13(b) Flashcards
On January 1, 2024, Crown Company sold property to Leary Company. There was no established exchange price for the properly, and Leary gave Crown a $5,000,000 zero-interest-bearing note payable in
5 equal annual installments of $800,000, with the first payment due December 31, 2024. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,111,720 at January 1, 2024. What should be the balance of the Discount on Notes Payable account on the books of Leary at December
31
,
2024
after adjusting entries are made, assuming that the effectlve
-
lnterest method of amortization is uned?
$1,608,225
discount = 5,000,000 - 3,111,720 = 1,888,280
interest expense = 3,111,720 x 0.09 = 280,055
1,888,280 - 280,055 = 1,608,225
At December 31, 2024, the following balances existed on the books of Tweedy Corporation:
Bonds Payable $6,000,000
Discount on Bonds Payable 840,000
Interest Payable 150,000
If the bonds are retired on January 1, 2025, at 102, what will Tweedy report as a loss in redemption?
$960,000
((6,000,000x1.02) - (6,000,000-840,000))
The 10% bonds payable of Nowon Company had a net carrying amount of $2,850,000 on December 31, 2024. The bonds, which had a face value of $3,000,000 were issued at a discount to yield
12%. The amortization of the bond discount wasrecorded under the effective-interest-method. Interest was paid on January 1 and July 1 of each year. On July 2, 2025, several years before their maturity, Nivon retired the bonds at 102. The interest payment on July 1, 2025 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2025?
$189,000
I got $210,000: ((3,000,000 x 1.02) - 2,850,000)
Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. Kant’s entry to record the redemption will include a
credit of $18,750 to Discount on Bonds Payable
On its December 3, 2024 balance sheet, Emig Corp, reported bonds payable of $6,000,000. The bonds had been issued at par. On January 2,2025, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amountshouldEmig eport in its 2025 income statement as a loss on extinguishment of debt?
$70,000
reissued at par, so the loss = the premium
On January 1, 2016, Goll Corp. issued 3,000 ofits 10%, $1,000 bonds for $3,120,000. These bonds were to mature on January 1, 2026 but were callable at 101 any time after December 31, 2023. Interest was payable semiannually on July 1 and January 1. On July 1, 2025, 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 2025 on this early extinguishment of debt was
$24,000 gain
120,000 / 20 = 6,000 per period
par = 3,000 x 1,000 = 3,000,000
premium = 3,120,000 - 3,000,000 = 120,000
unamortized premium = 120,000 - (6,000 x 11)
= 54,000
since premium ADD to carry
3,000,000 + 54,000 = 3,054,000
cash = 3,000,000 x 1.01 = 3,030,000
cash - carry
3,030,000 - 3,054,000 = (24,000) gain
Didde Company issues $25,000,000 face value of bonds at 96 on January 1, 2023. The bonds pay interest semiannually at 8% on June 30 and December 31 and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2026, $15,000,000 of the bonds are called at 102 plus accrued interest. What loss would be recognized on the called bonds on September 1, 2026?
$680,000 loss
remaining interest periods = 13 (closest)
discount = 25,000,000 x 0.04 = 1,000,000 /20 periods = 50,000 per period
unamortized = 50,000 x 13 = 650,000 x 3/5 of bonds called = 390,000
FV of bonds called - unamortized = 15,000,000 - 390,000 = 14,610,000
Call price = 15,000,000 x 1.02 = 15,300,000
LOSS:
15,300,000 - 14,610,000 = 690,000
(closest answer is less, most likely due to overstated remaining interest periods)
On January 1, 2024, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Dains gave Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments of $1,400,000 with the first payment due December 31, 2024. The note has no ready market. The prevaling rate of interest for a note of this type is 10%. The present value of a $4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of interest is $3,481,590. What is the amount of interest income that woulc be recognized by Jacobs in 2024 if the effective-interest method is used?
$348,159 (interest rate x PV)
The 12% bonds payable of Nyman Co. had a carrying amount of $4,160,000 on December 31, 2024. The bonds, which had a face value of $4,000,000, were issued at a premlum to yield 108. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2025, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement is
$32,000
premium = 4,160,000 - 4,000,000 = 160,000
interest PAYMENT = 4,000,000 x 0.12 x 1/2 = 240,000
interest EXPENSE = 4,160,000 x 0.1 x 1/2 = 208,000
premium amortization = 240,000 - 208,000 = 32,000
NEW CARRY = 4,160,000 - 32,000 = 4,128,000
redeemed at 104: 4,000,000 x 1.04 = 4,160,000
redeem - carry = loss
4,160,000 - 4,128,000 = 32,000
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 reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption
A corporation borrowed money from a bank 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 bank $80,000 each year for
10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
The amount of interest expense will DECREASE each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will INCREASE each period
On January 1, 2024, Rutgers Company issued for cash a $500,000, 5-year note bearing annual interest at 10% to Smith, Inc. The market rate of interest for a note of similar risk is 12%. What cash would have been recorded on the issue date of the note?
$463,954
interest payment = 500,000 x 0.1 = 50,000
PV of interest payment + PV of cash = PV
(50,000 x 3.60477) + (500,000 x 0.56743) = $463,954
When a zero-interest-bearing note is issued at an amount less than face value, the company records the difference between the face value amount and cash received (present value) as ____ and amortizates that amount to u interest expense over the life of the note.
a discount
On January 1, 2025, Doty Co, redeemed its 15 year bonds of $7,000,000 par value for 102. They were originally issued on January 1,2013 at 92 with a maturity date of January 1, 2024. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds?
$252,000
discount = 7,000,000 x (1-0.92) = 560,000
unamortized = 560,000 - (560,000/15) x 12) = 112,000
carry = 7,000,000 - 112,000 = 6,888,000
call = 7,000,000 x 1.02 = 7,140,000
7,140,000 - 6,888,000 = 252,000
