Question 1

Crawford Inc. has bonds outstanding during a year in which the market 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

When the market rate of interest rises, the fair value of the bonds decreases, resulting in a gain. Additionally, interest expense is recognized as usual.

Question 2

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

Accepted Answer

Under U.S. GAAP, convertible bonds are recorded entirely as debt upon issuance, with no separate allocation to equity.

Question 3

Required:
What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?

Accepted Answer

The answer of Required:
What total interest expense will Morton Sales...

Question 4

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2013. The bonds sold for $739,816 and mature in 2032 (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, 2013, the fair value of the bonds was $730,000. Pierce's earnings for the year will include:

Accepted Answer

The fair value of the bonds decreased from $739,816 to $730,000, resulting in a gain of $9,816. However, the effective interest method must be applied to determine the interest expense, which affects the gain/loss calculation. The difference between the interest expense and the cash interest paid results in an amortization of $801, which when added to the fair value change ($9,816), results in a total gain of $10,617.

Question 5

During 2013 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2011, payable to Third Bank. Interest was last paid on December 31, 2012. On December 31, 2013, 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 2013 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 is $300,000 plus the unpaid interest for 2013 ($30,000), totaling $330,000. The settlement amount is $250,000. Therefore, the gain is $330,000 - $250,000 = $80,000.

Question 6

On September 1, 2013, 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, 2013, Sam's Shoe Co....

Question 7

Required:
How much interest will Morton Sales Co. pay on these bonds in 2013?

Accepted Answer

The answer of Required:
How much interest will Morton Sales Co....

Question 8

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

Accepted Answer

Under IFRS, convertible bonds are accounted for as part debt and part equity. This is because the company is raising funds through the issuance of debt, but also providing an option for bondholders to convert their bonds into equity shares in the future. The amount of debt and equity components is determined by the fair value of each component at the time of issuance.

Question 9

Required:
What will Morton Sales Co. report on these bonds in its December 31, 2013, balance sheet?

Accepted Answer

The answer of Required:
What will Morton Sales Co. report on...

Question 10

Required:
What amount of interest expense on these bonds would Morton Sales Co. report in its 2013 income statement?

Accepted Answer

The answer of Required:
What amount of interest expense on these...

Question 11

TMC issued $50 million of its 12% bonds on April 1, 2013, at 98 plus accrued interest. The bonds are dated January 1, 2013, and mature on December 31, 2032. 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 0.98 * $50 million = $49 million. In addition, TMC received accrued interest from January 1, 2013, to April 1, 2013. The accrued interest is calculated as follows:Accrued interest = Face value * Interest rate * TimeAccrued interest = $50 million * 12% * (3/12)Accrued interest = $1.5 millionTherefore, TMC received a total of $49 million + $1.5 million = $50.5 million from the bond issuance.

Question 12

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

The answer of When bonds and other debt are issued,...

Question 13

On March 1, 2013, Doll Co. issued 10-year convertible bonds at 106. During 2016, 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, 2013, cash proceeds from the issuance of the convertible bonds should be reported as:

Accepted Answer

Under IFRS, the proceeds from the issuance of convertible bonds 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.

Question 14

Required:
What was the annual effective interest rate in the market when the bonds were issued?

Accepted Answer

The answer of Required:
What was the annual effective interest rate...

Question 15

On January 1, 2013, 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 the bonds were issued at 101, which means that Ozark received $20.2 million for the bonds. The bonds payable account should be credited for this amount.

Question 16

On January 1, 2013, 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 amount is $100,000 (1% of $10 million), so Ozark should credit premium on bonds payable.

Question 17

Determine the price of a $200,000 bond issue under each of the following independent assumptions:

Accepted Answer

The answer of Determine the price of a $200,000 bond...

Question 18

On January 1, 2013, Bishop Company issued 10% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2013.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2013.
3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method.
4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method.

Accepted Answer

The answer of On January 1, 2013, Bishop Company issued...

Question 19

Determine the price of a $500,000 bond issue under each of the following independent assumptions:

Accepted Answer

The answer of Determine the price of a $500,000 bond...

Question 20

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...

Quiz 14: Bonds and Long-Term Notes

Crawford Inc. has bonds outstanding during a year in which the market 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?

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

Required: What total interest expense will Morton Sales Co. report over the 10-year life of these bonds?

On September 1, 2013, 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?

Required: How much interest will Morton Sales Co. pay on these bonds in 2013?

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

Required: What will Morton Sales Co. report on these bonds in its December 31, 2013, balance sheet?

Required: What amount of interest expense on these bonds would Morton Sales Co. report in its 2013 income statement?

TMC issued $50 million of its 12% bonds on April 1, 2013, at 98 plus accrued interest. The bonds are dated January 1, 2013, and mature on December 31, 2032. Interest is payable semiannually on June 30 and December 31. What amount did TMC 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:

Required: What was the annual effective interest rate in the market when the bonds were issued?

Determine the price of a $200,000 bond issue under each of the following independent assumptions:

Determine the price of a $500,000 bond issue under each of the following independent assumptions:

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