PVB Flashcards Preview

Financial Accounting > PVB > Flashcards

Flashcards in PVB Deck (67):
1

Ray Finance, Inc. issued a I0-year, $100,000, 9% note on January I, year I. The note was issued to yield for proceeds of $93,770. Ray did not elect the fair value option to report financial liabilities. Interest is payable semiannually. The note is callable after 2 years at a price of $96,000. Due to a decline in the market rate to 8%, Ray retired the note on December 31, year 6. On that date, the carrying amount of the note was $94,582, and the discounted market rate was $105,230. What amount should Ray report as gain (loss) from retirement of the note for the year ended December 31, year 6

($1,418)

2

On January I, year I, Jaffe Corporation issued at 95 five hundred of its 9% $1,000 bonds. Interest is payable semiannually on July I and January I, and the bonds mature on January I, year Il. Jaffe paid bond issue costs of $20,000 which are appropriately recorded as a deferred charge. Jaffe uses the straight-line method of amortizing bond discount and bond issue costs. Assume Jaffe does not elect the fair value option for reporting financial liabilities. On Jaffe's December 31, year I balance sheet, the bonds payable should be reported at their carrying value of 

$477,500 

3

On July 28, Vent Corp. sold $500,000 of 4%, eight-year subordinated debentures for $450,000. The purchasers were issued 2,000 detachable warrants, each of which was for one share of $5 par common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of discount on the debentures should Vent record at issuance? 

$70,000 

4

On January I, year I, Jackson Corporations issued 100 of its 5% twenty-year, $1,000 bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Jackson's common stock at a specified price of $20 per share. Immediately after the issuance, the market value of the bonds without the warrants was $108,000, and the market value of the warrants was $12,000. At what amount should Jackson record the warrants on January I, year I? 

$10,000

5

On April I, year I, Girard Corporation issued at 98 plus accrued interest, 200 of its 10%, $1,000 bonds. The bonds are dated January I, year I, and mature on January I, year 11. Interest is payable semiannually on January I and July I. From the bond issuance Girard would realize net cash receipts of 

$201,000

6

Simms Corporation reports under IFRS. Simms issued 2,000 $1,000 convertible bonds at par, with an annual interest rate of 5% when the market was 8%. The bonds are due in 5 years and each $1,000 bond is convertible into 3 shares of common stock. At what amount would Simms record the equity component of the bond?

$239,569

7

On January I, year I, Carr Company purchased Fay Corp. 9% bonds with a face amount of $400,000 for $375,600, to yield 10%. The bonds are dated January I, year I, mature on December 31, year 10, and pay interest annually on December 31. Carr uses the interest method of amortizing bond discount. In its income statement for the year ended December 31, year I, what total amount should Carr report as interest revenue from the long-term bond investment?

$37,560

8

On March I, year I, Williams Corporation issued at 103 plus accrued interest, 100 of its 9% $1,000 bonds. The bonds are dated January I, year I, and mature on January I, year 11. Interest is payable semiannually on January I and July I. Williams paid bond issue costs of $5,000. Based on the information above, Williams would realize net cash receipts from the bond issuance of 

$99,500

9

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 Only

 

 

10

A I5-year bond was issued in year I at a discount. The fair value option was not elected to value financial liabilities. During year 10 a I0-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the year 10 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over the 15-year bonds. 

Carrying amount. 

11

In year I, Jeremy Corporation issued 1,000 of its 8% $1,000 bonds for $1,040,000. The bonds were due on December I, year 11. Jeremy did not elect the fair value option for reporting financial liabilities. On October I, year 7, as part of its normal financing management strategy, Jeremy Corporation redeemed the bonds at a time when the carrying value of the bonds was $50,000 more than the cash paid to retire the bonds. Jeremy should report the $50,000 gain as

Other income

12

Ward, Inc. had outstanding 10%, $1,000,000 face amount convertible bonds maturing on December 31, year 5, on which interest is paid December 31 and June 30. After amortization through June 30, year I, the unamortized balance in the bond premium account was $30,000. On that date, bonds with a face amount of $500,000 were converted into 20,000 shares of $20 par common stock. Ward incurred expenses of $10,000 in connection with the conversion. Recording the conversion by the book value (carrying amount) method, Ward should credit additional paid-in capital for 

$105,000

13

On July I, year I, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, year 9, and pay interest semiannually on June 30 and December 31. using the interest method, Pell recorded bond discount amortization of $1,800 for the 6 months ended December 31, year I. From this long-term investment, Pell should report year I revenue of

$21,800

14

On March I, year I, Cain Corp. issued at 103 plus accrued interest 200 of its 9% $1,000 bonds. The bonds are dated January I, year I, and mature on January I, year 11. Interest is payable semiannually on January I and July I. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of

$199,000 

15

When debt is issued at discount, interest expense over the term of debt equals the cash interest paid 

Plus discount. 

16

Mason Co. incurred costs of $6,600 When it issued, on August 31, year I, five-year debenture bonds dated April I, year I. What amount of bond issue expense should Mason report in its income statement for the year ended December 31, year I? 

$480

17

Bonds payable issued with scheduled maturities at various dates are called

a. Term bonds

b. Neither

c. Serial bonds

d. Serial bonds and Term bonds 

Serial bonds 

18

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On June 30, year I, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on bond should Webb report in its June 30, year 2 balance sheet?

$4,300

19

How would the amortization of discount on bonds payable affect each of the following?

    Carrying value of bond   Net income

a.   Increase                        Decrease 

b.  Increase                         Increase

c.  Decrease                       Decrease

d.  Decrease                       Increase 

 Increase                        Decrease 

20

On January I, year I, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,113 to yield 12%. Interest is payable semiannually on January I and July I. What amount should Korn report as interest expense for the 6 months ended June 30, year I? 

$21,247 

21

Simms Corporation reports under IFRS. Simms issued 2,000 $1,000 convertible bonds at par, with an annual interest rate of 5% when the market was 8%. The bonds are due in 5 years and each $1,000 bond is convertible into 3 shares of common stock. At what amount would Simms record the liability component of the bond?

$1,760,431

22

An investor purchased a bond classified as long-term investment between interest dates at premium. At the purchase date, the carrying value of the bond is more than the

a. Cash paid to seller and Face value of bond

b. Cash paid to seller

c. Face value of bond

d. Neither

Face value of bond

23

What type of bonds in particular bond issuance will not all mature on the same date? 

Serial bonds.

24

The proceeds from bond issued with detachable stock purchase warrants should be accounted for 

Partially as stockholders' equity, and partially as bonds payable.

25

On January I, year 2, Battle Corporation sold at 97 plus accrued interest 200 of its 8%, $1,000 bonds. The bonds are dated October I, year I, and mature on October I, year 12. Interest is payable semiannually on April I and October I. Accrued interest for the period October I, year I, to January I, year 2 amounted to $4,000. As a result on January I, year 2, Battle would record bonds payable, net of discount, at 

$194,000

26

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date? 

An interest expense that is greater than the cash payment made to bondholders. 

27

Wolf Company issued 1,000 of its $1,000 face amount, 20-year bonds on June 30, year I, for $1,020,000. Each bond carries five detachable stock purchase warrants, each of which entitles the holder to purchase for $60 one share of Wolf's common stock. On June 30, year I, the market prices were $50 per share of Wolf's common stock and $5 per warrant. Wolf does not elect the fair value option to report its financial liabilities. In its June 30, year I balance sheet, at what amount should Wolf report the carrying amount of the bonds? 

$995,000

28

At the time of conversion of bonds into common stock, the market value of the stock exceeds the net carrying amount of the bonds. A loss on conversion would be recognized when using the

a. Book value method

b. Book value method and Market value method 

c. Market value method

d. Neither

Market value method

29

Under IFRS, convertible bonds issued are 

Separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component.

30

Theoretically, the proceeds from the sale of bond will be equal to

The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest. 

31

For bond issue which sells for less than its par value, the market rate of interest is 

Higher than rate stated on the bond.

32

How would the amortization of premium on bonds payable affect each of the following?

   Carring value of bond    Net income

a.  Increase                        Decrease

b. Increase                         Increase 

c. Decrease                       Decrease

d. Decrease                       Increase 

Decrease                       Increase 

33

Witt Corp. has outstanding at December 31, year 1, two long-term borrowings with annual sinking fund requirements and maturities as follows:

             Sinking fund

             requirements    Maturities  

year I    $1,000,000       $0 

year 2   $1,500,000       $2,000,000

year 3   $1,500,000       $2,000,000

year 4   $2,000,000      $2,500,000

year 5   $2,000,000      $3,000,000

Total     $8,000,000       $9,500,000

In the notes to its December 31, year I balance sheet, how should Witt report the above data?

The combined aggregate of of maturities and sinking fund requirements detailed by year should be disclosed. 

34

On March I, year I, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How were the following amounts, as of December 31, year I, affected by the error?

     Bond carrying amount    Retained earnings

a.  Overstated                       Overstated

b.  Understated                    Understated 

c.  Overstated                       Understated

d.  Understated                    Overstated

Overstated                       Understated

35

An investor purchased a bond classified as long-term investment between interest dates at discount. At the purchase date, the carrying amount of the bond is more than the

a. Face amount of bond

b. Neither

c. Cash paid to seller

d. Cash paid to seller and Face amount of bond

Neither

36

On March I, year I, Playa Corporation issued bonds with fair value of $1,000,000. Playa prepares its financial statements in accordance with IFRS. What methods may Playa use to report the bonds on its December 31, year I statement of financial position?

I. Amortized cost.

II. Fair value method.

III. Fair value through profit or loss 

I and III only

37

On June 30, year I, Dean Company had outstanding 8%. $1,000,000 face value, 15-year bonds maturing on June 30, year 11. Interest is payable on June 30 and December 31. The unamortized balances on June 30, year I, in the bond discount and deferred bond issue costs accounts were $45,000 and $15,000, respectively. Dean reacquired all of these bonds at 93 on June 30, year I, and retired them. How much gain should Dean report on this early extinguishment of debt?

$10,000

38

When the interest payment dates of bond are May I and November I, and the bond is issued on June I, year I, the amount of interest expense for the year ended December 31, year I, would be for 

7 months

39

On March I, year I, Harbour Corporation issued 10% debentures dated January I, year I, in the face amount of $1,000,000, with interest payable on January I and July I. The debentures were sold at par and accrued interest. How much should Harbour debit to cash on March I, year I? 

$1,016,667

40

On June I of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April I and October I. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?

$14,000 

41

On July I, year I, Belmont Corporation issued for $960,000, 1,000 of its 9% $1,000 callable bonds. The bonds are dated July I, year I, and mature on July I, year 11. Interest is payable semiannually on January I and July I. Belmont uses the straight-line method of amortizing bond discount. The bonds can be called by the issuer at 101 at any time after June 30, year 6. On July I, year 7, Belmont called in all of the bonds and retired them. How much loss should Belmont report on this early extinguishment of debt for the year ended December 31, year 7? 

$26,000 

42

A bond issued on June I, year I, has interest payment dates of April I and October I. Bond interest expense for the year ended December 31, year I, would be for period of 

 7 months. 

43

On April 30, year I, Witt Corp. had outstanding 8% $1,000,000 face amount, convertible bonds maturing on April 30, year 5. Interest is payable on April 30 and October 31. On April 30, year I, all these bonds were converted into 40,000 shares of $20 par common stock. On the date of conversion

Unamortized bond discount was $30,000.

Each bond had market price of $1,080.

Each share of stock had market price of $28.

Under the book value method, what amount should Witt record as loss on conversion of bonds?

$0

44

Album Co. issued ten-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carring value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?

12%

45

Glen Corporation had the following long-term debt:

Sinking fund bonds, maturing in installments            $1,100,000

Industrial revenue bonds, maturing in installments        900,000

Subordinated bonds, maturing on a single date          1,500,000

The total of the serial bonds amounted to 

$2,000,000

46

On December 31, year I, Wall Corp. issued $100,000 maturity value, 10% bonds for $100,000 cash. The bonds are dated December 31, year I, and mature on December 31, year 11. Interest will be paid semiannually on June 30 and December 31. In Wall's September 30, year 2 balance sheet, the amount of accrued interest expense should be 

 $ 2,500 

47

Which of the following is generally associated with the terms of convertible debt securities?

a. An initial conversion price that is less than the market value of the common stock at time of issuance.

b. A feature to subordinate the security to nonconvertible debt.

c. A noncallable feature.

d. An interest rate that is lower than nonconvertible debt. 

An interest rate that is lower than nonconvertible debt. 

48

During year I Cain Corporation incurred the following costs in connection with the issuance of bonds:

Printing and engraving                   $ 15,000

Legal fees                                         80,000

Fees paid to independent

accountants for registration

information                                       10,000

Commissions paid to underwriter    150,000

What amount should be recorded as deferred charge to be amortized over the term of the bonds?

$255,000

49

A portion of the proceeds should be allocated to paid-in capital for bonds issued with

a. Neither

b. Nondetachable stock purchase warrants

c. Detachable stock purchase warrants and Nondetachable stock purchase warrants

d. Detachable stock purchase warrants

Detachable stock purchase warrants

50

Ray Corp. has $300,000 convertible bonds outstanding at June 30, year I. Each $1,000 bond is convertible into 10 shares of Ray's $50 par value common stock. On July I, year I, the interest was paid to bondholders, and the bonds were converted into common stock Which had a fair market value of $75 per share. The unamortized premium on these bonds payable is $6,000 at the date of conversion. Under the book value method, this conversion increases the following elements of the stockholders' equity section by

     Common stock     Additional paid-in capital

a.   $300,000            $6,000

b.   $225,000            $81,000

c.   $153,000             $153,000

d.   $150,000            $156,000 

$150,000            $156,000 

51

On January I, year I, Colt Company issued 10-year bonds with a face amount of $1,000,000 and stated interest rate of 8% payable annually on January I. The bonds were priced to yield 10%. Present value factors are as follows:

                                                           At 8%         At 10%

Present value of I for 10 periods          0.463         0.386 

Present value of an ordinary annuity

of I for 10 periods                                 6.710          6.145 

The total issue price (rounded) of the bonds was 

 $ 877,600

52

Which of the following statements characterizes convertible debt?

a. No value is assigned to the conversion feature when convertible debt is issued.

b. The holder of the debt must be repaid with shares of the issuer's stock.

c. The issuer's stock price is less than market value when the debt is converted.

d. The transaction should be recorded as the issuance of stock. 

No value is assigned to the conversion feature when convertible debt is issued. 

53

On July I, year I, Bosworth Corporation's bondholders exchanged their convertible bonds for $1 par value common stock. The carrying value of the bonds was $50 less than the market value of the common stock issued. Bosworth uses the bock value method of accounting for the conversion. Which of the following statements is true regarding the conversion of Bosworth bonds?

a. Stockholders' equity is increased.

b. An extraordinary' loss is recognized.

c. Additional paid-in capital is decreased.

d. Retained earnings is increased. 

Stockholders' equity is increased. 

54

Foley Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6% $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts. 

           A.        B.             C.              D.                     E. 

                      Cash         Interest     Discount        Carrying

1       Year       paid          expense   amortization    amount  

2         1                                                                   $86,500

3         2         $6,000

Which formula should Foley use in cell E3 to calculate the bonds' carrying amount at the end of year 2?

a. E2-C3

b. E2+C3

c. E2+D3

d. E2-D3

E2+D3

55

A company issued 10-year term bonds at a discount in year I. Bond issue costs were incurred at that time. The company uses the effective interest method to amortize bond issue costs. Reporting the bond issue costs as a deferred charge would result in 

The same reduction in net income in year 2 as reporting the bond issue costs as reduction of the related debt liability.

56

A company issues bonds at 98, with maturity value of $50,000. The entry the company uses to record the original issue should include which of the following?

a. A debit to bonds payable of $50,000.

b. A debit to bond discount of $1,000.

c. A credit to bonds payable of $49,000.

d. A credit to bond premium of $1,000. 

A debit to bond discount of $1,000. 

57

On January I, year I, Hansen, Inc. issued for $939,000, 1,000 of its 9% $1,000 bonds. The bonds were issued to yield 10%. The bonds are dated January I, year I, and mature on December 31, year 10. Interest is payable annually on December 31. Hansen uses the interest method of amortizing bond discount. In its December 31, year I balance sheet, Hansen should report unamortized bond discount of 

$57,100 

58

Colfax issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds was less than the cash proceeds. How should the warrants be recorded? 

Record the warrants at fair value of the warrants. 

59

On July I, year 7, Hilltop Company purchased as a long-term investment Essex Company's 10-year 9% bonds, with a face value of $100,000, for $95,200. Interest is payable semiannually on January I and July I. The bonds mature on July I, year 11. Hilltop uses the straight-line method of amortization. What is the amount of interest income and amortization of bond discount that Hilltop should report in its income statement for the year ended December 31, year 7?

$4,500 

60

On September I, year I, after interest and amortization had been recorded, Oak Co. converted $1,000,000 of its 10% convertible bonds into 50,000 shares of $5 par common stock. The carrying amount of the bonds on the date of conversion was $1,200,000, and the market value of Oak's common stock was $25 per share. Under the market value method, what amount should Oak record as a credit to additional paid-in capital? 

$1,000,000

61

On January I, a company issued a $50,000 face value, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year? 

$46,768

62

Under either the book value or market value method, the same amount would be debited to 

a. Neither

b. Premium bonds payable

c. Bonds payable

d. Bonds payable and Premium bonds payable

Bonds payable and Premium bonds payable

63

On January I, year I, Gilson Corporation issued for $1,030,000, 1,000 of its 9% $1,000 callable bonds. The bonds are dated January I, year I, and mature on December 31, year 14. Interest is payable semiannually on January I and July I. The bonds can be called by the issuer at 102 on any interest payment date after December 31, year 5. The unamortized bond premium was $14,000 at December 31, year 6, and the market price of the bonds was 99 on this date. Gilson does not elect the fair value option for reporting financial liabilities. In its December 31, year 6 balance sheet, at what amount should Gilson report the carrying value of the bonds? 

$1,014,000

64

On January I, year I, Weaver Company purchased as a long-term investment $500,000 face value of Park Corporation's 8% bonds for $456,200. The bonds were purchased to yield 10% interest. The bonds mature on January I, year 7, and pay interest annually on January I. Weaver intends to hold the bonds until their scheduled maturity. Weaver uses the interest method of amortization and does not elect the fair value option for reporting financial assets. What amount should Weaver report on its December 31, year I balance sheet as long-term investment? 

$461,820

65

On January I, Stunt Corp. had outstanding convertible bonds with a face value of $1,000,000 and an unamortized discount of $100,000. On that date, the bonds were converted into 100,000 shares of $1 par stock. The market value on the date of conversion was $12 per share. The transaction will be accounted for with the book value method. By what amount will Stunt's stockholders' equity increase as a result of the bond conversion? 

$900,000

66

In open market transactions, Oak Corp. simultaneously sold its long-term investment in Maple Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Oak's gain on the purchase of its own bonds exceeded its loss on the sale of Maple's bonds. Oak should report the

Effect of its own bond transactions as gain in income before extraordinary items and report the Maple bond transaction as loss in income before extraordinary items. 

67

On July I, year I, Menzie Corporation sold a $1,000,000, 20-year, 10% bond issue for $1,060,000. Each $1,000 bond had a detachable warrant eligible for the purchase of one share of Menzie's $50 par value common stock for $60. Immediately after sale of the bonds, Menzie's securities had the following market values:

10% bonds without warrants             $1,040 

Warrants                                                20

Common stock, $50 par value              56

How much should Menzie credit to premium on bonds payable? 

$40,000