Bonds

Gleim CPA Test Prep: Financial (137 questions)

[1] Gleim #: 12.1.1 -- Source: CPA 1189 T-18

Bonds payable issued with scheduled maturities at various dates are called

Serial Bonds

Term Bonds

A.

No

Yes

B.

No

No

C.

Yes

No

D.

Yes

Yes

[2] Gleim #: 12.1.2 -- Source: CPA 591 I-47

Hancock Co.’s December 31, Year 4, balance sheet contained the following items in the long-term liabilities liabilities section: Unsecured 9.37 9.375% 5% reg registe istere red d bon bonds ($25 ($25,0 ,000 00 matur aturin ing g ann annuall ally beg beginn inning ing in Year Year 8) 11.5% convertible bo bonds, ca callable beginning in Year 13 13, du due Ye Year 24 24

$275 $275,0 ,000 00 125,000

Secured 9.875% guaranty security bonds, due Year 24 10.0 10.0% % comm commod odit ity y back backed ed bon bonds ds ($5 ($50, 0,00 000 0 mat matur urin ing g annu annual ally ly begi beginn nnin ing g in Year Year 8) 8)

$250,000 200, 200,00 000 0

What are the total amounts of serial bonds and debenture bonds?

Serial Bo Bonds

Debenture Bo Bonds

A.

$475,000

$400,000

B.

$475,000

$125,000

C.

$450,000

$400,000

D.

$200,000

$650,000


Blue Corp.’s December 31, Year 4, balance sheet contained the following items in the long-term liabilities liabilities section: 9-3/4% registered debentures, callable in Year 15, due in Year 20 9-1/ 9-1/2% 2% col colla late tera rall tru trust st bond bonds, s, con conve vert rtib ible le into into com common stoc stock k begi beginn nnin ing g in in Yea Yearr 13, 13, due due in in Year Year 23 23 10% subordinated debentures ($30,000 maturing annually beginning in Year 10)

$700,000 600, 600,00 000 0 300,000

What is the total amount of Blue’s term bonds?

A. B. C. D.

$600,000 $700,000 $1,000,000 $1,300,000

Copyright 2011 Gleim Publications Inc. Printed for Javeri Khushbu

Page 1


[4] Gleim #: 12.1.4 -- Source: Publisher, adapted Debentures are

A. B. C. D.

Income bonds that require interest payments only when earnings permit. Subordinated debt and rank behind convertible bonds. Bonds secured by the full faith and cr edit of the issuing firm. A form of lease f inancing similar to equipment equipment trust certificates.

[5] Gleim #: 12.1.5 -- Source: Publisher, adapted

Which one of the following characteristics distinguishes income bonds from other bonds?

A. B. C. D.

The bondholder is guaranteed an income over the life of the security. By promising a return to the bondholder, bondholder, an income bond is junior to preferred and common stock. Income bonds are junior to subordinated debt but senior to preferred and common stock. Income bonds pay interest only if the issuing company has earned the interest.


Serial bonds are attractive to investors because

A. B. C. D.

All bonds in the issue mature on the same date. The yield to maturity is the same for all bonds in the issue. Investors can choose the maturity that suits their financial needs. The coupon rate on these bonds is adjusted to the maturity date.


The best advantage of a zero-coupon bond to the issuer is that the

A. B. C. D.

Bond requires a low issuance cost. Bond requires no interest income calculation to the holder or issuer until maturity. Interest can be amortized annually by the APR method and need not be shown as an interest expense to the issuer. Interest can be amortized annually on a straight-line basis but is a noncash outlay.

[8] Gleim #: 12.1.8 -- Source: CPA 0908 FIN-13

What type of bonds in a pa rticular bond issuance will not all mature on the same date?

A. B. C. D.

Debenture bonds. Serial bonds. Term bonds. Sinking fund bonds.


Page 2


[4] Gleim #: 12.1.4 -- Source: Publisher, adapted Debentures are

A. B. C. D.

Income bonds that require interest payments only when earnings permit. Subordinated debt and rank behind convertible bonds. Bonds secured by the full faith and cr edit of the issuing firm. A form of lease f inancing similar to equipment equipment trust certificates.


Which one of the following characteristics distinguishes income bonds from other bonds?

A. B. C. D.

The bondholder is guaranteed an income over the life of the security. By promising a return to the bondholder, bondholder, an income bond is junior to preferred and common stock. Income bonds are junior to subordinated debt but senior to preferred and common stock. Income bonds pay interest only if the issuing company has earned the interest.


Serial bonds are attractive to investors because

A. B. C. D.

All bonds in the issue mature on the same date. The yield to maturity is the same for all bonds in the issue. Investors can choose the maturity that suits their financial needs. The coupon rate on these bonds is adjusted to the maturity date.


The best advantage of a zero-coupon bond to the issuer is that the

A. B. C. D.

Bond requires a low issuance cost. Bond requires no interest income calculation to the holder or issuer until maturity. Interest can be amortized annually by the APR method and need not be shown as an interest expense to the issuer. Interest can be amortized annually on a straight-line basis but is a noncash outlay.


What type of bonds in a pa rticular bond issuance will not all mature on the same date?

A. B. C. D.

Debenture bonds. Serial bonds. Term bonds. Sinking fund bonds.


Page 2


[9] Gleim #: 12.1.9 -- Source: CPA 593 I-16 The following information relates relates to noncurrent investments that Fall Corp. placed in trust as required by the underwriter of its bonds:

Bond sinking-fund balance, 1/1 Additional investment during year Dividends on investments Interest revenue Administration costs Carrying amount of bonds payable

$

450,000 90,000 15,000 30,000 5,000 1,025,000

What amount should Fall report in its December 31 balance sheet related to its noncurrent investment for bond sinking-fund requirements?

A. B. C. D.

$585,000 $580,000 $575,000 $540,000


An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund I. Increases by revenue earned on the investments investments II. Is not affected by revenue earned on the investments III. Decreases when the investments are purchased

A. B. C. D.

I only. I and III only. II and III only. III only.


On March 1, Year 1, a company established established a sinking fund in connection with an issue issue of bonds due in Year 13. At December 31, Year 5, the independent trustee held cash in the sinking-fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the company’s classified balance sheet at D ecember 31, Year 5?

A. B. C. D.

The cash in the sinking fund should appear as a current asset. Only the accumulated deposits should appear as a noncurrent asset. The entire balance in the sinking-fund account should appear as a current asset. The entire balance in the sinking-fund account should appear as a noncurrent asset.


The market price of a bond issued at a discount is the present value of its principal amount at the market (eff ective) rate of interest

A. B. C. D.

Less the present value of all future interest payments at the market (effective) ra te of interest. Less the present value of all future interest payments at the rate of interest stated on the bond. Plus the present value of all future interest payments at the market (effective) rate of interest. Plus the present value of all future interest payments at the rate of interest stated on the bond.


Page 3


[13] Gleim #: 12.2.13 -- Source: CPA 592 I-30 The following information pertains to Camp Corp.’s issuance of bonds on July 1, Year 4:

Face amount Term Stated interest rate Interest payment dates Yield

$800,000 10 years 6% Annually on July 1 9% At 6%

At 9%

0.558 1.791

0.422 2.367

7.360

6.418

Present value of 1 for 10 periods Future value of 1 for 10 periods Present value of ordinary a nnuity of 1 for 10 periods

What should the issue price be for each $1,000 bond?

A. B. C. D.

$1,000 $943 $864 $807

[14] Gleim #: 12.2.14 -- Source: CPA 594 F-46

A bond issued on June 1, Year 4, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, Year 4, is for a period of

A. B. C. D.

3 months. 4 months. 6 months. 7 months.


On June 30, Year 4, Huff Corp. issued 1,000 of its 8%, $1,000 bonds at 99. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Year 4, Huf f should report the bond liability at

A. B. C. D.

$955,000 $990,000 $1,000,000 $1,025,000


On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 13. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4, balance sheet?

A. B. C. D.

$27,000 $24,000 $18,000 $9,000


Page 4


[17] Gleim #: 12.2.17 -- Source: CPA 0605 FIN-4 On June 1 of the current year, Dahli Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Dahli report?

A. B. C. D.

$6,000 $8,000 $12,000 $14,000


Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying amount of the bonds on January 2 was $185,953. A journal entry was recorded for the f irst interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

A. B. C. D.

6% 7% 12% 14%


On January 2, Year 4, Nast Co. issued 8% bonds with a fa ce amount of $1 million that mature on January 2, Year 10. The bonds were issued to yield 12%, resulting in a discount of $150,000. Na st incorrectly used the straight-line method instead of the eff ective-interest method to amortize the discount. How is the carrying amount of the bonds affected by the error?

At Dec. 31, Year 4

At Jan. 2, Year 10

A.

Overstated

Understated

B.

Overstated

No effect

C.

Understated

Overstated

D.

Understated

No effect


Webb Co. has outstanding a 7%, 10-year bond with a $100,000 face amount. The bond was originally sold to yield 6% annual interest. Webb uses the effective-interest method to amortize bond premium. On June 30, Year 3, the car rying amount of the outstanding bond was $105,000. What amount of unamortized premium on the bond should Webb report in its June 30, Y ear 4, balance sheet?

A. B. C. D.

$1,050 $3,950 $4,300 $4,500


Page 5


[21] Gleim #: 12.2.21 -- Source: CPA 595 F-19 On July 1, Year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accr ued interest. The bonds are dated April 1, Year 1, and mature on April 1, Year 11. Interest is payable semiannually on April 1 and Oc tober 1. What amount did Eagle receive from the bond issuance?

A. B. C. D.

$579,000 $594,000 $600,000 $609,000


On January 2, Year 1, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, Year 11. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, Year 1, balance sheet, what amount should West report as bonds payable?

A. B. C. D.

$469,500 $470,475 $471,025 $500,000


On January 1, Year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and Oc tober 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $8,000. On January 1, Year 2, what amount should Oak report as bonds payable, net of discount?

A. B. C. D.

$380,300 $388,000 $388,300 $392,000


On March 1, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of the effective-interest method to amortize the discount. How were the following amounts, as of December 31 aff ected by the error?

Bond Carrying

Retained

Amount

Earnings

A.

Overstated

Overstated

B.

Understated

Understated

C.

Overstated

Understated

D.

Understated

Overstated


Page 6


[25] Gleim #: 12.2.25 -- Source: CPA 1188 T-14 The issue price of a bond is equal to the present value of the f uture cash flows for interest and principal when the bond is issued

At Par

At a Discount

At a Premium

A.

Yes

No

Yes

B.

Yes

No

No

C.

No

Yes

Yes

D.

Yes

Yes

Yes


A bond issued on June 1 has interest payment dates of April 1 and Oc tober 1. Bond interest expense for the year ended December 31 would be for a period of

A. B. C. D.

Three months. Four months. Six months. Seven months.


On January 1, Year 2, Pine Corp. sold 200 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and Oc tober 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $4,000. On January 1, Year 2, Pine should report bonds payable, net of discount, at

A. B. C. D.

$196,000 $194,150 $194,000 $190,150


How is the carrying amount of a bond payable affected by amortization of the following?

Discount

Premium

A.

Increase

Increase

B.

Decrease

Decrease

C.

Increase

Decrease

D.

Decrease

Increase


A 5-year term bond was issued on January 1, Year 1, at a discount. The carr ying amount of the bond at December 31, Year 2, will be

A. B. C. D.

Higher than the carrying amount at December 31, Year 1. Lower than the carrying amount at December 31, Year 1. The same as the carrying amount at January 1, Year 1. Higher than the carrying amount at December 31, Year 3.


Page 7


[30] Gleim #: 12.2.30 -- Source: CPA 590 I-38 On January 1, Year 1, Kay, Inc. issued 10% bonds in the face amount of $400,000, which mature on January 1, Year 11. The bonds were issued for $354,000 to yield 12%, resulting in bond discount of $46,000. Kay uses the interest method of amortizing bond discount. Interest is payable semiannually on July 1 and January 1. A t June 30, Year 1, Kay’s unamortized bond discount should be

A. B. C. D.

$46,000 $44,760 $43,700 $42,000


On January 1, Year 1, Wolf Corp. issued its 10% bonds in the face amount of $1 million. They mature on January 1, Year 11. The bonds were issued for $1,135,000 to yield 8%, resulting in bond premium of $135,000. Wolf uses the interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, Year 1, Wolf’s adjusted unamortized bond premium should be

A. B. C. D.

$135,000 $125,800 $121,500 $115,864


On January 1, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Korn report as interest expense for the 6 months ended June 30?

A. B. C. D.

$17,706 $20,000 $21,247 $24,000


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[33] Gleim #: 12.2.33 -- Source: CPA 1184 I-24 On December 31, Year 1, Arnold, Inc. issued $200,000, 8% serial bonds, to be repaid in the amount of $40,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% per year. The bond proceeds were $190,280 based on the present values at December 31, Year 1, of the five annual payments:

Amounts Due Due Date

Principal

Interest

Present Value at 12/31/Yr 1

12/31/Yr 2 12/31/Yr 3 12/31/Yr 4 12/31/Yr 5 12/31/Yr 6

$40,000 40,000 40,000 40,000 40,000

$16,000 12,800 9,600 6,400 3,200

$ 50,900 43,610 37,250 31,690 26,830 $190,280

Arnold amortizes the bond discount by the interest method. In its December 31, Year 2, balance sheet, at what amount should Arnold report the carrying value of the bonds?

A. B. C. D.

$139,380 $149,100 $150,280 $153,308


For a bond issue that sells for less than its par value, the market rate of interest is

A. B. C. D.

Dependent on the rate stated on the bond. Equal to the rate stated on the bond. Less than the rate stated on the bond. Higher than the rate stated on the bond.


On November 1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus ac crued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 balance sheet?

A. B. C. D.

$17,500 $16,000 $11,667 $10,667


A bond issued on June 1 has interest payment dates of April 1 and Oc tober 1. Bond interest expense for the year ended December 31 is for a period of

A. B. C. D.

7 months. 6 months. 4 months. 3 months.


Page 9



When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid

A. B. C. D.

Minus discount. Minus discount minus par value. Plus discount. Plus discount plus par value.


Foley Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6%, $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts. A

B

C

D

E

1

Year

Cash paid

Interest expense

Discount amortization

Carrying amount

2

1

3

2

$86,580 $6,000

Which formula should Foley use in cell E3 to calculate the bonds’ carrying amount at the end of Year 2?

A. B. C. D.

E2 + D3. E2 – D3. E2 + C3. E2 – C3.


On January 1, a company issued a $50,000 face a mount, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond c arrying amount on December 31 of the current year?

A. B. C. D.

$46,139 $46,446 $46,768 $47,106


A company issued a bond with a sta ted rate of interest that is less than the effective interest ra te on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?

A. B. C. D.

An interest expense that is less than the cash payment made to bondholders. An interest expense that is greater than the c ash payment made to bondholders. A debit to the unamortized bond discount. A debit to the unamortized bond premium.


Page 10


[41] Gleim #: 12.2.41 -- Source: CPA 0409 FIN-50 A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following?

A. B. C. D.

A debit to bond discount of $1,000. A credit to bonds payable of $49,000. A credit to bond premium of $1,000. A debit to bonds payable of $50,000.


Mann Corp.’s liability account balances at June 30, Year 2, included a 10% note payable in the amount of $3.6 million. The note is dated October 1, Year 1, and is pa yable in three equal annual payments of $1.2 million plus interest. The first interest and principal payment was made on October 1, Year 2. In Mann’s June 30, Year 3, balance sheet, what amount should be reported as a ccrued interest payable for this note?

A. B. C. D.

$270,000 $180,000 $90,000 $60,000


On January 1, Year 1, Gilson Corporation issued for $1,030,000 one thousand of its 9%, $1,000 callable bonds. The bonds are dated January 1, Year 1, and mature on December 31, Year 15. Interest is payable semiannually on January 1 and July 1. The bonds c an be called by the issuer at 102 on any interest payment date after December 31, Year 5. The unamortized bond premium was $14,000 at December 31, Year 8, and the market price of the bonds was 99 on this date. In its December 31, Year 8, balance sheet, at w hat amount should Gilson report the carrying value of the bonds?

A. B. C. D.

$1,020,000 $1,016,000 $1,014,000 $990,000


On July 1, Day Co. received $103,288 for $100,000 f ace amount, 12% bonds, a price that yields 10%. Interest expense for the 6 months ended December 31 should be

A. B. C. D.

$6,197 $6,000 $5,164 $5,000


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[45] Gleim #: 12.2.45 -- Source: CPA 587 I-27 On July 1, Year 3, Lundy Company issued for $438,000 500 of its 8%, $1,000 bonds. The bonds were issued to yield 10%. The bonds a re dated July 1, Year 3, and mature on July 1, Year 13. Interest is payable semiannually on January 1 and July 1. Using the interest method, how much of the bond discount should be amortized for the 6 months ended December 31, Year 3?

A. B. C. D.

$3,800 $3,100 $2,480 $1,900


On January 1, Year 4, Celt Corp. issued 9% bonds in the face amount of $1 million, which mature on January 1, Year 14. The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000. Celt uses the interest method of amortizing bond discount. Interest is payable annually on December 31. At December 31, Year 4, Celt’s unamortized bond discount should be

A. B. C. D.

$51,000 $51,610 $52,000 $57,100


During Year 4, Eddy Corp. incurred the following costs in connection with the issuance of bonds: Printing and engraving Legal fees Fees paid to independent accountants for registration information Commissions paid to underwriter

$ 30,000 160,000 20,000 300,000

What amount should be recorded a s a deferred charge to be amortized over the term of the bonds?

A. B. C. D.

$510,000 $480,000 $300,000 $210,000


On January 2, Year 3, Gill Co. issued $2 million of 10-year, 8% bonds at par. The bonds, dated J anuary 1, Year 3, pay interest semiannually on January 1 and July 1. Bond issue costs w ere $250,000. What amount of bond issue costs are unamortized at June 30, Year 4?

A. B. C. D.

$237,500 $225,000 $220,800 $212,500


Page 12


[49] Gleim #: 12.3.49 -- Source: CPA FIN R99-9 Perk, Inc. issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?

A. B. C. D.

Discount the bonds at the stated rate of interest. Discount the bonds at the market rate of interest. Discount the bonds at the stated rate of interest and deduct bond issuance costs. Discount the bonds at the market rate of interest and deduct bond issuance costs.


A company issued 10-year term bonds at a discount in Year 1. Bond issue costs were incurred a t that time. The company uses the effectiveinterest method to amortize bond issue costs. Reporting the bond issue costs as a deferred c harge results in

A. B. C. D.

More of a reduction in net income in Year 2 than reporting the bond issue costs as a reduction of the related debt liability. The same reduction in net income in Year 2 as reporting the bond issue costs as a reduction of the related debt liability. Less of a reduction in net income in Year 2 than reporting the bond issue costs as a reduction of the related debt liability. No reduction in net income in Year 2.


On March 1, Year 1, Cain Corp. issued, at 103 plus accrued interest, 200 of its 9%, $1,000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of

A. B. C. D.

$216,000 $209,000 $206,000 $199,000


Dixon Co. incurred costs of $3,300 when it issued, on August 31, Year 1, 5-year debenture bonds dated April 1, Year 1. What amount of issue expense should Dixon report in its income statement for the year ended December 31, Year 1?

A. B. C. D.

$220 $240 $495 $3,300


Page 13


[53] Gleim #: 12.3.53 -- Source: CPA 1192 I-37 Lake Co. issued 3,000 of its 9%, $1,000 f ace amount bonds at 101 1/2. In connection with the sale of these bonds, Lake paid the following expenses:

Promotion costs Engraving and printing Underwriters’ c ommissions

$ 20,000 25,000 200,000

What amount should Lake record as bond issue costs to be amortized over the term of the bonds?

A. B. C. D.

$0 $220,000 $225,000 $245,000


Which of the f ollowing statements characterizes convertible debt?

A. B. C. D.

The holder of the debt must be repaid with shares of the issuer’s stock. No value is assigned to the conversion feature when convertible debt is issued. The transaction should be recorded as the issuance of stock. The issuer’s stock price is less than market value when the debt is converted.

[Fact Pattern #1] On January 2, Year 1, Chard Co. issued 10-year convertible bonds at 105. During Year 4, these bonds were converted into common stock having an aggregate par value equal to the total fa ce amount of the bonds. At conversion, the market price of Chard’s common stock was 50% above its par value. [55] Gleim #: 12.4.55 -- Source: CPA 1190 T-29

(Refers to Fact Pattern #1) On January 2, Year 1, Chard should have reported cash proceeds f rom the issuance of the convertible bonds as

A. B. C. D.

Contributed capital for the entire proceeds. Contributed capital for the portion of the proceeds a ttributable to the conversion feature and as a liability for the balance. A liability for the face amount of the bonds and contributed capital for the premium. A liability for the entire proceeds.


(Refers to Fact Pattern #1) Depending on whether the book-value method or the market-value method was used, Chard should have recognized gains or losses on conversion when using the

Book-Value Method

Market-Value Method

A.

Either gain or loss

Gain

B.

Either gain or loss

Loss

C.

Neither gain nor loss

Loss

D.

Neither gain nor loss

Gain


Page 14


[57] Gleim #: 12.4.57 -- Source: CPA 593 T-12 On March 31, Year 4, Ashley, Inc.’s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley’s books was less than the market value but greater than the par value of the common stock issued. If Ashley used the book-value method of accounting for the conversion, which of the following statements accurately states an eff ect of this conversion?

A. B. C. D.

Equity is increased. Additional paid-in capital is decreased. Retained earnings is increased. An extraordinary loss is recognized.


On July 1, Year 4, after recording interest and amortization, York Co. converted $1 million of its 12% c onvertible bonds into 50,000 shares of $1 par value common stock. On the conversion date, the carrying amount of the bonds was $1.3 million, the market value of the bonds was $1.4 million, and York’s common stock was publicly trading at $30 per share. Using the book-value method, what amount of additional paid-in capital should York record as a result of the conversion?

A. B. C. D.

$950,000 $1,250,000 $1,350,000 $1,500,000


Faber, Inc. had outstanding 10%, $1 million face amount convertible bonds maturing on December 31, Year 5, on which interest is paid June 30 and December 31. A fter amortization through June 30, Year 1, the unamortized balance in the bond discount account was $30,000. On that date, all of these bonds were converted into 40,000 shares of $20 par value common stock. Faber incurred expenses of $10,000 in connection with the conversion. Recording the conversion by the book value (carrying amount) method, Faber should credit additional paid-in capital for

A. B. C. D.

$160,000 $170,000 $180,000 $230,000


Which of the f ollowing is generally associated with the terms of convertible debt securities?

A. B. C. D.

An interest rate that is lower than nonconvertible debt. An initial conversion price that is less than the market value of the common stock at time of issuance. A noncallable feature. A feature to subordinate the security to nonconvertible debt.


Page 15


[61] Gleim #: 12.4.61 -- Source: CPA 0409 FIN-34 On January 1, Stunt Corp. had outstanding convertible bonds with a fac e value of $1,000,000 and an unamortized discount of $100,000. On that date, the bonds were converted into 100,000 shares of $1 par stock. The market value on the date of conversion was $12 per share. The transaction will be accounted for with the book value method. By what amount will Stunt’s stockholders’ equity increase as a result of the bond conversion?

A. B. C. D.

$100,000 $900,000 $1,000,000 $1,200,000


When bonds are issued with stock purchase warrants, a portion of the proceeds should be allocated to additional paid-in capital for bonds issued with

Detachable Stock

Nondetachable Stock

Purchase Warrants

Purchase Warrants

A.

No

Yes

B.

Yes

Yes

C.

Yes

No

D.

No

No


Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue, the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?

Less Than Warrants'

Contributed

Market Value

Capital

A.

No

Yes

B.

Yes

No

C.

Yes

Yes

D.

No

No


On December 30, Year 4, Fort, Inc. issued 1,000 of its 8%, 10-year, $1,000 f ace value bonds with detachable stock warrants at par. Each bond carried a detac hable warrant for one share of Fort’s common stock at a specified option price of $25 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000 and the market value of the wa rrants was $120,000. In its December 31, Year 4, balance sheet, what amount should Fort report as bonds payable?

A. B. C. D.

$1,000,000 $975,000 $900,000 $880,000


Page 16


[65] Gleim #: 12.4.65 -- Source: CPA 593 T-13 Quoit, Inc. issued preferred stock with detachable common stock warrants. T he issue price exceeded the sum of the warra nts’ fair value and the preferred stocks’ par value. The preferred stocks’ fair value was not determinable. What amount should be assigned to the warrants outstanding?

A. B. C. D.

Total proceeds. Excess of proceeds over the par value of the preferred stock. The proportion of the proceeds that the warrants’ fair value bears to the preferred stocks’ par value. The fair value of the warrants.


On July 28, Vent Corp. sold $500,000 of 4%, 8-year subordinated debentures for $450,000. The purchasers were issued 2,000 detac hable warrants, each of which was f or one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance?

A. B. C. D.

$50,000 $60,000 $70,000 $74,000


Cuddy Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares (one share per warrant) of Cuddy’s common stock. Total proceeds from the issue amounted to $240,000. The fair value of each warrant was $2, and the fair value of the bonds without the warrants was $196,000. Under IFRSs, the bonds were issued at a discount of

A. B. C. D.

$0 $678 $4,000 $40,678


A freestanding combination of one written put option on the issuer’s equity shares and a second option may be a liability or an asset. Assume the first option requires the entity to buy 1,000 shares of the entity’s own stock at a given date f or $30 per share if the market price declines below $30. The second option is a purchased c all option that permits the issuer to buy 1,000 shares on the given date for $30 per share if the price rises above $31. If the f air value of the put at issuance exceeds the fair value of the call,

A. B. C. D.

The issuer pays cash. The combined instrument is classified as a liability. Classification of the combined instrument depends on the settlement provision. The combined instrument is a net w ritten option classified as an asset.


Page 17


[69] Gleim #: 12.4.69 -- Source: Publisher, adapted The issuer agrees to a forward contract to repurchase 100,000 of its equity shares for $50 per share in 3 years. No other consideration is given or received, and no unstated rights or privileges are involved. The quoted market price of these shares is $42 per share at the inception of the contract, which will be physically settled in cash. How should the issuer account for this contract?

A. B. C. D.

A memorandum entry. As an asset if price movements are f avorable and the contract is net-cash settled. Initially debit equity and credit a liability for $5,000,000. Initially debit equity and credit a liability for $4,200,000.


On March 1, Year 4, Evan Corp. issued $1 million of 10%, nonconvertible bonds at 103. They were due on February 28, Year 14. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan common stock, par value $25. On March 1, Year 4, the quoted market value of Evan’s common stock was $20 per share, a nd the market value of each warrant was $4. What amount of the bond issue proceeds should Evan record a s an increase in equity?

A. B. C. D.

$120,000 $90,000 $30,000 $0


Main Co. issued bonds with detachable common stock warrants. Only the warrants had a known fair value. The sum of the f air value of the warrants and the f ace amount of the bonds exceeds the cash proceeds. This excess is reported as

A. B. C. D.

Discount on bonds payable. Premium on bonds payable. Common stock subscribed. Contributed capital in excess of par-stock warrants.

[72] Gleim #: 12.4.72 -- Source: CPA 591 II-5

Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray’s common stock. Total proceeds fr om the issue amounted to $240,000. The market value of each warrant wa s $2, and the market value of the bonds without the warrants was $196,000. The bonds were issued at a discount of

A. B. C. D.

$0 $678 $4,000 $40,678


Page 18


[73] Gleim #: 12.4.73 -- Source: CPA 1189 I-28 On May 1, Kreal Corp. issued $2 million of 20-year, 10% bonds for $2,120,000. Each $1,000 bond had a detachable warrant eligible for the purchase of one share of Kreal’s $50 par c ommon stock for $60. Immediately after the bonds were issued, Kreal’s securities had the following market values:

10% bond without warrant Warrant Common stock, $50 par

$1,040 20 56

What amount should Kreal credit to premium on bonds payable?

A. B. C. D.

$120,000 $80,000 $40,000 $0


On December 31, Moss Co. issued $1 million of 11% bonds at 109. Each $1,000 bond was issued with 50 detac hable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4. On December 31, what amount should Moss record as discount or premium on issuance of bonds?

A. B. C. D.

$40,000 premium. $90,000 premium. $110,000 discount. $200,000 discount.


Roaster Company issued bonds with detachable stock warrants. Each warra nt granted an option to buy one share of $40 par value common stock for $75 per share. Five hundred warrants were originally issued, and $4,000 was appropriately credited to warrants. If 90% of these warrants are exercised when the market pr ice of the common stock is $85 per share, how much should be credited to capital in excess of par on this transaction?

A. B. C. D.

$19,350 $19,750 $23,850 $24,250


On July 1, Year 5, Wistar Corp. issued 1,000 of its 6%, 10-year, $1,000 face amount bonds with detachable stock warrants at 110. Each warrant could be redeemed for one share of Wistar’s common stock at a specified option price of $25 per share. Immediately after issuance, the fair value of the bonds without the warrants was $1,080,000, and the fair value of the warrants was $120,000. Under IFRSs, Wistar will record the warrants at

A. B. C. D.

$0 $2,500 $20,000 $120,000


Page 19


[77] Gleim #: 12.4.77 -- Source: Publisher, adapted Under IFRSs, which of the following is the method of allocating the proceeds of a compound financial instrument that contains both a liability and an equity component?

A. B. C. D.

Liability component at fa ir value, equity component at fair value, difference to premium or discount on bonds payable. Liability component at fa ir value, difference to equity component. Equity component at fair value, dif ference to liability component. The method most appropriate given all events and circumstances.


On March 1, Year 1, Somar Co. issued 20-year bonds a t a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its Year 6 income statement?

A. B. C. D.

A gain in continuing operations. A loss in continuing operations. An extraordinary gain. An extraordinary loss.


A 15-year bond was issued in Year 1 at a discount. During Year 10, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 10 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s fa ce amount over the 15-year bond’s

A. B. C. D.

Face amount. Carrying amount. Face amount minus the deferred loss on bond retirement. Carrying amount minus the deferred loss on bond retirement.


A debtor should derecognize a liability in which circumstances? I. The debtor pays the creditor and is relieved of its obligation with respect to the liability. II. The debtor is legally released from being the primary obligor. III. The debtor irrevocably places cash or other assets in a trust to be used solely for satisfying scheduled payments of interest and principal of a specif ic obligation.

A. B. C. D.

I only. I and II only. II and III only. I, II, and III.


Page 20


[81] Gleim #: 12.5.81 -- Source: CPA 1194 F-42 On July 31, Year 4, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face amount bonds, due on July 31, Year 14, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its Year 4 income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds?

A. B. C. D.

$53,000 gain. $0 $(65,000) loss. $(77,000) loss.


On January 1, Year 13, Hart, Inc. redeemed its 15-year bonds of $500,000 par value for 102. They were originally issued on January 1, Year 1, at 98 with a maturity date of January 1, Year 16. The bond issue costs relating to this transaction were $20,000. Hart properly amortizes discounts, premiums, and bond issue costs using the stra ight-line method. What amount of loss should Hart recognize on the redemption of these bonds?

A. B. C. D.

$16,000 $12,000 $10,000 $0


On June 2, Year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000. On June 2, Year 6, Tory retired half of the bonds a t 98. What is the net carrying amount that Tory should use in computing the gain or loss on retirement of debt?

A. B. C. D.

$250,000 $248,000 $247,000 $246,000


A 10-year term bond was issued in Year 2 at a discount with a ca ll provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in Year 4, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in Year 4 should have equaled the

A. B. C. D.

Call price. Call price less unamortized discount. Face amount less unamortized discount. Face amount plus unamortized discount.


Page 21


[85] Gleim #: 12.5.85 -- Source: CPA 590 I-40 On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but w ere callable at 101 anytime after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On J uly 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Fox’s gain or loss in Year 6 on this early extinguishment of debt was a

A. B. C. D.

$30,000 gain. $22,000 gain. $10,000 loss. $8,000 gain.


On its December 31, Year 1, balance sheet, Nilo Corp. reported bonds payable of $8 million and related unamortized bond issue costs of $430,000. The bonds had been issued at par. On January 2, Year 2, Nilo retired $4 million of the outstanding bonds at par plus a call premium of $100,000. What amount should Nilo report in its Year 2 income statement as loss on extinguishment of debt?

A. B. C. D.

$0 $100,000 $215,000 $315,000


On June 30, Year 1, Town Co. had outstanding 8%, $2 million face amount, 15-year bonds maturing on June 30, Year 11. Interest is payable on June 30 and December 31. The unamortized balances of bond discount and deferred issue costs on June 30, Year 1, were $70,000 and $20,000, respectively. On June 30, Year 1, Town ac quired 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?

A. B. C. D.

$1,980,000 $1,930,000 $1,910,000 $1,880,000


In open market transactions, Gold Corp. simultaneously sold its noncurrent investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the

A. B. C. D.

Net effect of the two transactions as an extraordinary gain. Net effect of the two transactions in income before extraordinary items. Gain on its purchase in income before extraordinary items and the loss on the sale as a n extraordinary loss. Gain on its purchase as an extraordinary gain and the loss on the sale in income before extraordinary items.


Page 22


[89] Gleim #: 12.5.89 -- Source: Publisher, adapted On December 31, Marcar Co. placed cash of $430,000 in an irrevocable trust. The trust’s assets are to be used solely for satisfying scheduled payments of both interest and principal on Marcar’s $550,000 bond payable. The possibility that Marcar will be required to make future payments with respect to that debt is r emote. Marcar has not been legally released from its obligations under the bond agreement. On December 31, the bond’s carrying amount was $520,000, and its pr esent value was $400,000. Disregarding income taxes, what amount of gain (loss) should Marcar report in its income statement for the year?

A. B. C. D.

$0 $90,000 $120,000 $150,000


Whetstone Co. took advantage of market conditions to refund debt. This refunding operation was the fourth carried out by Whetstone within the last 3 years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(n)

A. B. C. D.

Extraordinary gain, net of income taxes. Extraordinary loss, net of income taxes. Part of continuing operations. Deferred credit to be amortized over the life of the new debt.


Lowe Corp. had the following gains, net of applicable taxes, during the current year: Foreign currency transaction gain resulting from major devaluation Gain from ear ly extinguishment of Lowe’s debt

$175,000 250, 000

What amount should Lowe report as extraordinary gains in its income statement?

A. B. C. D.

$425,000 $250,000 $175,000 $0


Ray Finance, Inc. issued a 10-year, $100,000, 9% note on January 1, Year 1. The note was issued to yield 10% f or proceeds of $93,770. Interest is payable semiannually. The note is callable after 2 years at a price of $96,000. Due to a decline in the market rate to 8%, Ray retired the note on December 31, Year 3. On that date, the carrying amount of the note was $94,582, and the discounted amount of its cash flows based on the market rate was $105,280. What amount should Ray report as gain (loss) fr om retirement of the note for the year ended December 31, Year 3?

A. B. C. D.

$9,280 $4,000 $(2,230) $(1,418)


Page 23


[93] Gleim #: 12.5.93 -- Source: CPA 1192 I-47 On June 30, Year 7, King Co. had outstanding 9%, $5,000,000 fa ce value bonds maturing on June 30, Year 9. Interest was payable semiannually every June 30 and December 31. On June 30, Year 7, af ter amortization was recorded for the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, Year 7, what amount should King recognize as gain before income taxes on redemption of bonds?

A. B. C. D.

$20,000 $80,000 $120,000 $180,000


Verona Co. had $500,000 in current liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but bef ore the financial statements were issued. The proceeds from the stock issue w ere intended to be used to pay the current debt. What amount should Verona report as a current liability on its balance sheet at the end of the current year?

A. B. C. D.

$0 $100,000 $400,000 $500,000


On December 31, Year 4, Largo, Inc. had a $750,000 note payable outstanding due July 31, Year 5. Largo borrowed the money to finance construction of a new plant. Largo planned to ref inance the note by issuing noncurrent bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 5. In February Year 5, Largo completed a $1.5 million bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during Year 5. On March 3, Year 5, Largo issued its Year 4 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, Year 4, balance sheet?

A. B. C. D.

$750,000 $500,000 $250,000 $0


Cali, Inc. had a $4 million note payable due on March 15, Year 2. On January 28, Year 2, before the issuance of its Year 1 financial statements, Cali issued long-term bonds in the amount of $4.5 million. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, Year 1, financial statements?

A. B. C. D.

As a current liability, with separate disclosure of the note refinancing. As a current liability, with no separate disclosure required. As a noncurrent liability, with separate disclosure of the note refinancing. As a noncurrent liability, with no separate disclosure required.


Page 24


[97] Gleim #: 12.6.97 -- Source: CPA 591 I-35 Ames, Inc. has $1 million of notes payable due June 15, Year 2. At the f inancial statement date of December 31, Year 1, Ames signed an agreement to borrow up to $1 million to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Ames was providing. At the date of issue of the December 31, Year 1, financial statements, the value of the collateral was $1.2 million and was not expected to fall below this amount during Year 2. In its December 31, Year 1, balance sheet, Ames should classify the notes payable as

Short-term

Long-term

Obligations

Obligations

A.

$0

$1,000,000

B.

$40,000

$960,000

C.

$200,000

$800,000

D.

$1,000,000

$0


Included in Lee Corp.’s liability account balances at December 31, Year 4, were the following: 14% note payable issued October 1, Year 4, maturing September 30, Year 5 16% note payable issued April 1, Year 2, payable in six equal a nnual installments of $50,000 beginning April 1, Year 3

$125,000 200,000

Lee’s December 31, Year 4, financial statements were issued on March 31, Year 5. On January 15, Year 5, the entire $200,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, Year 5, Lee consummated a noncancelable agreement with the lender to refinance the 14%, $125,000 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, Year 4, balance sheet, the amount of the notes payable that Lee should classify as short-term obligations is

A. B. C. D.

$175,000 $125,000 $50,000 $0


On December 31, Year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, Year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, Year 2, the note was refinanced. How should Taylor report the note payable in its December 31, Year 1, balance sheet?

A. B. C. D.

A current liability. A long-term liability. A long-term note receivable. A current note receivable.


Page 25


[100] Gleim #: 12.6.100 -- Source: CPA 0407 FIN-28 On December 31, Year 1, Paxton Co. had a note payable due on August 1, Year 2. On January 20, Year 2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, Year 2, Paxton was informed by its financial advisor that the lender is not expected to be f inancially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, Year 2. How should Paxton classify the note on its balance sheet at December 31, Year 1?

A. B. C. D.

As a current liability because the financing agreement was signed after the balance sheet date. As a current liability because the lender is not expected to be f inancially capable of honoring the agreement. As a long-term liability because the agreement does not expire within one year. As a long-term liability because no violation of any provision in the financing agreement exists.


On December 31, Year 3, Matricula Corp. reported $100,000 in current liabilities. Matricula issued audited financial statements on March 31, Year 4. On February 15, Year 4, the company issued $80,000 of common stock, the proceeds of which were intended to pay the current debt. What amount of current liabilities should Matricula report in its December 31, Year 3 balance sheet prepared under IFRSs?

A. B. C. D.

$0 $20,000 $80,000 $100,000

[Fact Pattern #2] House Publishers offered a contest in which the winner would receive $1 million, payable over 20 years. On December 31, Year 4, House announced the winner of the contest and signed a note payable to the winner for $1 million, payable in $50,000 installments every January 2. Also on December 31, Year 4, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 5. [102] Gleim #: 12.7.102 -- Source: CPA 1194 F-22

(Refers to Fact Pattern #2) In its December 31, Year 4, balance sheet, at what amount should House measure the note payable, net of current portion?

A. B. C. D.

$368,250 $418,250 $900,000 $950,000


(Refers to Fact Pattern #2) In its Year 4 income statement, what should House report as contest prize expense?

A. B. C. D.

$0 $418,250 $468,250 $1,000,000


Page 26


[104] Gleim #: 12.7.104 -- Source: CPA 1193 I-27 On December 31, Year 4, Roth Co. issued a $10,000 note payable to Wake Co. in exchange for services rendered to Roth. The transaction was not in the normal course of business. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%, a rate that is unreasonable in the circumstances. The market interest rate is 8%, the prevailing rate for similar instruments of issuers with similar credit ratings. The compound interest factor of $1 due in 9 months at 8% is .944. At what a mount should the note payable be credited in Roth’s December 31, Year 4, balance sheet?

A. B. C. D.

$10,300 $10,000 $9,652 $9,440


On March 1, Year 3, Fine Co. borrowed $10,000 and signed a 2-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, Year 5. What amount should Fine report as a liability for accrued interest at December 31, Year 4?

A. B. C. D.

$0 $1,000 $1,200 $2,320


A company issued a current note payable with a stated 12% rate of interest to a bank. The ba nk charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction is

A. B. C. D.

Equal to 12.5%. More than 12.5%. Less than 12.5%. Independent of 12.5%.


The discount resulting from the determination of a note payable’s present value should be reported on the balance sheet as a(n)

A. B. C. D.

Addition to the face amount of the note. Deferred charge separate f rom the note. Deferred credit separate from the note. Direct deduction from the face a mount of the note.


Page 27


[108] Gleim #: 12.7.108 -- Source: CPA 590 I-29 On December 30, Bart, Inc. purchased a machine from Fell Corp. in exchange for a noninterest-bearing note requiring eight payments of $20,000. The first payment was made on December 30, and the other payments are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows:

Period

Present Value of Ordinary Annuity of 1 at 11%

Present Value of Annuity in Advance of 1 at 11%

7 8

4.712 5.146

5.231 5.712

On Bart’s December 31 ba lance sheet, the carrying amount of the note payable to Fell was

A. B. C. D.

$94,240 $102,920 $104,620 $114,240


On October 1, Year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, Year 1. Fleur’s Year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All a mounts due on the note were paid February 1, Year 2. Fleur’s Year 1 cost of goods sold for the holiday merchandise was

A. Overstated by the difference between the note’s fac e amount and the note’s October 1, Year 1, present value. B. Overstated by the difference between the note’s fac e amount and the note’s October 1, Year 1, present value plus 11% interest for 2 months. C. Understated by the difference between the note’s face amount and the note’s October 1, Year 1, present value. D. Understated by the difference between the note’s face amount and the note’s October 1, Year 1, present value plus 16% interest for 2 months. [110] Gleim #: 12.7.110 -- Source: CPA 0706 FIN-29

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what a mount should World report as interest expense?

A. B. C. D.

$0 $14,200 $22,500 $30,000


On August 1, Year 1, Vann Corp.’s $500,000 1-year, noninterest-bearing note due July 31, Year 2, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discount. What carrying amount should Vann report for notes payable in its December 31, Year 1, balance sheet?

A. B. C. D.

$500,000 $477,500 $468,500 $446,000


Page 28



Which of the following is reported as interest expense?

A. B. C. D.

Pension cost interest. Amortization of discount of a note. Deferred compensation plan interest. Interest incurred to finance a softwar e development for internal use.

[113] Gleim #: 12.8.113 -- Source: CPA FIN R02-9

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared with the carrying amount of the debt to determine whether the debtor should report a gain on restructuring?

A. B. C. D.

The total future ca sh payments. The present value of the debt at the original interest rate. The present value of the debt at the modified interest rate. The amount of future c ash payments designated as principal r epayments.


Ace Corp. entered into a tr oubled debt restructuring agreement with National Bank. National agreed to acc ept land with a ca rrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as extraordinary gain in its income statement?

A. B. C. D.

$0 $25,000 $50,000 $75,000


On December 30, Year 4, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro r ata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1.2 million. Hale’s common stock was trading at $1.25 per share on December 30, Year 4. As a result of this transaction, Hale’s total equity had a net increase of

A. B. C. D.

$1,200,000 $800,000 $100,000 $80,000


Under IFRSs, an entity most likely may derecognize a f inancial liability if it

A. B. C. D.

Transfers amounts to a trust to be used to repay the obligation. Exchanges debt instruments with the lender that have substantially similar terms. Exchanges debt instruments with the lender that have substantially different terms. Transfers amounts in a transaction that meets the requirements of an in-substance defeasance.


Page 29


[117] Gleim #: 12.8.117 -- Source: Publisher, adapted Debtor owes Bank on a 10-year, 15% note in the amount of $100,000, plus $30,000 accrued interest. Because of f inancial difficulty, Debtor has been unable to make annual interest payments for the past 2 years, a nd the note is now due. Accordingly, Bank legally agreed to restructure Debtor’s debt as f ollows:

The $30,000 of accrued interest was forgiven. Debtor was given 3 more years to pay off the debt at 8% interest. Payments are to be made annually at year-end. The present value of the payments using the prevailing rate for similar instruments of an issuer with a similar credit rating is $84,018. Under IFRSs, what does Debtor record a t the date of the restructuring?

A. B. C. D.

A loss of $30,000. A gain of $30,000. A gain of $45,982. No gain or loss because no extinguishment occurred.


When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment? I. The loan’s observable market price. II. The fair value of the collateral if the loan is collateral dependent.

A. B. C. D.

I only. II only. Either I or II. Neither I nor II.


During Year 2, Colt Company experienced financial difficulties and is likely to default on a $500,000, 15%, 3-year note dated January 1, Year 1, and made payable to Cain National Bank. On December 31, Year 2, the bank agreed to settle the note and unpaid Year 2 interest of $75,000. The settlement amount is $410,000 c ash payable on January 31, Year 3. What amount should Colt report as a gain from the debt restructuring in its Year 2 income statement?

A. B. C. D.

$165,000 $90,000 $75,000 $0

[Fact Pattern #3] Knob Co. transferred real estate pursuant to a troubled debt restructuring to Mene Corp. in full liquidation of Knob’s liability to Mene.

Carrying amount of liability liquidated Carrying amount of real estate transferred Fair value of real estate transferred

$150,000 100,000 90,000


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[120] Gleim #: 12.8.120 -- Source: CPA 1193 I-57 (Refers to Fact Pattern #3) What amount should Knob report as a gain (loss) on restructuring of payables?

A. B. C. D.

($10,000) $0 $50,000 $60,000


(Refers to Fact Pattern #3) What amount should Knob report as ordinary gain (loss) on tr ansfer of real estate?

A. B. C. D.

($10,000) $0 $50,000 $60,000


E&S Partnership purchased land for $500,000 on May 1, Year 1, paying $100,000 cash and giving a $400,000 note payable to Big State Bank. E&S made three annual payments on the note totaling $179,000, which included interest of $89,000. E&S then defaulted on the note. Title to the land was transferr ed by E&S to Big State, which c anceled the note, releasing the partnership from further liability. At the time of the default, the f air value of the land approximated the note balance. In E&S’s Year 4 income statement, the amount of the loss should be

A. B. C. D.

$279,000 $221,000 $190,000 $100,000


Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the cr editor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?

A. B. C. D.

$0 $3,000 $25,000 $28,000


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[124] Gleim #: 12.8.124 -- Source: Publisher, adapted The guidance for accounting by creditors for impairment of a loan requires recognition of an impairment when it is probable that a creditor will be unable to c ollect

Contractual

Contractual

Principal Payments

Interest Payments

A.

Yes

No

B.

Yes

Yes

C.

No

Yes

D.

No

No


Casey Corp. entered into a troubled debt restructuring agreement with First State Bank. First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000. Disregarding income taxes, what amount should Casey report as extraordinary gain in its income statement?

A. B. C. D.

$0 $35,000 $65,000 $100,000


The guidance for asset retirement obligations prescribes the accounting for obligations related to the retirement of long-lived tangible assets. A liability for an asset retirement obligation (ARO) within the scope of this guidance may arise solely from

A. B. C. D.

A plan to sell a long-lived asset. The improper operation of a long-lived asset. The temporary idling of a long-lived asset. The acquisition, construction, development, or normal operation of a long-lived asset.


An entity is most likely to account for an asset retirement obligation (ARO) by

A. B. C. D.

Recognizing the fair value of the liability using an expected present value technique. Recognizing a liability equal to the sum of the net undiscounted future cash f lows associated with the ARO. Decreasing the carrying amount of the related long-lived asset. Decreasing the liability for the ARO to reflect the accretion expense.


A business entity acquired a tangible long-lived asset with an asset retirement obligation (ARO) and included asset retirement cost (ARC) in the asset’s carrying amount. The entity also recorded a liability for the ARO on the acquisition date. Subsequently, the entity should

A. B. C. D.

Test the ARC for impairment but not amortize it. Test the tangible long-lived asset for impairment and exclude ARC from the carrying amount for this purpose. Recognize accretion expense before the periodic change in the ARO due to revised estimates of cash flows. Discount upward revisions of the undiscounted estimated cash flows relating to the ARO by using the original credit-adjusted riskfree rate.


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A business entity acquired a long-lived tangible asset on January 1, Year 4. On that date, it recorded a liability for an asset retirement obligation (ARO) and capitalized asset retirement cost (ARC). The estimated useful life of the long-lived tangible asset is 5 years, the credit-adjusted risk-free (CARF) rate used for initial measurement of the ARO is 10%, the initial fair value of the ARO liability based on an expected present value calculation is $250,000, and no changes occur in the undiscounted estimated cash flows used to calculate that fair value. If the entity settles the ARO on December 31, Year 8, for $420,000, what is the settlement gain or loss (rounded)?

A. B. C. D.

$(17,372) $25,000 $(152,628) $(170,000)


On January 1, 10 years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depot’s useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the tenth year is $155,000. What amount of loss should Andrew recognize in its financial statements in Year 10?

A. B. C. D.

None. $5,000 $150,000 $155,000


Transpone Co. is obligated on a note payable to one of its suppliers. The discounted present value of the remaining cash flows of this liability is $2,800. Transpone has informed the supplier of its intent to def ault on the note. After negotiations, the supplier has agreed to new terms under which the discounted present value of the cash flows will be $2,600. What amount should Transpone report for gain on extinguishment of debt in its income statement for the year prepared under IFRSs?

A. B. C. D.

$0 $200 $2,800 $4,000

[Fact Pattern #4] Employer plans to close a plant in 18 months. All of the employees of the plant will be terminated at the time of closing. Because of its need to retain employees until closing, Employer defines a one-time benefit a rrangement in a plan of termination that meets the criteria established by GAAP, including communication to employees. Under the plan, each employee who provides services for the entire 18-month period will receive a bonus of $5,000 payable 6 months after termination. An employee who leaves voluntarily prior to closing will receive no part of the bonus. The expected value of the cash outflow for this one-time termination benefit is $2,000,000. Employer’s credit-adjusted risk-free ( CARF) rate is 3% semiannually. Potentially relevant interest fa ctors for the present value of $1 include the following:

3% for 1 period 2 periods 3 periods 4 periods

.971 .943 .915 .888


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[132] Gleim #: 12.10.132 -- Source: Publisher, adapted (Refers to Fact Pattern #4) What is the a mount of the liability recognized by Employer in the first month of the future service period?

A. B. C. D.

$98,667 $107,889 $1,776,000 $1,942,000


(Refers to Fact Pattern #4) Assume that, after 6 months, Employer revises its expected value of the cash outflow for the bonus to $1,600,000 because fewer employees are likely to remain for the full service period. What is the amount of the cumulative-effect change, if any, required to reflect this revised estimate?

A. B. C. D.

$86,311 $129,467 $517,867 $647,334


(Refers to Fact Pattern #4) Employer plans to restructure operations at one of its plants and will therefore terminate 80 employees at that location. Employer communicates its plan on June 1, Year 4. The plan to provide one-time termination benefits meets the criteria established by GAAP. Each employee who voluntarily leaves within 21 days will receive $8,500 in 30 days. These payments were duly made July 21, Year 4. Eac h employee who is involuntarily terminated subsequently will receive $5,500. However, the payments for voluntary and involuntary termination benefits will not be made to more than 80 employees in total. Moreover, Employer estimates that it will reac h its employee separation target within the 60-day minimum retention period. In its balance sheet dated J une 30, Year 4, assuming that 20 employees accept the off er for voluntary termination, Employer should report a liability for termination benefits of

A. B. C. D.

$60,000 $440,000 $500,000 $680,000


Grand Corporation has decided to close its plant in Littleville. Accordingly, it will terminate the 50 employees who work at the plant. Grand gives the employees 60 days’ notice on March 1 that it will close the plant on April 30. It will pay each employee $3,000 at the time (s)he stops providing services during the retention period. This one-time benefit arrangement is defined in a plan of termination that meets the criteria established by GAAP, including communication to employees. Grand should account for the one-time termination benefits by recognizing a liability

A. B. C. D.

At the communication date at either fair value on that date or $150,000. At the termination date for $150,000. At the communication date at fair value on the termination date. Ratably over the future service period.


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Bonds

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