FAR 11.04 - BOND RETIREMENT Flashcards
FAR 11.04 - BOND RETIREMENT
On June 2, 20X8, Tory, Inc. issued $500,000 of 10%, 15-year bonds at 98.8. Interest is payable semiannually on
June 1 and December 1. Discount at issuance was $6,000. Tory uses the straight-line method to amortize the
discount, which does not differ materially from GAAP in this instance. On June 2, 20X13, Tory retired half of the bonds at 98.
What is the net amount that Tory should use in computing the gain or loss on retirement of debt?
$249,000
$248,000
$247,000
$248,500
$248,000
EXPLANATION:
As of 6/2/X13, 5 years of the bonds 15-year life has elapsed indicating that 1/3 of the discount would have been amortized.
The carrying value of the bonds for retirement purposes equals the face of $500,000 less the unamortized discount of $4,000 for a net amount of $496,000.
Since half of the bonds are being retired, the carrying value for the purpose of computing gain or loss will be $248,000.
FAR 11.04 - BOND RETIREMENT
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and
purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the…
The effects of the two transactions in income from continuing operations.
Effect of its own bond transaction gain in income from continuing operations, and report the Iron bond transaction as a loss in income from discontinued operations.
Effect of its own bond transaction as a gain from discontinued operations, and report the Iron bond transaction loss in income from continuing operations.
The effects of the two transactions in Other Comprehensive Income (OCI).
The effects of the two transactions in income from continuing operations.
EXPLANATION:
Despite the fact that the broker remitted the net amount to Gold, the two transactions will be reported separately.
The gain on the retirement of Gold’s bonds is reported as a component of income from continuing operations.
The loss on the sale of Iron’s bonds is also a component of income from continuing operations but, if material, would be reported separately
FAR 11.04 - BOND RETIREMENT
An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund
I. Increases by revenue earned on the investments.
II. Is not affected by revenue earned on the investments.
III. Decreases when the investments are purchased.
I and III.
I only.
III only.
II and III.
I only.
EXPLANATION:
When cash is transferred to a sinking fund, it is a transfer from a current asset to a noncurrent asset.
When investment are purchased, the amount in the sinking fund remains unchanged, only the composition of the fund has changed.
As revenues are earned on the investments, the earnings are reported as income and added to the sinking fund.
FAR 11.04 - BOND RETIREMENT
The following information relates to noncurrent investments that Fall Corp. placed in trust as required by the
underwriter of its bonds:
Bond sinking fund balance, 12/31/X1= $450,000 20X2 additional investment = $90,000 Dividends on investments = $15,000 Interest revenue = $30,000 Adminstration costs = $5,000 Carrying amount of B/P = $1,025,000
What amount should Fall report in its December 31, 20X2, balance sheet related to its noncurrent investment for bond sinking fund requirements?
$580,000
$540,000
$585,000
$575,000
$580,000
EXPLANATION:
The amount to be reported as a noncurrent investment in the bond sinking fund can be computed by taking the
beginning balance of $450,000, adding the additional investment of $90,000 and earnings of $15,000 and $30,000.
Administration costs would be deducted resulting in a balance of $580,000.
The carrying amount of the bonds payable is not relevant to the balance of the sinking fund.
FAR 11.04 - BOND RETIREMENT
On March 1, 20X8, a company established a sinking fund in connection with an issue of bonds due in 20X20. At December 31, 20X12, the independent trustee held cash in the sinking fund account representing the annual deposits to the fund and the interest earned on those deposits.
How should the sinking fund be reported in the company’s balance sheet at December 31, 20X12?
Only the accumulated deposits should appear as a noncurrent asset.
The entire balance in the sinking fund account should appear as a noncurrent asset.
The cash in the sinking fund should appear as a current asset.
The entire balance in the sinking fund account should appear as a current asset.
The entire balance in the sinking fund account should appear as a noncurrent asset.
EXPLANATION:
When cash is transferred to a sinking fund, it is a transfer from a current asset to a noncurrent asset.
When investments are purchased, the amount in the sinking fund remains unchanged, only the composition of the fund has changed.
As revenues are earn on the investments, the earnings are reported as income and added to the sinking fund.
On the company’s balance sheet, the entire balance of the sinking fund, including amounts deposited and earnings, is reported a a noncurrent asset regardless of the composition of the sinking fund.
