Long-Term Liabilities 14 - 21
The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on December 31, 2012. The bonds, which had a face value of $800,000, 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, 2013, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2013? Ignore taxes. a. $16,000. b. $50,400. c. $44,800. d. $56,000.
A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $600,000. To extinguish this debt, the company had to pay a call premium of $200,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately,
whichever management selects. The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on December 31, 2012. The bonds, which had a face value of $2,000,000, 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, 2013, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is a. $0.
b. $16,000. c. $24,800. d. $80,000.
Didde Company issues $15,000,000 face value of bonds at 96 on January 1, 2011. The bonds are dated January 1, 2011, 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, 2014, $9,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014? a. $900,000 loss b. $408,000 loss c. $540,000 loss d. $680,000 loss
14 - 22 Test Bank for Intermediate Accounting, Fourteenth Edition
95. Cortez Company issues $3,000,000 face value of bonds at 96 on January 1, 2011. The
bonds are dated January 1, 2011, 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, 2014, $1,800,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014? a. $180,000 loss b. $81,600 loss c. $108,000 loss d. $136,000 loss
96. On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note
(face amount, $120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest for a loan of this type is 10%. The present value of $120,000 at 10% for three years is $90,156. What amount of interest income should Ms. Price recognize in 2012? a. $9,016. b. $12,000. c. $36,000. d. $27,048.
97. On January 1, 2012, Jacobs Company sold property to Dains Company which originally
cost Jacobs $950,000. There was no established exchange price for this property. Danis gave Jacobs a $1,500,000 zero-interest-bearing note payable in three equal annual installments of $500,000 with the first payment due December 31, 2012. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,500,000 note payable in three equal annual installments of $500,000 at a 10% rate of interest is $1,243,500. What is the amount of interest income that should be recognized by Jacobs in 2012, using the effective-interest method? a. $0.
b. $50,000. c. $124,350. d. $150,000.
98. On January 1, 2012, Crown Company sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $3,000,000 zero-interest-bearing note payable in 5 equal annual installments of $600,000, with the first payment due December 31, 2012. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,163,000 at January 1, 2012. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2012 after adjusting entries are made, assuming that the effective-interest method is used? a. $0
b. $642,330 c. $669,600 d. $837,000
Long-Term Liabilities 14 - 23
Putnam Company‘s 2012 financial statements contain the following selected data:
Income taxes Interest expense Net income
Putnam‘s times interest earned for 2012 is a. 3.0 times b. 3.4 times. c. 4.0 times. d. 5.0 times.
In the recent year Hill Corporation had net income of $280,000, interest expense of $60,000, and tax expense of $80,000. What was Hill Corporation's times interest earned ratio for the year? a. 7.0 b. 5.0 c. 4.7 d. 3.7
In recent year Cey Corporation had net income of $350,000, interest expense of $70,000, and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year? a. $700,000 b. $630,000 c. $560,000
d. None of the above.
The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012, contained the following accounts.
5-year Bonds Payable 8% $2,000,000 Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 mo.) 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 2013) 25,000 The total long-term liabilities reported on the balance sheet are
a. $2,365,000. b. $2,350,000. c. $2,465,000. d. $2,450,000.
Use the following information for questions *103 through *105:
On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $580,000, an original cost of $960,000, and accumulated depreciation of $460,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2013, reduces the face amount of the note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
$40,000 25,000 60,000
14 - 24 Test Bank for Intermediate Accounting, Fourteenth Edition
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
b. $80,000 gain. c. $120,000 gain. d. $380,000 loss.
*104. Nolte should recognize a gain on the partial settlement and restructure of the debt of
b. $30,000. c. $110,000. d. $150,000.
*105. Nolte should record interest expense for 2013 of
b. $30,000. c. $60,000. d. $90,000.
MULTIPLE CHOICE—CPA Adapted
On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance? a. $3,045,000 b. $3,000,000 c. $2,970,000 d. $2,895,000
Long-Term Liabilities 14 - 25
On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000, which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%, resulting in bond premium of $540,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2012, Solis's adjusted unamortized bond premium should be a. $540,000. b. $503,200. c. $486,000. d. $406,000.
On July 1, 2011, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2017. The bonds were issued for $9,390,000 to yield 10%, resulting in a bond discount of $610,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2013, Noble's unamortized bond discount should be a. $528,100. b. $510,000. c. $488,000. d. $430,000.
On January 1, 2012, Huff Co. sold $3,000,000 of its 10% bonds for $2,655,888 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, 2012? a. $132,798 b. $150,000 c. $159,353 d. $180,000
On January 1, 2013, Doty Co. redeemed its 15-year bonds of $3,500,000 par value for 102. They were originally issued on January 1, 2001 at 98 with a maturity date of January 1, 2016. The bond issue costs relating to this transaction were $210,000. Doty amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?
a. $126,000 b. $84,000 c. $70,000 d. $0
On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of $9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at par plus a call premium of $105,000. What amount should Emig report in its 2013 income statement as loss on extinguishment of debt (ignore taxes)? a. $0
b. $105,000 c. $240,000 d. $345,000
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