Chapter 14

Question 1

On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. The present value of the interest is

Answer 1

($6,000,000 × .03) × (PVF-AD16,4%) =

Question 2

Issue price of the Bond is

Answer 2

Principle + interest

Question 3

Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

Answer 3

($5,000,000 × (PVF10,2.5%) + ((5,000,000*3%) × (PVF-OA10,2.5%)) = $5,218,809

Question 4

Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Answer 4

(20,000,000 × .97) + ((20,000,000*9%) × 2/12) = $19,700,000.

Question 5

Everhart Company issues $25,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

Answer 5

($25,000,000 × (PVF10,2.5%)) + ((25,000,000*.03) × (PVF-OA10,2.5%)) = $26,094,045.

Question 6

Farmer Company issues $30,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Answer 6

($30,000,000 × .97) + ($2,700,000 × 2/12) = $29,550,000

Question 7

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2017?

Answer 7

($14,703,108 × .04) + 14,706,232 × .04) = $1,176,373

Question 8

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet?

Answer 8

$14,703,108 + [($14,703,108 × .04) – $585,000] + [$14,706,232 × .04) – $585,000] = $14,709,481.

Question 9

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018?

Answer 9

14,703,108 + ((15,000,000*2%) × 3/20) = $14,747,642

Question 10

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. What is interest expense for 2018, using straight-line amortization?

Answer 10

(15,000,000 × .078) + ($296,892 ÷ 20) = $1,184,845.

Question 11

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, how much interest expense will be recognized in 2017?

Answer 11

($24,505,180 × .04) + ($24,510,387 × .04) = $1,960,623.

Question 12

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet?

Answer 12

24,505,180 + [($24,505,180 × .04) – (25,000,000(7.8%/2))] + [($24,510,387 × .04) – 25,000,000(7.8%/2)] = $24,515,802.

Question 13

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018?

Answer 13

24,505,180 + ($494,820 × 3/20) = $24,579,403.

Question 14

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. What is interest expense for 2018, using straight-line amortization?

Answer 14

(25,000,000 × .078) + ($494,820 ÷ 20) = $1,974,741

Question 15

On January 1, 2017, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2017 is

Answer 15

(2,154,500 × .05) + [[$2,154,500 – ($120,000 – $107,725)] × .05] = 214,836

Question 16

On January 2, 2017, a calendar-year corporation sold 8% bonds with a face value of $3,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,768,000 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2017?

Answer 16

(2,768,000 × .05)+([$2,768,000 + ($138,400 – $120,000)] × .05 ) = 277,720

Question 17

On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a credit of

Answer 17

($6,000,000 × 1.04) – $6,000,000 = $240,000 premium

Question 18

On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2017 income statement of Macklin Corporation would be

Answer 18

[($6,000,000 × .05) × 3/12] – [($240,000 ÷ 10) × 3/12] = $69,000

Question 19

On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a

Answer 19

($8,000,000 × 1.04) – $8,000,000 = $320,000 premium

Question 20

On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. Bond interest expense reported on the December 31, 2017 income statement of Bartley Corporation would be

Answer 20

[($8,000,000 × .05) × 3/12] – [($320,000 ÷ 10) × 3/12] = $92,000

Question 21

At the beginning of 2017, Wallace Corporation issued 10% bonds with a face value of $6,000,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5,558,400 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

Answer 21

($5,558,400 × .06) = $333,504 ($5,558,400 + $33,504) × .06 = $335,514

$333,504 + $335,514 = $669,018

Question 22

On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of

Answer 22

($4,695,000 × .10) – ($5,000,000 × .09) = $19,500
($5,000,000 – $4,695,000) – $19,500 = $285,500.

Question 23

On January 1, Martinez Inc. issued $6,000,000, 11% bonds for $6,390,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of:

Answer 23

($6,000,000 × .11) – ($6,390,000 × .10) = $21,000
($6,390,000 – $6,000,000) – $21,000 = $369,000.

Question 24

At the beginning of 2017, Winston Corporation issued 10% bonds with a face value of $4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $3,705,600 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

Answer 24

($3,705,600 × .06) = $222,336 ($3,705,600 + $22,336) × .06 = $223,676
$222,336 + $223,676 = $446,012

Question 25

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. The entry to record the redemption will include a

Answer 25

500,000 – $481,250 = $18,750 discount.

Question 26

Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a

Answer 26

518,725 – $500,000 = $18,725 premium

Question 27

At December 31, 2017 the following balances existed on the books of Foxworth Corporation:
Bonds Payable $6,000,000
Discount on Bonds Payable 840,000
Interest Payable 150,000
If the bonds are retired on January 1, 2018, at 102, what will Foxworth report as a loss on redemption?

Answer 27

($6,000,000 × 1.02) – ($6,000,000 – $840,000) = $960,000.

Question 28

At December 31, 2017 the following balances existed on the books of Rentro Corporation:
Bonds Payable $7,000,000
Discount on Bonds Payable 980,000
Interest Payable 168,000
If the bonds are retired on January 1, 2018, at 102, what will Rentro report as a loss on redemption?

Answer 28

($7,000,000 × 1.02) – ($7,000,000 – $980,000) = $1,120,000

Question 29

The December 31, 2017, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2026 $5,000,000
Unamortized premium on bonds payable 135,000
The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2018, Hess retired $2,000,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes.

Answer 29

5,135,000 - (135,000/18) * (2/6) * .4 = 2,053,000
2,053,000 - (2,000,000 *.98) = 93,000

Question 30

On January 1, 2012, Hernandez Corporation issued $18,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2018, when the fair value of the bonds was 96, Hernandez repurchased $4,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2018. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as

Answer 30

18,000,000 * 1.03 - (540,000 / 10) * 7 * (2/9) = 4,036,000
4,036,000 - (4,000,000 *,96) = 196,000

Question 31

The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2017. 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 was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2018, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2018? Ignore taxes.

Answer 31

2,850,000 + [($2,850,000 × .06) – ($3,000,000 × .05)] = $2,871,000 (CV of bonds) $2,871,000 – ($3,000,000 × 1.02) = $189,000

Question 32

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1,500,000. To extinguish this debt, the company had to pay a call premium of $500,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?

Answer 32

1,500,000 + $500,000 = $2,000,000

Question 33

The 12% bonds payable of Nyman Co. had a carrying amount of $4,160,000 on December 31, 2017. The bonds, which had a face value of $4,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2018, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is

Answer 33

4,160,000 – [($4,000,000 × .06) – ($4,160,000 × .05)] = $4,128,000 (CV of bonds) ($4,000,000 × 1.04) – $4,128,000 = $32,000

Question 34

Didde Company issues $25,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, 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, 2019, $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, 2019?

Answer 34

{$24,000,000 + [$1,000,000 × (3 2/3 ÷ 10)]} × .60 = $14,620,000
$15,300,000 – $14,620,000 = $680,000

Question 35

Cortez Company issues $6,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, 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, 2019, $3,600,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2019?

Answer 35

{$5,760,000 + [$240,000 × (3 2/3 ÷ 10)]} × .60 = $3,508,800
3,672,000 – $3,508,800 = $163,200

Question 36

On January 1, 2017, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2019. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest income should Ms. Price recognize in 2017?

Answer 36

187,825 × .10 = $18,783

Question 37

On January 1, 2018, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Danis 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, 2018. The note has no ready market. The prevailing 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 $3,481,800. What is the amount of interest income that should be recognized by Jacobs in 2018, using the effective-interest method?

Answer 37

3,481,800 × .10 = $348,180

Question 38

On January 1, 2018, Crown Company sold property to Leary Company. There was no established exchange price for the property, 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, 2018. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,605,000 at January 1, 2018. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2018 after adjusting entries are made, assuming that the effective-interest method is used?

Answer 38

5,000,000 – $3,605,000 – ($3,605,000 × .09) = $1,070,550

Question 39

Putnam Company’s 2018 financial statements contain the following selected data: Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2018 is

Answer 39

(60,000 + 40,000 + 25,000) / 25,000 = 5 times

Question 40

In the recent year Hill Corporation had net income of $210,000, interest expense of $50,000, and tax expense of $90,000. What was Hill Corporation’s times interest earned for the year?

Answer 40

($210,000 + $50,000 + $90,000) ÷ $50,000 = 7.0

Question 41

In recent year Cey Corporation had net income of $750,000, interest expense of $150,000, and a times interest earned ratio of 9. What was Cey Corporation’s income before taxes for the year?

Answer 41

($750,000 + $150,000 + X) ÷ $150,000 = 9
X = $450,000

Question 42

The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2018, contained the following accounts.
5-year Bonds Payable 8% $3,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 months.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Income Taxes Payable (due 3/15 of 2019) 25,000
The total long-term liabilities reported on the balance sheet are

Answer 42

3,000,000 + $100,000 + $165,000 + ($200,000 – $15,000) = $3,450,000

Question 43

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, 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

Answer 43

1,450,000 – ($2,400,000 – $1,150,000) = $200,000

Question 44

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. Nolte should recognize a gain on the partial settlement and restructure of the debt of

Answer 44

($3,000,000 + $300,000) – [$1,450,000 + $1,250,000 + ($1,250,000 × .06 × 3)] = $375,000

Question 45

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. Nolte should record interest expense for 2018 of

Answer 45

The effective-interest rate is 0%.