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Exam 14: Bonds and Long-Term Notes

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Question 71

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Nickel Inc. owns $100,000 of 10-year, 6% bonds as an investment on December 31, 2008. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000. Nickel uses straight-line amortization. On May 1, 2009, $10,000 of the bonds were redeemed at 110. How much, and what type of gain or loss, most likely results from this redemption?

A) $467 ordinary gain.
B) $467 extraordinary gain.
C) $467 extraordinary loss.
D) $467 ordinary loss.

E) A) and B)
F) All of the above

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Question 72

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Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond carrying value, respectively?

A) Understated, understated.
B) Understated, overstated.
C) Overstated, understated.
D) Overstated, overstated.

E) B) and C)
F) A) and C)

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Question 73

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

Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2009. Miranda paid for the machine by issuing a $200,000, 3-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest. Required: 1. Prepare the journal entry by Miranda to record the purchase. 2. Prepare journal entries to record interest for each of the first 2 years.

The method used to pay interest depends on whether the bonds are:

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

On January 1, 2009, Field Company purchased 12% bonds, dated January 1, 2009, with a face amount of $20 million. The bonds mature in 2018 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2009. 2. Prepare the journal entry to record the bond purchase by Field on January 1, 2009. 3. Prepare the journal entry to record interest on June 30, 2009, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2009, using the straight-line method.

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2009. The bonds sold for $739,816 and mature in 2028 (20 years) . For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2009, the fair value of the bonds was $730,000. Pierce's earnings for the year will include:

172.DCL Industries purchased a supply of mechanical components from E Corporation on November 1, 2009. In payment for the $48,000 purchase, DCL issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. Required: 1. Prepare the journal entry for DCL's purchase of the components on November 1, 2009. 2. Prepare the journal entry for the first installment payment on November 30, 2009. 3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2009?

On August 1, 2010, United Corporation issued $10 million of 8% convertible bonds at 105. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5 par common stock. World Company purchased 10% of the bond issue. On August 1, 2010, the market value per share for United stock was $56 and the market value of each warrant was $6. In March 2016, when United common stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held. Required: 1. Prepare the journal entries on August 1, 2010, to record (a) the issuance of the bonds by United and (b) the investment by World. 2. Prepare the journal entries for both companies in March 2016 to record the exercise of the warrants.

What is the carrying value of the bonds as of December 31, 2010?

Bonds were issued at a discount. In the bond amortization schedule:

On January 1, 2009, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2009 (assume annual interest payments and amortization) ?

What would be the total interest expense recognized for the bond issue over its full term?

How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to accounting for convertible debt?

On January 1, 2009. Boomer Universal issued 12% bonds dated January 1, 2009, with a face amount of $200 million. The bonds mature in 2018 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2009. 2. Prepare the journal entry to record their issuance by Boomer on January 1, 2009. 3. Prepare the journal entry to record interest on June 30, 2009, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2009, using the straight-line method.

An amortization schedule for bonds issued at a premium:

The rate of interest that actually is incurred on a bond payable is called the:

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?