be amortized over the term of the bonds is

On January 1,SOMA issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1.The bonds were priced to yield 10 percent.The total issue price (rounded) of the bonds was

On October 1,2014,Southpark Inc.issued,at 101 plus accrued interest,800 of its 10 percent,$1,000 bonds.The bonds are dated July 1,2014,and mature on July 1,2021.Interest is payable semiannually on January 1 and July 1.At the time of issuance,Southpark would receive cash of