Question 1

The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

Accepted Answer

A) True 
 B)False

Question 2

Use the following information for questions *103 through *105:
On December 31, 2012, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,800,000 note with $180,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $870,000, an original cost of $1,440,000, and accumulated depreciation of $690,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2015, reduces the face amount of the note to $750,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
-Nolte should recognize a gain or loss on the transfer of the equipment of

Accepted Answer

A)  $0. 
B)  $120,000 gain. 
C)  $180,000 gain. 
D)  $570,000 loss.

Question 3

The printing costs and legal fees associated with the issuance of bonds should

Accepted Answer

A)  be expensed when incurred. 
B)  be reported as a deduction from the face amount of bonds payable. 
C)  be accumulated in a deferred charge account and amortized over the life of the bonds. 
D)  not be reported as an expense until the period the bonds mature or are retired.

Question 4

Under IFRS, all troubled-debt restructurings are accounted for as extinguishments.

Accepted Answer

A) True 
 B)False

Question 5

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

Accepted Answer

A)  the effective yield or market rate of interest exceeded the stated (nominal) rate. 
B)  the nominal rate of interest exceeded the market rate. 
C)  the market and nominal rates coincided. 
D)  no necessary relationship exists between the two rates.

Question 6

On its December 31, 2014 balance sheet, Emig Corp. reported bonds payable of $3,000,000 and related unamortized bond issue costs of $160,000. The bonds had been issued at par. On January 2, 2015, Emig retired $1,500,000 of the outstanding bonds at par plus a call premium of $35,000. What amount should Emig report in its 2015 income statement as loss on extinguishment of debt (ignore taxes)?

Accepted Answer

A)  $0 
B)  $35,000 
C)  $80,000 
D)  $115,000

Question 7

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: 
-The present value of the principal is

Accepted Answer

A)  $2,136,000. 
B)  $2,160,000. 
C)  $2,492,000. 
D)  $2,508,000.

Question 8

Long-term debt that matures within one year and is to be converted into stock should be reported

Accepted Answer

A)  as a current liability. 
B)  in a special section between liabilities and stockholders' equity. 
C)  as noncurrent. 
D)  as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

Question 9

"In-substance defeasance" is a term used to refer to an arrangement whereby

Accepted Answer

A)  a company gets another company to cover its payments due on long-term debt. 
B)  a governmental unit issues debt instruments to corporations. 
C)  a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust. 
D)  a company legally extinguishes debt before its due date.

Question 10

In 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

Accepted Answer

A)  compute a new effective-interest rate. 
B)  not recognize a loss. 
C)  calculate its loss using the historical effective rate of the loan. 
D)  calculate its loss using the current effective rate of the loan.

Question 11

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?

Accepted Answer

A)  $1,026,805 
B)  $780,000 
C)  $784,596 
D)  $789,896

Question 12

U.S. GAAP and IFRS have the same accounting guideline for bond issue cost.

Accepted Answer

A) True 
 B)False

Question 13

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

Accepted Answer

A)  greater than if the straight-line method were used. 
B)  greater than the amount of the interest payments. 
C) the same as if the straight-line method were used. 
D)  less than if the straight-line method were used.

Question 14

Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.:March 1Issued $3,000,000 face value Pitts Co. second mortgage, 8% bonds for $3,270,600, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102.June 1Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.)December 1Paid semiannual interest on Pitts Co. bonds and purchased $1,500,000 face value bonds at the call price in accordance with the provisions of the bond indenture.

Accepted Answer

The answer of Prepare the necessary journal entries to record...

Question 15

A troubled debt restructuring will generally result in a

Accepted Answer

A)  loss by the debtor and a gain by the creditor. 
B)  loss by both the debtor and the creditor. 
C)  gain by both the debtor and the creditor. 
D)  gain by the debtor and a loss by the creditor.

Question 16

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

Accepted Answer

A) True 
 B)False

Question 17

Bond interest expense reported on the December 31, 2014 income statement of Bartley Corporation would be

Accepted Answer

A)  $67,500 
B)  $115,000 
C)  $57,500 
D)  $62,500

Question 18

Kant Corporation retires its $300,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $288,750. The entry to record the redemption will include a

Accepted Answer

A)  credit of $11,250 to Loss on Bond Redemption. 
B)  credit of $11,250 to Discount on Bonds Payable. 
C)  debit of $17,250 to Gain on Bond Redemption. 
D)  debit of $16,000 to Premium on Bonds Payable.

Question 19

Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?

Accepted Answer

A)  The shareholders' loss is the debtholders' gain. 
B)  The income of the company will increase as the amount of interest payment will reduce. 
C)  The decrease in market rate will increase the value of equity shares. 
D)  The debtholders' loss is the shareholders' gain.

Question 20

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 reacquisition

Accepted Answer

A)  any costs of issuing the bonds must be amortized up to the purchase date. 
B)  the premium must be amortized up to the purchase date. 
C)  interest must be accrued from the last interest date to the purchase date. 
D)  All of these answers are correct.

Exam 14: Long-Term Liabilities

The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

The printing costs and legal fees associated with the issuance of bonds should

Under IFRS, all troubled-debt restructurings are accounted for as extinguishments.

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

Long-term debt that matures within one year and is to be converted into stock should be reported

"In-substance defeasance" is a term used to refer to an arrangement whereby

In 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

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?

U.S. GAAP and IFRS have the same accounting guideline for bond issue cost.

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

A troubled debt restructuring will generally result in a

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

Bond interest expense reported on the December 31, 2014 income statement of Bartley Corporation would be

Kant Corporation retires its $300,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $288,750. The entry to record the redemption will include a

Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?

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 reacquisition