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Exam 14: Bonds and Long-Term Notes

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Question 1

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During 2016 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000,10%,four-year note dated January 1,2014,payable to Third Bank.Interest was last paid on December 31,2015.On December 31,2016,Third Bank accepted $250,000 in settlement of the note.Ignoring income taxes,what amount should Marquis report as a gain from the debt restructuring in its 2016 income statement?

A) $20,000.
B) $50,000.
C) $80,000.
D) $0.

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Question 2

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Bonds were issued at a discount.In the bond amortization schedule:

A) The interest expense is less with each successive interest payment.
B) The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid.
C) The outstanding balance (book value) of the bonds declines eventually to face value.
D) The reduction in the discount is less with each successive interest payment.

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Question 3

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Pierce Company issued 11% bonds,dated January 1,with a face amount of $800,000 on January 1,2016.The bonds sold for $739,816 and mature in 2035 (20 years) .For bonds of similar risk and maturity the market yield was 12%.Interest is paid semiannually on June 30 and December 31.Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value.On December 31,2016,the fair value of the bonds was $730,000.The entire change in fair value was due to a change in the general (risk-free) rate of interest.Pierce's net income for the year will include:

On January 31,2016,B Corp.issued $600,000 face value,12% bonds for $600,000 cash.The bonds are dated December 31,2015,and mature on December 31,2025.Interest will be paid semiannually on June 30 and December 31.What amount of accrued interest payable should B report in its September 30,2016,balance sheet?

Which of the following indicates the margin of safety provided to creditors?

On January 1,2016,Ozark Minerals issued $10 million of 9%,10-year convertible bonds at 101.The bonds pay interest on June 30 and December 31.Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock.Bonds that are similar in all respects,except that they are nonconvertible,currently are selling at 99.Upon issuance,Ozark should:

A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is 11%.These bonds will sell at a price that is:

In each succeeding payment on an installment note:

Cramer Company sold five-year,8% bonds on October 1,2016.The face amount of the bonds was $100,000,while the issue price was $102,000.Interest is payable on April 1 of each year.The fiscal year of Cramer Company ends on December 31.How much interest expense will Cramer Company report in its December 31,2016,income statement (assume straight-line amortization) ?

For a bond issue that sells for more than the bond face amount,the effective interest rate is:

On January 1,2016,Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a book amount of $966,130.The indenture specified a call price of $981,000.The bonds were issued previously at a price to yield 14%.Tiny Tim called the bonds (retired them) on July 1,2016.What is the amount of the loss on early extinguishment?

When bonds are retired prior to their maturity date:

Eagle Company issued 10-year bonds at 96 during the current year.In the year-end financial statements,the discount should be:

When bonds are sold at a premium and the effective interest method is used,at each subsequent interest payment date,the cash paid is:

What is the stated annual rate of interest on the bonds?

Required: What amount of interest expense on these bonds would Morton Sales Co.report in its 2016 income statement?

A $500,000 bond issue sold at 98.Therefore,the bonds:

When bonds are sold at a premium,if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue,the annual amount of the straight-line amortization of premium is:

Listed below are 4 terms followed by a list of phrases that describe or characterize each of the terms.Match each phrase with the number for the most correct term.

The book value of zero-coupon bonds increases by the periodic amount of interest recognized.