21.An example of an item which is not a liability is dividends payable in stock. 22. 22.
The The coven covenant ants s and other other terms terms of the agree agreeme ment nt betwe between en the issu issuer er of bonds bonds and the lender are set forth in the bond indenture.
23.
The term term used used for for bonds bonds that that are are unsec unsecure ured d as to to princ principa ipall is debenture bonds.
P
onds for which the owners! names are not regist registere ered d with with the issuing issuing corporation are called bearer bonds.
"
onds that pay no interes interestt unless unless the issuing issuing company company is profita profitable ble are called called income bonds. %f bonds bonds are issue issued d init initia ially lly at a prem premiu ium m and and the effec effecti tive ve&i &int nter eres estt method method of amorti'ation is used( interest expense in the earlier ear lier years will be greater than if the straight-line method were used.
24.
2#.
"
2$. 2$.
2).
The inte interes restt rate rate writte written n in the term terms s of the the bond inden indentur ture e is *nown *nown as as the coupon rate, nominal rate, or stated rate.
2+.
The rate rate of of intere interest st actu actuall ally y earned earned by by bondho bondholde lders rs is call called ed the the effective, yield, or market rate.
,se the following information for -uestions 2 and 3/0 ox o. issued 1//(/// of ten&year( 1/ bonds that pay interest semiannually. The bonds are sold to yield +. 2.
5ne step step in calcu calculat lating ing the the issue issue price price of the the bonds bonds is to multip multiply ly the the princip principal al by the table value for 20 periods and 4% from the present value of 1 table.
31.
6eich( 6eich( %nc. %nc. issu issued ed bonds bonds with with a maturi maturity ty amoun amountt of 2//(/ 2//(/// // and a matur maturity ity ten ten years from date of issue. %f the bonds were issued at a premium( this indicates that the nominal rate of interest eceeded the market rate.
32. 32.
%f bond bonds s are are ini initial tially ly sol sold at a dis discoun countt and and the the strai traigh ght& t&li line ne method thod of amorti'ation is used( interest expense in the earlier ear lier years will eceed eceed what what it wou would ld have have been been had the effecti effectiveve-in inter terest est method method of amorti!ation been used.
33.
,nder ,nder the effec effectiv tive&i e&inte nteres restt method method of bond bond discoun discountt or premium premium amort amorti'a i'atio tion( n( the periodic interest expense is e-ual to the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34.
7hen the effective&interest method is used to amorti'e bond premium or discount( the periodic amorti'ation will increase if the bonds were issued at either a discount or a premium.
3#.
%f bonds are issued between interest dates( the entry on the boo*s of the issuing corporation could include a credit to "nterest #pense.
3$.
7hen the interest payment dates of a bond are 8ay 1 and 9ovember 1( and a bond issue is sold on :une 1( the amount of cash received by the issuer will be increased by accrued interest from $ay 1 to une 1.
3).
Theoretically( the costs of issuing bonds could be epensed when incurred. reported as a reduction of the bond liability. debited to a deferred charge account and amorti!ed over the life of the bonds.
3+.
The printing costs and legal fees associated with the issuance of bonds should be accumulated in a deferred charge account and amorti!ed over the life of the bonds.
3.
Treasury bonds should be shown on the balance sheet as a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
4/.
An early extinguishment of bonds payable( which were originally issued at a premium( is made by purchase of the bonds between interest dates. At the time of reac-uisition any costs of issuing the bonds must be amorti!ed up to the purchase date. the premium must be amorti!ed up to the purchase date. interest must be accrued from the last interest date to the purchase date.
41.
The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a difference between the reac&uisition price and the net carrying amount of the debt which should be recogni!ed in the period of redemption.
P
;%n&substance defeasance; is a term used to refer to an arrangement whereby a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
P
A corporation borrowed money from a ban* to build a building. The long&term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the ban* +/(/// each year for 1/ years to repay the loan. 7hich of the following relationships can you expect to apply to the situation< 'he amount of interest epense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
42.
43.
"
44.
A debt instrument with no ready mar*et is exchanged for property whose fair mar*et value is currently indeterminable. 7hen such a transaction ta*es place the present value of the debt instrument must be approimated using an imputed interest rate.
4#.
7hen a note payable is issued for property( goods( or services( the present value of the note is measured by the fair value of the property, goods, or services. the market value of the note. using an imputed interest rate to discount all future payments on the note.
4$.
7hen a note payable is exchanged for property( goods( or services( the stated interest rate is presumed to be fair unless no interest rate is stated. the stated interest rate is unreasonable. the stated face amount of the note is materially different from the current cash sales price for similar items or from current market value of the note.
4).
=iscount on 9otes Payable is charged to interest expense using the effective-interest method.
4+.
7hich of the following is an example of ;off&balance&sheet financing;< 1. 9on&consolidated subsidiary. 2. "pecial purpose entity. 3. 5perating leases. (ll of these are eamples of )off-balance-sheet financing.)
"
7hen a business enterprise enters into what is referred to as off&balance&sheet financing( the company can enhance the &uality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
"
#/.
>ong&term debt that matures within one year and is to be converted into stoc* should be reported as noncurrent and accompanied with a note eplaining the method to be used in its li&uidation.
#1.
7hich of the following must be disclosed relative to long&term debt maturities and sin*ing fund re-uirements< 'he amount of future payments for sinking fund re&uirements and longterm debt maturities during each of the net five years.
#2.
9ote disclosures for long&term debt generally include all of the following except names of specific creditors.
#3.
The times interest earned ratio is computed by dividing income before income taes and interest epense by interest epense.
#4.
The debt to total assets ratio is computed by dividing total liabilities by total assets.
4.
?##.
%n a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows( a new effective-interest rate must be computed.
?#$.
A troubled debt restructuring will generally result in a gain by the debtor and a loss by the creditor.
?#).
%n a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair mar*et value less than the carrying amount of the debt( the debtor would recogni'e a gain on the settlement.
?#+.
%n a troubled debt restructuring in which the debt is continued with modified terms( a gain should be recogni'ed at the date of restructure( but no interest expense should be recogni'ed over the remaining life of the debt( whenever the carrying amount of the pre-restructure debt is greater than the total future cash flows.
?#.
%n a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows( the creditor should calculate its loss using the historical effective rate of the loan.
,se the following information for -uestions $/ through $20 5n :anuary 1( 2/1/( @llison o. issued eight&year bonds with a face value of 1(///(/// and a stated interest rate of $( payable semiannually on :une 3/ and =ecember 31. The bonds were sold to yield +. Table values are0 Present value of 1 for + periods at $.......................................... Present value of 1 for + periods at +.......................................... Present value of 1 for 1$ periods at 3........................................ Present value of 1 for 1$ periods at 4........................................ Present value of annuity for + periods at $................................ Present value of annuity for + periods at +................................ Present value of annuity for 1$ periods at 3.............................. Present value of annuity for 1$ periods at 4.............................. $/.
The present value of the principal is *+4,000. 1(///(/// .#34 B #34(///
$1.
The present value of the interest is *4,+0. C1(///(/// ./3D 11.$#2 B 34(#$/
$2.
The issue price of the bonds is *//,+0. #34(/// E 34(#$/ B ++3(#$/
.$2) .#4/ .$23 .#34 $.21/ #.)4) 12.#$1 11.$#2
$3. =owning ompany issues #(///(///( $( #&year bonds dated :anuary 1( 2/1/ on :anuary 1( 2/1/. The bonds pay interest semiannually on :une 3/ and =ecember 31. The bonds are issued to yield #. 7hat are the proceeds from the bond issue< Present value of a single sum for # periods Present value of a single sum for 1/ periods Present value of an annuity for # periods
2.# .++3+# .)+12/ 4.$4#+3
3./ .+$2$1 .)44/ 4.#))1
#./ .)+3#3 .$131 4.324+
Present value of an annuity for 1/ periods
+.)#2/$
+.#3/2/
).)21)3
$./ .)4)2$ .##+3 4.2123 $ ).3$//
*+,21/,/0 C#(///(/// .)+12/D E C1#/(/// +.)#2/$D B #(21+(+/
$4. eller ompany issues 2/(///(/// of 1/&year( bonds on 8arch 1( 2/1/ at ) plus accrued interest. The bonds are dated :anuary 1( 2/1/( and pay interest on :une 3/ and =ecember 31. 7hat is the total cash received on the issue date< *1,00,000 C2/(///(/// .)D E C1(+//(/// 2F12D B 1()//(/// $#.@verhart ompany issues 1/(///(///( $( #&year bonds dated :anuary 1( 2/1/ on :anuary 1( 2/1/. The bonds pays interest semiannually on :une 3/ and =ecember 31. The bonds are issued to yield #. 7hat are the proceeds from the bond issue< Present value of a single sum for # periods Present value of a single sum for 1/ periods Present value of an annuity for # periods
2.# .++3+# .)+12/ 4.$4#+3
3./ .+$2$1 .)44/ 4.#))1
#./ .)+3#3 .$131 4.324+
Present value of an annuity for 1/ periods
+.)#2/$
+.#3/2/
).)21)3
$./ .)4)2$ .##+3 4.2123 $ ).3$//
*10,4,1/ C1/(///(/// .)+12/D E C3//(/// +.)#2/$D B 1/(43)($1+
$$.
armer ompany issues 1/(///(/// of 1/&year( bonds on 8arch 1( 2/1/ at ) plus accrued interest. The bonds are dated :anuary 1( 2/1/( and pay interest on :une 3/ and =ecember 31. 7hat is the total cash received on the issue date< *,/+0,000 C1/(///(/// .)D E C//(/// 2F12D B (+#/(///
$).
A company issues 2/(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 1($/4(14#. ,sing effective&interest amorti'ation( how much interest expense will be recogni'ed in 2/1/< *1,+/,4/ C1($/4(14# ./4D E C1($/+(31/ ./4D B 1(#$+(4+
$+.
A company issues 2/(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 1($/4(14#. ,sing effective&interest amorti'ation( what will the carrying value of the bonds be on the =ecember 31( 2/1/ balance sheet< *1,12,4 1($/4(14# E GC1($/4(14# ./4D H )+/(///IE G1($/+(31/ ./4D H )+/(///I B 1($12($43.
$.
A company issues 2/(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2//. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 1($/4(14#. ,sing straight&line amorti'ation( what is the carrying value of the bonds on =ecember 31( 2/11< *1,,+2 1($/4(14# E C3#(+## 3F2/D B 1($$3(#23
)/.
A company issues 2/(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 1($/4(14#. 7hat is interest expense for 2/11( using straight&line amorti'ation< *1,+, C2/(///(/// ./)+D E C3#(+## J 2/D B 1(#)()3
)1.
A company issues #(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 4(/1(/3$. ,sing effective&interest amorti'ation( how much interest expense will be recogni'ed in 2/1/< *2,124 C4(/1(/3$ ./4D E C4(/2(/)) ./4D B 32(124
)2.
A company issues #(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 4(/1(/3$. ,sing effective&interest amorti'ation( what will the carrying value of the bonds be on the =ecember 31( 2/1/ balance sheet< *4,0,10 4(/1(/3$ E GC4(/1(/3$ ./4D H 1#(///I E GC4(/2(/)) ./4D H 1#(///I B 4(/3(1$/ )3.
A company issues #(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2//. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 4(/1(/3$. ,sing straight&line amorti'ation( what is the carrying value of the bonds on =ecember 31( 2/11< *4,1+,//1 4(/1(/3$ E C+($4 3F2/D B 4(1#(++1
)4.
A company issues #(///(///( ).+( 2/&year bonds to yield + on :anuary 1( 2/1/. %nterest is paid on :une 3/ and =ecember 31. The proceeds from the bonds are 4(/1(/3$. 7hat is interest expense for 2/11( using straight&line amorti'ation<
*4,4/ C#(///(/// ./)+D E C+($4 J 2/D B 34(4+
)#.
5n :anuary 1( 2/1/( Kuber o. sold 12 bonds with a face value of $//(///. The bonds mature in five years( and interest is paid semiannually on :une 3/ and =ecember 31. The bonds were sold for $4$(2// to yield 1/. ,sing the effective&interest method of amorti'ation( interest expense for 2/1/ is *4,4. $4$(2// ./# B 32(31/ G$4$(2// H C3$(/// H 32(31/DI ./# B 32(12$ $4(43$
)$.
5n :anuary 2( 2/1/( a calendar&year corporation sold + bonds with a face value of $//(///. These bonds mature in five years( and interest is paid semiannually on :une 3/ and =ecember 31. The bonds were sold for ##3($// to yield 1/. ,sing the effective&interest method of computing interest( how much should be charged to interest expense in 2/1/< *++,+44. ##3($// ./# B 2)($+/ G##3($// E C2)($+/ H 24(///DI ./# B 2)(+$4 ##(#44
'he following information applies to both &uestions and /. 5n 5ctober 1( 2/1/ 8ac*lin orporation issued #( 1/&year bonds with a face value of 1(///(/// at 1/4. %nterest is paid on 5ctober 1 and April 1( with any premiums or discounts amorti'ed on a straight&line basis.
)).
The entry to record the issuance of the bonds would include a credit of *40,000 to remium on onds ayable. C1(///(/// 1./4D H 1(///(/// B 4/(/// premium
)+.
ond interest expense reported on the =ecember 31( 2/1/ income statement of 8ac*lin orporation would be *11,+00 GC1(///(/// ./#D 3F12I H GC4/(/// J 1/D 3F12I B 11(#//
'he following information applies to both &uestions and /0. 5n 5ctober 1( 2/1/ artley orporation issued #( 1/&year bonds with a face value of #//(/// at 1/4. %nterest is paid on 5ctober 1 and April 1( with any premiums or discounts amorti'ed on a straight&line basis.
).
The entry to record the issuance of the bonds would include a credit of *20,000 to remium on onds ayable. C#//(/// 1./4D H #//(/// B 2/(/// premium
+/.
ond interest expense reported on the =ecember 31( 2/1/ income statement of artley orporation would be *+,+0 GC#//(/// ./#D 3F12I H GC2/(/// J 1/D 3F12I B #()#/
+1.
At the beginning of 2/1/( 7allace orporation issued 1/ bonds with a face value of //(///. These bonds mature in the five years( and interest is paid semiannually on :une 3/ and =ecember 31. The bonds were sold for +33()$/ to yield 12. 7allace uses a calendar&year reporting period. ,sing the effective& interest method of amorti'ation( what amount of interest expense should be reported for 2/1/< C6ound your answer to the nearest dollar.D *100,+ C+33()$/ ./$D B #/(/2$L G#/(/2$ H C//(/// ./#DI B #(/2$ C+33()$/ E #(/2$D ./$ B #/(32) #/(/2$ E #/(32) B 1//(3#3
+2.
5n :anuary 1( Patterson %nc. issued #(///(///( bonds for 4($#(///. The mar*et rate of interest for these bonds is 1/. %nterest is payable annually on =ecember 31. Patterson uses the effective&interest method of amorti'ing bond discount. At the end of the first year( Patterson should report unamorti'ed bond discount of *2/+,+00. C4($#(/// .1/D H C#(///(/// ./D B 1(#// C#(///(/// H 4($#(///D H 1(#// B 2+#(#//
+3.
5n :anuary 1( 8artine' %nc. issued 3(///(///( 11 bonds for 3(1#(///. The mar*et rate of interest for these bonds is 1/. %nterest is payable annually on =ecember 31. 8artine' uses the effective&interest method of amorti'ing bond premium. At the end of the first year( 8artine' should report unamorti'ed bond premium of0 *1/4,+00 C3(///(/// .11D H C3(1#(/// .1/D B 1/(#// C3(1#(/// H 3(///(///D H 1/(#// B 1+4(#//
+4.
At the beginning of 2/1/( 7inston orporation issued 1/ bonds with a face value of $//(///. These bonds mature in five years( and interest is paid semiannually on :une 3/ and =ecember 31. The bonds were sold for ###(+4/ to yield 12. 7inston uses a calendar&year reporting period. ,sing the effective& interest method of amorti'ation( what amount of interest expense should be reported for 2/1/< C6ound your answer to the nearest dollar.D *,01 C###(+4/ ./$D B 33(3#/L G33(3#/ H C$//(/// ./#DI B 3(3#/ C###(+4/ E 3(3#/D ./$ B 33(##1 33(3#/ E 33(##1 B $$(/1
+#.
Mant orporation retires its 1//(/// face value bonds at 1/2 on :anuary 1( following the payment of interest. The carrying value of the bonds at the redemption date is $(2#/. The entry to record the redemption will include a credit of *,+0 to 3iscount on onds ayable. 1//(/// H $(2#/ B 3()#/ discount
+$.
+).
arr orporation retires its 1//(/// face value bonds at 1/# on :anuary 1( following the payment of interest. The carrying value of the bonds at the redemption date is 1/3()4#. The entry to record the redemption will include a debit of *,4+ to remium on onds ayable. 1/3()4# H 1//(/// B 3()4# premium. At =ecember 31( 2/1/ the following balances existed on the boo*s of oxworth orporation0 onds Payable 2(///(/// =iscount on onds Payable 1$/(/// %nterest Payable #/(/// ,namorti'ed ond %ssue osts 12/(/// %f the bonds are retired on :anuary 1( 2/11( at 1/2( what will oxworth report as a loss on redemption< *20,000 C2(///(/// 1./2D H C2(///(/// H 1$/(/// H 12/(///D B 32/(///
++.
At =ecember 31( 2/1/ the following balances existed on the boo*s of 6entro orporation0 onds Payable 1(#//(/// =iscount on onds Payable 12/(/// %nterest Payable 3)(/// ,namorti'ed ond %ssue osts /(/// %f the bonds are retired on :anuary 1( 2/11( at 1/2( what will 6entro report as a loss on redemption< *240,000 C1(#//(/// 1./2D H C1(#//(/// H 12/(/// H /(///D B 24/(///
+.
The =ecember 31( 2/1/( balance sheet of Kess orporation includes the following items0 bonds payable due =ecember 31( 2/1 ,namorti'ed premium on bonds payable
1(///(/// 2)(///
The bonds were issued on =ecember 31( 2//( at 1/3( with interest payable on :uly 1 and =ecember 31 of each year. Kess uses straight&line amorti'ation. 5n 8arch 1( 2/11( Kess retired 4//(/// of these bonds at + plus accrued interest. 7hat should Kess record as a gain on retirement of these bonds< %gnore taxes. *1/,00.
327( 000 2 1 027 000 3 ( ( − 18 × 6÷
× .4 B 41/($// CN of retired bondsD
41/($// H C4//(/// .+D B 1+($//. /.
5n :anuary 1( 2//4( Kernande' orporation issued 4(#//(/// of 1/ ten&year bonds at 1/3. The bonds are callable at the option of Kernande' at 1/#. Kernande' has recorded amorti'ation of the bond premium on the straight&line method Cwhich was not materially different from the effective&interest methodD.
5n =ecember 31( 2/1/( when the fair mar*et value of the bonds was $( Kernande' repurchased 1(///(/// of the bonds in the open mar*et at $. Kernande' has recorded interest and amorti'ation for 2/1/. %gnoring income taxes and assuming that the gain is material( Kernande' should report this reac-uisition as a gain of *4,000.
13#(/// × ) × 2F 4(500(000 x1./3 − ÷ 1/ B 1(//(/// CN of retired bondsD 1(//(/// H C1(///(/// × .$D B 4(///.
1.
The 1/ bonds payable of 9ixon ompany had a net carrying amount of #)/(/// on =ecember 31( 2/1/. The bonds( which had a face value of $//(///( were issued at a discount to yield 12. The amorti'ation of the bond discount was recorded under the effective&interest method. %nterest was paid on :anuary 1 and :uly 1 of each year. 5n :uly 2( 2/11( several years before their maturity( 9ixon retired the bonds at 1/2. The interest payment on :uly 1( 2/11 was made as scheduled. 7hat is the loss that 9ixon should record on the early retirement of the bonds on :uly 2( 2/11< %gnore taxes. *,/00. #)/(/// E GC#)/(/// ./$D H C$//(/// ./#DI B #)4(2// CN of bondsD #)4(2// H C$//(/// 1./2D B 3)(+//.
2.
A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamorti'ed discount of 3//(///. To extinguish this debt( the company had to pay a call premium of 1//(///. Ignoring income tax considerations( how should these amounts be treated for accounting purposes< harge *400,000 to a loss in the year of etinguishment. 3//(/// E 1//(/// B 4//(///
3.
The 12 bonds payable of 9yman o. had a carrying amount of +32(/// on =ecember 31( 2/1/. The bonds( which had a face value of +//(///( were issued at a premium to yield 1/. 9yman uses the effective&interest method of amorti'ation. %nterest is paid on :une 3/ and =ecember 31. 5n :une 3/( 2/11( several years before their maturity( 9yman retired the bonds at 1/4 plus accrued interest. The loss on retirement( ignoring taxes( is *,400. +32(/// H GC+//(/// ./$D H C+32(/// ./#DI B +2#($// CN of bondsD C+//(/// 1./4D H +2#($// B $(4//
4.
=idde ompany issues 1/(///(/// face value of bonds at $ on :anuary 1( 2//. The bonds are dated :anuary 1( 2//( pay interest semiannually at + on :une 3/ and =ecember 31( and mature in 1/ years. "traight&line amorti'ation is used for discounts and premiums. 5n "eptember 1( 2/12( $(///(/// of the bonds are called at 1/2 plus accrued interest. 7hat gain or loss would be recogni'ed on the called bonds on "eptember 1( 2/12< *22,000 loss O($//(/// E G4//(/// C3 2F3 J 1/DI .$/ B #(+4+(///
$(12/(/// H #(+4+(/// B 2)2(///.
#.
orte' ompany issues #(///(/// face value of bonds at $ on :anuary 1( 2//. The bonds are dated :anuary 1( 2//( pay interest semiannually at + on :une 3/ and =ecember 31( and mature in 1/ years. "traight&line amorti'ation is used for discounts and premiums. 5n "eptember 1( 2/12( 3(///(/// of the bonds are called at 1/2 plus accrued interest. 7hat gain or loss would be recogni'ed on the called bonds on "eptember 1( 2/12< *1,000 loss O4(+//(/// E G2//(/// C3 2F3 J 1/DI .$/ B 2(24(/// 3(/$/(/// H 2(24(/// B 13$(///
$.
5n :anuary 1( 2/1/( Ann Price loaned 4#(/)+ to :oe Miger. A 'ero&interest& bearing note Cface amount( $/(///D was exchanged solely for cashL no other rights or privileges were exchanged. The note is to be repaid on =ecember 31( 2/12. The prevailing rate of interest for a loan of this type is 1/. The present value of $/(/// at 1/ for three years is 4#(/)+. 7hat amount of interest income should 8s. Price recogni'e in 2/1/< *4,+0/. 4#(/)+ .1/ B 4(#/+
).
5n :anuary 1( 2/1/( :acobs ompany sold property to =ains ompany which originally cost :acobs )$/(///. There was no established exchange price for this property. =anis gave :acobs a 1(2//(/// 'ero&interest&bearing note payable in three e-ual annual installments of 4//(/// with the first payment due =ecember 31( 2/1/. The note has no ready mar*et. The prevailing rate of interest for a note of this type is 1/. The present value of a 1(2//(/// note payable in three e-ual annual installments of 4//(/// at a 1/ rate of interest is 4(+//. 7hat is the amount of interest income that should be recogni'ed by :acobs in 2/1/( using the effective&interest method< *,4/0. 4(+// .1/ B (4+/
+.
5n :anuary 1( 2/1/( rown ompany sold property to >eary ompany. There was no established exchange price for the property( and >eary gave rown a 2(///(/// 'ero&interest&bearing note payable in # e-ual annual installments of 4//(///( with the first payment due =ecember 31( 2/1/. The prevailing rate of interest for a note of this type is . The present value of the note at was 1(442(/// at :anuary 1( 2/1/. 7hat should be the balance of the =iscount on 9otes Payable account on the boo*s of >eary at =ecember 31( 2/1/ after adQusting entries are made( assuming that the effective&interest method is used< *42/,220 2(///(/// H 1(442(/// H C1(442(/// ./D B 42+(22/
.
Putnam ompanyRs 2/1/ financial statements contain the following selected data0 %ncome taxes %nterest expense 9et income
4/(/// 2/(/// $/(///
PutnamRs times interest earned for 2/1/ is times. $/(/// E 4/(/// E 2/(/// SSSSSSSSSSSSS B $ times. 2/(/// 1//.
%n the recent year Kill orporation had net income of 14/(///( interest expense of 4/(///( and tax expense of 2/(///. 7hat was Kill orporation!s times interest earned ratio for the year< +.0 C14/(/// E 4/(/// E 2/(///D J 4/(/// B #./
1/1.
%n recent year ey orporation had net income of 2#/(///( interest expense of #/(///( and a times interest earned ratio of . 7hat was ey orporation!s income before taxes for the year< *400,000 C2#/(/// E #/(/// E D J #/(/// B C3//(/// E D B #/(/// B 1#/(///L %T B 4//(/// C2#/(/// E 1#/(///
1/2.
The adQusted trial balance for >ifesaver orp. at the end of the current year( 2/1/( contained the following accounts. #&year onds Payable + 1(#//(/// ond %nterest Payable #/(/// Premium on onds Payable 1//(/// 9otes Payable C3 mo.D 4/(/// 9otes Payable C# yr.D 1$#(/// 8ortgage Payable C1#(/// due currentlyD 2//(/// "alaries Payable 1+(/// Taxes Payable Cdue 3F1# of 2/11D 2#(/// The total long&term liabilities reported on the balance sheet are *1,+0,000. 1(#//(/// E 1//(/// E 1$#(/// E C2//(/// H 1#(///D B 1(#/(///
,se the following information for -uestions ?1/3 through ?1/#0
5n =ecember 31( 2//+( 9olte o. is in financial difficulty and cannot pay a note due that day. %t is a $//(/// note with $/(/// accrued interest payable to Piper( %nc. Piper agrees to accept from 9olte e-uipment that has a fair value of 2/(///( an original cost of 4+/(///( and accumulated depreciation of 23/(///. Piper also forgives the accrued interest( extends the maturity date to =ecember 31( 2/11( reduces the face amount of the note to 2#/(///( and reduces the interest rate to $( with interest payable at the end of each year. ?1/3. 9olte should recogni'e a gain or loss on the transfer of the e-uipment of *40,000 gain. 2/(/// H C4+/(/// H 23/(///D B 4/(/// ?1/4. 9olte should recogni'e a gain on the partial settlement and restructure of the debt of *+,000. C$//(/// E $/(///D H G2/(/// E 2#/(/// E C2#/(/// ./$ 3DI B )#(///. ?1/#. 9olte should record interest expense for 2/11 of *0. /. The effective&interest rate is / 1/$.
5n :uly 1( 2/1/( "pear o. issued 1(/// of its 1/( 1(/// bonds at plus accrued interest. The bonds are dated April 1( 2/1/ and mature on April 1( 2/2/. %nterest is payable semiannually on April 1 and 5ctober 1. 7hat amount did "pear receive from the bond issuance< *1,01+,000 C1(///(/// .D E C1(///(/// .1/ 3F12D B 1(/1#(///
1/).
5n :anuary 1( 2/1/( "olis o. issued its 1/ bonds in the face amount of 3(///(///( which mature on :anuary 1( 2/2/. The bonds were issued for 3(4/#(/// to yield +( resulting in bond premium of 4/#(///. "olis uses the effective&interest method of amorti'ing bond premium. %nterest is payable annually on =ecember 31. At =ecember 31( 2/1/( "olis!s adQusted unamorti'ed bond premium should be *,400. 4/#(/// H GC3(///(/// .1/D H C3(4/#(/// ./+DI B 3))(4//
1/+.
5n :uly 1( 2//( 9oble( %nc. issued bonds in the face amount of #(///(///( which mature on :uly 1( 2/1#. The bonds were issued for 4($#(/// to yield 1/( resulting in a bond discount of 3/#(///. 9oble uses the effective&interest method of amorti'ing bond discount. %nterest is payable annually on :une 3/. At :une 3/( 2/11( 9oble!s unamorti'ed bond discount should be *24,0+0. 2//H2/1/04($#(/// E GC4($#(/// .1D H C#(///(/// ./DI B 4()14(#//. 2/1/H2/1104()14(#// E C4)1(4#/ H 4#/(///D B 4()3#(#/ #(///(/// H 4()3#(#/ B 2$4(/#/.
1/.
5n :anuary 1( 2/1/( Kuff o. sold 1(///(/// of its 1/ bonds for ++#(2$ to yield 12. %nterest is payable semiannually on :anuary 1 and :uly 1. 7hat amount should Kuff report as interest expense for the six months ended :une 3/( 2/1/< *+,11/ ++#(2$ ./$ B #3(11+
11/.
5n :anuary 1( 2/11( =oty o. redeemed its 1#&year bonds of 2(#//(/// par value for 1/2. They were originally issued on :anuary 1( 1 at + with a maturity date of :anuary 1( 2/14. The bond issue costs relating to this transaction were 1#/(///. =oty amorti'es discounts( premiums( and bond issue costs using the straight&line method. 7hat amount of loss should =oty recogni'e on the redemption of these bonds Cignore taxesD< *0,000 200( 000 × 12 ÷ 2(300( 000 + 15 C2(#//(/// 1./2D H B /(///
111.
5n its =ecember 31( 2/1/ balance sheet( @mig orp. reported bonds payable of $(///(/// and related unamorti'ed bond issue costs of 32/(///. The bonds had been issued at par. 5n :anuary 2( 2/11( @mig retired 3(///(/// of the outstanding bonds at par plus a call premium of )/(///. 7hat amount should @mig report in its 2/11 income statement as loss on extinguishment of debt Cignore taxesD< *20,000 C3(///(/// E )/(///D H GC$(///(/// H 32/(///D 1F2I B 23/(///
112.
5n :anuary 1( 2//$( Uoll orp. issued 1(/// of its 1/( 1(/// bonds for 1(/4/(///. These bonds were to mature on :anuary 1( 2/1$ but were callable at 1/1 any time after =ecember 31( 2//. %nterest was payable semiannually on :uly 1 and :anuary 1. 5n :uly 1( 2/11( Uoll called all of the bonds and retired them. ond premium was amorti'ed on a straight&line basis. efore income taxes( Uoll!s gain or loss in 2/11 on this early extinguishment of debt was */,000 gain. 40(000 × 11÷ 1( 040( 000 − 20 H C1(///(/// 1./1D B +(///
113.
5n :une 3/( 2/11( 5mara o. had outstanding +( 3(///(/// face amount( 1#& year bonds maturing on :une 3/( 2/21. %nterest is payable on :une 3/ and =ecember 31. The unamorti'ed balances in the bond discount and deferred bond issue costs accounts on :une 3/( 2/11 were 1/#(/// and 3/(///( respectively. 5n :une 3/( 2/11( 5mara ac-uired all of these bonds at 4 and retired them. 7hat net carrying amount should be used in computing gain or loss on this early extinguishment of debt< *2,/+,000.
3(///(/// H C1/#(/// E 3/(///D B 2(+$#(/// 114.
A ten&year bond was issued in 2// at a discount with a call provision to retire the bonds. 7hen the bond issuer exercised the call provision on an interest date in 2/11( the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2/11 should have e-ualed the face amount less unamorti!ed discount.
11#.
Paige o. too* advantage of mar*et conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a part of continuing operations.
?11$. @ddy o. is indebted to ole under a 4//(///( 12( three&year note dated =ecember 31( 2//. ecause of @ddy!s financial difficulties developing in 2/11( @ddy owed accrued interest of 4+(/// on the note at =ecember 31( 2/11. ,nder a troubled debt restructuring( on =ecember 31( 2/11( ole agreed to settle the note and accrued interest for a tract of land having a fair value of 3$/(///. @ddy!s ac-uisition cost of the land is 2/(///. %gnoring income taxes( on its 2/11 income statement @ddy should report as a result of the troubled debt restructuring Uain on =isposal 6estructuring Uain *0,000 *//,000 3$/(/// H 2/(/// B )/(/// C4//(/// E 4+(///D H 3$/(/// B ++(///
