Chapter 14 Quiz

1)
Wilson Corp. issued $9,000,000 of 4% bonds on April 1 at par value. The bonds were dated January 1.
The company pays interest on June 30 and December 31 each year. How much will the buyer need to
pay the company in accrued interest at purchase and how much will the buyer receive in interest on
June 30?

pay April 1 $90,000; receive June 30 $180,000

9,000,000 * 2% = 180,000

180,000 * (3/6) = 90,000

2)
Xenia Corporation issued 3,000 term bonds with a face value of $1,000 each and no additional features
for $3,200,000. The bonds' selling price indicated that the bonds were paying interest that was ________.

higher than the market rate

3)

TIP: This B/P is issued between two interest payment dates. The cash proceeds will include the issue price
and the accrued interest.

Samuel's, Inc. sold $ 15,000 of 8% bonds to an individual on April 1 at par value. The bonds pay interest
on June 30 and December 31 each year. What are the proper entries for the sale of the bonds and the
June 30 payment of the interest for these bonds? (Do not round intermediate calculations. Only round
your final answer to the nearest dollar.)

Account Debit Credit

April 1 Cash 15,300
Interest Payable 300
Bonds Payable 15,000

Account Debit Credit

June 30 Interest Expense 300
Interest Payable 300
Cash 600
15,000 * 4% = 600 * (3/6) = 300

4)
On January 1, the Hudson Company borrowed $190,000 to purchase machinery and agreed to pay 8%
interest for six years on an installment note. Each note payment is $41,100 and is due on the last day of
the year. What is the carrying value of the loan at the end of the first year? (Do not round intermediate
calculations. Only round your final answer to the nearest dollar.)
$164,100

190,000 * 8% = 15,200

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 190,000 + 15,200 = 205,200 – 41,100 = 164,100

5)
The fair value option for liabilities reports unrealized gains and losses that are not related to changes in
instrument−specific credit risk ________.

in net income

6)

Tip: The bond issue cost will reduce your initial carrying value (i.e., increase your initial discount or reduce
your initial premium). The challenge is that the lowered carrying value due to bond issue cost will change your
effective interest rate which will need to be re-calculated. (see my handout) Use the RATE function on Excel:
You will need NPER PMT = - Face value x stated interest rate (paid) PV = Initial carrying value after deducting
bond issue cost FV = - Face Value (paid on maturity date)

Jorge Corp issued $ 580,000 of 6%, 10-year bonds on January 2, 2018 for $ 570,000. In addition, the
company incurred $50,000 in bond issue costs. Interest is paid annually. What is the effective interest
rate for the bonds given the information provided? Round your answer to two decimal places.
7.51%

RATE(10,-34800,520000,-570000) = 7.38%

580,000 * 6% = 34,800

570,000 – 50,000 = 520,000

7)

TIP: The bond issue cost will reduce your initial carrying value (i.e., increase your initial discount or reduce
your initial premium). The carrying value of B/P after subtracting the bond issue cost will be reported on the
balance sheet.

On June 30 of the current year, 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 of the
current year, Huff should report the bond liability on its balance sheet at:

$955,000

1,000 * 1,000 = 1,000,000

1,000,000 * .99 = 990,000

990,000 – 35,000 = 955,000

8)

TIP: We have a case of nondetachable stock warrants here. Check the definition of nondetachable stock
warrants first before answering this question.

Ripa, Inc. issued $ 6,000,000 of bonds at par. The bonds contained nondetachable stock warrants.
Similar bonds without the warrants were selling at 99. By what amount will Additional Paid-in Capital

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 minus Stock Warrants be credited?
$0

9)

The account Discount on Bonds Payable is a contra-liability account.

TRUE

10)

Arco, Inc. issued $ 330,000 of 4%, 10-year convertible bonds at par on July 1, 2018. Each bond has a par
value of $ 1,100. The bonds include the option for bondholders to convert each bond into 55 $1 par
value shares of common stock beginning two years after the date of issue. The market price of the stock
at the time of issue is $ 26 per share. What is the correct journal entry for the issue?

Date Account Debit Credit

July 1, 2018 Cash 330,000
Discount on Bonds Payable 99,000

Bonds Payable 330,000

Add. Paid−in Capital−Bene. Conv. Option 99,000

11)
The effective interest rate properly reflects the effective cost of borrowing at the ________.

historical market rate at the date the bonds sold

12)

TIP: Because you don't have the market value of the stock warrants (all you have is the market value of B/P
without warrants) you cannot split the cash proceeds into B/P and stock warrants using the proportion
method. You can only use the incremental method. Step 1: Cash proceeds = 5000 shares of B/P x1000 x 103%
= 515000 Step 2: Market value of B/P = 1007 per bond x 5000 bonds = 503500 Step 3: Figure out the
incremental value (residual value) = 515000 - 503500 = 115000. This represents the cash proceeds assigned to
Stock Warrants.

Neil Corporation issued 5,000 $1,000 bonds at 103. Each bond contains 15 detachable stock warrants
that allow the bondholder to purchase a share of Neil's common stock for $50. Immediately after the
issue, the bonds without the warrants were selling for $1,007. The stock warrants had no readily
determinable value. How much will be credited to Additional Paid-in Capital-Stock Warrants?
$115,000

5,000 * 1,000 * 103% = 5,150,000

5,000 * 1007 = 5,035,000

5,150,000 – 5,035,000 = 115,000

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 13)

TIP: It is two years from July 1, year 1 to June 30, Year 3.

On July 1, Year 1, Cobb Company issued 9% bonds in the face amount of $1,000,000 that mature in 10
years. The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000. Cobb
uses the effective interest method of amortizing bond discount. Interest is payable annually on June 30.
At June 30, Year 3, Cobb's unamortized bond discount should be:
$52,810

Year 1: 939,000 + ([939,000*10%] – [1,000,000*9%]) = 942,900

Year 2: 942,900 +([942,900*10%] – [1,000,000*9%]) = 947,190

1,000,000 – 947,190 = 52,810

14)

TIP: You have a case of detachable stock warrants here. You need to split your cash proceeds from issuance
(number of B/P x FV of each x Issue price %) into two components: (1) B/P (2) Stock warrants. How to split it
into two components? This question is asking you to use the proportion method. This method is based on the
market values of the B/P and the stock warrants. A: Market value of BP (without stock warrants) B: Market
Value of stock warrants Total = A+ B % of Cash proceeds allocated to B/P = A/(A+B) % of Cash proceeds
allocated to Stock Warrants= B/(A+B)

Barker Industries issued 8,000 $1,000 bonds at 105. Each bond contains 20 detachable stock warrants
that allow the bondholder to purchase a share of Barker's common stock for $50. Immediately after the
issue, the warrants were selling for $4 each and the bonds without the warrants were selling for $ 986.
How much will be credited to Additional Paid-in Capital minus Stock Warrants? (Round intermediate
calculations to four decimal places and your final answer to the nearest dollar.) Use the proportional
method.

$630,395

15)
Given the following information from an amortization table, compute the interest expense and the carrying
value for the next line of the table, rounding your answer to the nearest dollar:
5% 4%
Cash Effective Premium Carrying
Interest Interest Amortization Value
$2,400 $1,973 $427 $48,905

Interest Expense $ 1,956; Carrying Value $ 48,461

48,905 * 4% = 1956

2400 – 1956 = 444

48905 – 444 = 48,461

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 16)

Zambrano Corp. decided to go into the market to repurchase bonds before their due date. The following
are the balances of the accounts on the date of the retirement:

Bonds Payable $5,000,000

Discount on Bonds Payable $ 76,000

If Zambrano pays $ 4,892,000 to retire the bond, what is the gain or loss on the early extinguishment of
the debt?

$ 32,000 gain

5,000,000 – 4,892,000 = 108,000 – 76,000 = 32,000 gain

17)
The selling price of a bond is the ________.

present value of the par value plus the present value of the interest payments

18)

TIP: Since you elect the FVO, you must report the fair value = Face Value x selling price XXX%

Parrish Industries has bonds outstanding (originally sold for $4,340,000) in the face amount of $
5,300,000 with a current bond discount of $ 200,000. The bonds were selling at 104 on the market at its
year end. If Parrish elects the fair value option for these bonds, at what value should it report these
bonds on its balance sheet at year end?

$5,512,000

5,300,000 * 104% = 5,512,000

19)

A primary benefit of reclassification of short-term debt into long-term debt is to improve ________.

liquidity ratios

20)

Harrison Corporation borrowed $ 41,000 from F&M Bank on June 1 of the current year. The bank
required 6% interest. Interest will be paid when the nine-month note becomes due. What is the interest
expense for the current year? (Do not round intermediate calculations. Only round your final answer to
the nearest dollar.)

$1435

41,000 * 6% = 2460* (7/12) jun-dec = 1,435

21)

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 TIP: The fiscal year end is 9/30. You need to accrued the interest expense from 6/30-9/30. However, you are
given the information on the amortization table for the period from 6/30 to 12/31.

Given the following information from an amortization table for December 31, 2017, prepare the journal
entry to record the accrual of interest at year end if the fiscal year of the company ends on September 30.
Assume the last interest payment occurred on 6/30/2017, and the next interest payment on12/31/2017.
Round numbers to two decimal places.
6% Cash 5% Effective Premium Carrying
Interest Interest Amortization Value
$42,000 $35,333 $6,667 $700,000

Journal Entry

Account Debit Credit

September 30 Interest Expense 17,666.50

Premium on Bonds Payable 3,333.50

Interest Payable 21,000.00
35,333/2 = 17,666.5
6667/2 = 3,333.5
42,000/2 = 21,000

22)

TIP: Total interest expense = Total cash interest paid + Total discount or - Total premium

$100,000 of five-year bonds are sold for $97,300 on the issue date. Interest of $4,000 is paid each year
until the bonds are repaid. What is the total interest expense to the company for issuing these bonds?

$22,700

4,000 * 5 = 20,000

100,000 – 97,300 = 2,700

20,000 + 2,700 = 22,700

23)

TIP: (1) Each period is semiannual => Adjust your stated and market interest rate => Compute your issue price
=> figure out your discount or premium. (2) You need to use the amortization table to figure out your interest
expense and carrying value of B/P after one period. Interest expense is the number reported on the income
statement. Carrying value is the number reported on the balance sheet.

On July 1, Year 1, Planet Corporation sold Ken Company 10-year, 8% bonds with a face amount
of $500,000 for $520,000. The market rate was 6%. The bonds pay interest semiannually on June 30 and
December 31. For the 6 months ended December 31, Year 1, what amount should Planet report as bond
interest expense and long-term liability in the balance sheet and income statement for Year 1?

Balance Sheet – 515,600 Income Statement – 15,600

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 520,000 * 3% = 15,600

500,000 + 15,600 = 515,600

24)
Companies use a fair value adjustment account to adjust the related liability account when remeasuring
the liability to its fair value.
TRUE

25)
When a company has current debt that can be reclassified as long-term, it should do so because
________.

the debt will no longer require the use of current assets or the creation of another current liability

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