MULTIPLE CHOICE—CPA Adapted
106. On July 1, 2018, Spear Co. issued 4,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2018 and mature on April 1, 2028. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?
a. $4,060,000
b. $4,000,000
c. $3,960,000
d. $3,860,000
107. On January 1, 2018, Solis Co. issued its 10% bonds in the face amount of $8,000,000,
which mature on January 1, 2028. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2018, Solis's adjusted unamortized bond premium should be
a. $1,080,000.
b. $1,006,400.
c. $972,000.
d. $812,000.
108. On July 1, 2016, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2022. The bonds were issued for $9,560,000 to yield 10%, resulting in a bond discount of $440,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2018, Noble's unamortized bond discount should be
a. $322,400.
b. $340,000.
c. $352,000.
d. $310,000.
109. On January 1, 2018, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2018?
a. $221,330
b. $250,000
c. $265,589
d. $300,000
110. On January 1, 2018, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102. They were originally issued on January 1, 2006 at 92 with a maturity date of
January 1, 2021. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?
a. $252,000
b. $168,000
c. $140,000
d. $0
111. On its December 31, 2017 balance sheet, Emig Corp. reported bonds payable of
$6,000,000 The bonds had been issued at par. On January 2, 2018, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amount should Emig report in its 2018 income statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $30,000
c. $35,000
d. $70,000
112. On January 1, 2013, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000. These bonds were to mature on January 1, 2023 but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On
July 1, 2018, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2018 on this early extinguishment of debt was
a. $90,000 gain.
b. $36,000 gain.
c. $30,000 loss.
d. $24,000 gain.
113. On June 30, 2018, Omara Co. had outstanding 8%, $8,000,000 face amount, 15-year bonds maturing on June 30, 2028. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2018 was $360,000. On June 30, 2018, Omara acquired 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. $7,920,000.
b. $7,720,000.
c. $7,640,000.
d. $7,520,000.
114. A ten-year bond was issued in 2016 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2018, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2018 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
115. Paige Co. took advantage of market 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
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*116. Eddy Co. is indebted to Cole under a $1,000,000, 12%, three-year note dated
December 31, 2016. Because of Eddy's financial difficulties developing in 2018, Eddy owed accrued interest of $120,000 on the note at December 31, 2018. Under a troubled debt restructuring, on December 31, 2018, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $900,000. Eddy's acquisition cost of the land is $725,000. Ignoring income taxes, on its 2018 income statement Eddy should report as a result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $395,000 $0
b. $275,000 $0
c. $175,000 $100,000
d. $175,000 $220,000
BRIEF EXERCISES
BE. 14-117—Terms related to long-term debt.
Place the letter of the best matching phrase before each word.
1. Indenture 6. Times Interest Earned
2. Refunding 7. Mortgage
3. Bonds Issued at Par 8. Premium on Bonds
4. Carrying Value 9. Reacquisition Price
5. Nominal Rate 10. Market Rate
a. Requires that bond discount be reported in the balance sheet as a direct deduction from the face of the bond.
b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f. Results when bonds are sold above par.
g. The replacement of an existing bond issuance with a new one.
h. Price paid by issuing corporation for its own bonds.
i. Book value of bonds at any given date.
j. Ratio of current assets to current liabilities.
k. The bond contract or agreement.
l. Indicates the company’s ability to meet interest payments as they come due.
m. Ratio of debt to equity.
n. Exclusive right to manufacture a product.
o. A document that pledges title to property as security for a loan.
BE. 14-118—Bond issue price and premium amortization.
On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .386
Present value of 1 for 10 periods at 12% .322
Present value of 1 for 20 periods at 5% .377
Present value of 1 for 20 periods at 6% .312
Present value of annuity for 10 periods at 10% 6.145
Present value of annuity for 10 periods at 12% 5.650
Present value of annuity for 20 periods at 5% 12.462
Present value of annuity for 20 periods at 6% 11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $4,420,000. Prepare the amortization table for 2018, assuming that amortization is recorded on interest payment dates using the effective-interest method.
BE. 14-119—Amortization of discount or premium.
Grider Industries, Inc. issued $15,000,000 of 8% debentures on May 1, 2017 and received cash totaling $13,308,942. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2025. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/17 through 4/30/18) these bonds were outstanding. (Show computations and round to the nearest dollar.)
EXERCISES
Ex. 14-120—Entries for Bonds Payable.
Prepare journal entries to record the following transactions related to long-term bonds of Quirk Co.
(a) On April 1, 2016, Quirk issued $2,000,000, 9% bonds for $2,151,472 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2026.
(b) On July 1, 2018 Quirk retired $600,000 of the bonds at 102 plus accrued interest. Quirk uses straight-line amortization.
Ex. 14-121—Retirement of bonds.
Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.)
The December 31, 2018 balance sheet of Wolfe Co. included the following items:
7.5% bonds payable due December 31, 2026 $3,000,000
Unamortized discount on bonds payable 120,000
The bonds were issued on December 31, 2016 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.)
On April 1, 2016, Wolfe retired $600,000 of these bonds at 101 plus accrued interest.
Ex. 14-122—Early extinguishment of debt.
Hurst, Incorporated sold its 8% bonds with a maturity value of $9,000,000 on August 1, 2016 for $8,838,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2018. By October 1, 2018, the market rate of interest has declined and the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8% bonds in the market and is able to purchase $1,500,000 worth at 101. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line amortization.) Show calculations.
*Ex. 14-123—Accounting for a troubled debt settlement.
Mann, Inc., which owes Doran Co. $1,200,000 in notes payable with accrued interest of $108,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $1,140,000, an original cost of $1,680,000, and accumulated depreciation of $390,000.
Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann 's books to record the settlement of this debt.
(d) Prepare the journal entry on Doran's books to record the settlement of the receivable.
*Ex. 14-124—Accounting for a troubled debt restructuring.
On December 31, 2017, Short Co. is in financial difficulty and cannot pay a note due that day. It is a $2,000,000 note with $200,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued interest, extend the maturity date to December 31, 2019, and reduce the interest rate to 4%. The present value of the restructured cash flows is $1,712,000.
Instructions
Prepare entries for the following:
(a) The restructure on Short’s books.
(b) The payment of interest on December 31, 2018.
(c) The restructure on Bryan’s books.
*Ex. 14-125—Accounting for troubled debt.
(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a settlement of troubled debt which includes the transfer of noncash assets?
(b) What are the general rules for measuring and recognizing a gain and for recording future payments by the debtor in a troubled debt restructuring?
PROBLEMS
Pr. 14-126—Bond discount amortization.
On June 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $2,631,300 was determined from present value tables. Specifically explain how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.)
Pr. 14-127—Bond interest and discount amortization.
Grove Corporation issued $6,000,000 of 8% bonds on October 1, 2017, due on October 1, 2022. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method.
Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2017 $5,536,676
April 1, 2018
October 1, 2018
(b) Prepare the adjusting entry for December 31, 2018. Use the effective-interest method.
(c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2018.
Pr. 14-128—Entries for bonds payable.
Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.:
March 1
Issued $4,000,000 face value Pitts Co. second mortgage, 8% bonds for $4,360,800, 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 1
Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.)
December 1
Paid semiannual interest on Pitts Co. bonds and purchased $2,000,000 face value bonds at the call price in accordance with the provisions of the bond indenture.
Pr. 14-12 9
Prepare journal entries to record the following transactions relating to long-term bonds of Kirby, Inc. (Show computations.)
(a) On June 1, 2017, Kirby, Inc. issued $8,000,000, 6% bonds for $7,841,000, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2027. The bonds are callable at 102.
(b) On August 1, 2017, Kirby paid interest on the bonds and recorded amortization. Kirby uses straight-line amortization.
(c) On February 1, 2019, Kirby paid interest and recorded amortization on all of the bonds, and purchased $5,000,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2019.
Pr. 14-130—Fair value option
Harper Company commonly issues long-term notes payable to its various lenders. Harper has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Harper has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes.
Carrying Value Fair Value
December 31, 2017 $135,000 $135,000
December 31, 2018 112,000 107,000
December 31, 2019 90,000 97,000
Instructions
(a) Prepare the journal entry at December 31 (Harper’s year-end) for 2017, 2018, and 2019 to record the fair value option for these notes.
(b) At what amount will the note be reported on Harper’s 2018 balance sheet?
(c) What is the effect of recording the fair value option on these notes on Harper’s 2019 income?
*Pr. 14-131—Accounting for a troubled debt restructuring.
Ludwig, Inc., which owes Giffin Co. $4,000,000 in notes payable, is in financial difficulty. To eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $3,050,000 and a recorded cost of $2,250,000.
Instructions
(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Ludwig, Inc. on the restructuring of the debt.
(c) Prepare the journal entry on Ludwig 's books to record the restructuring of this debt.
(d) Compute the gain or loss to Giffin Co. from restructuring of its receivable from Ludwig.
(e) Prepare the journal entry on Giffin's books to record the restructuring of this receivable.
IFRS QUESTIONS
True/False
1. IFRS requires the use of straight-line method for amortization of a discount or premium.
2. U.S. GAAP and IFRS have the same accounting guidelines for bond issue costs.
3. Under IFRS, bond issue costs are recorded as an asset.
4. Under IFRS, all troubled-debt restructurings are accounted for as extinguishments.
5. Under IFRS the required procedure for amortization of a discount or premium is the effective-interest method.
Multiple Choice Questions
6. IFRS generally assumes that all restructurings be accounted for as:
a. extinguishments of debt.
b. loss on debt.
c. amortization expense.
d. bad-debt expense.
7. All of the following are differences between IFRS and U.S. GAAP in accounting for liabilities except:
a. When a bond is issued at a discount U.S. GAAP records the discount in a separate contra-liability account. IFRS records the bond net of the discount.
b. Under IFRS, bond issuance costs reduces the carrying value of the debt. Under U.S. GAAP, these costs are recorded as an asset and amortized to expense over the term of the bond.
c. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.”
d. U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are accrued.
8. IFRS requires bond issue costs:
a. to be recorded as an asset.
b. to be excluded while computing the interest expense.
c. to be netted against the carrying amount of the bonds.
d. to be considered when computing income tax payable.
9. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at
a. present value discounted at the firm’s cost of capital.
b. current market values of the obligations, based on changes in the discount rate with unrealized gains and losses reflected in a separate account in stockholders’ equity.
c. fair value with gains and losses on changes in fair value recorded in income in certain situations.
d. historic costs without reflecting changes in valuation as obligations will be retired at their maturity date.
