21.

An example of an item which is not a liability is

dividends payable in stock.

22. The covenants and other terms of the agreement between the issuer of bonds
and the lender are set forth in the
bond indenture.

23. The term used for bonds that are unsecured as to principal is
debenture bonds.
P
24. Bonds for which the owners' names are not registered with the issuing
corporation are called
bearer bonds.
S
25. Bonds that pay no interest unless the issuing company is profitable are called
income bonds.
S
26. If bonds are issued initially at a premium and the effective-interest method of
amortization is used, interest expense in the earlier years will be
greater than if the straight-line method were used.

27. The interest rate written in the terms of the bond indenture is known as the
coupon rate, nominal rate, or stated rate.

28. The rate of interest actually earned by bondholders is called the

effective, yield, or market rate.

Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%.

29. One step in calculating the issue price of the bonds is to multiply the principal by
the table value for
20 periods and 4% from the present value of 1 table.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten
years from date of issue. If the bonds were issued at a premium, this indicates
that
the nominal rate of interest exceeded the market rate.

32. If bonds are initially sold at a discount and the straight-line method of
amortization is used, interest expense in the earlier years will
exceed what it would have been had the effective-interest method of
amortization been used.

33. Under the effective-interest method of bond discount or premium amortization,

the periodic interest expense is equal to
the market rate multiplied by the beginning-of-period carrying amount of
the bonds.
34. When the effective-interest method is used to amortize bond premium or
discount, the periodic amortization will
increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
credit to Interest Expense.

36. When the interest payment dates of a bond are May 1 and November 1, and a
bond issue is sold on June 1, the amount of cash received by the issuer will be
increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could be

expensed when incurred.
reported as a reduction of the bond liability.
debited to a deferred charge account and amortized over the life of the
bonds.

38. The printing costs and legal fees associated with the issuance of bonds should
be accumulated in a deferred charge account and amortized over the life of
the bonds.

39. Treasury bonds should be shown on the balance sheet as

a deduction from bonds payable issued to arrive at net bonds payable and
outstanding.

40. An early extinguishment of bonds payable, which were originally issued at a

premium, is made by purchase of the bonds between interest dates. At the time
of reacquisition
any costs of issuing the bonds must be amortized up to the purchase date.
the premium must be amortized up to the purchase date.
interest must be accrued from the last interest date to the purchase date.

41. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a difference between the reacquisition price and the net carrying amount of
the debt which should be recognized in the period of redemption.
P
42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a company provides for the future repayment of a long-term debt by
placing purchased securities in an irrevocable trust.
P
43. A corporation borrowed money from a bank to build a building. The long-term
note signed by the corporation is secured by a mortgage that pledges title to the
building as security for the loan. The corporation is to pay the bank $80,000 each
year for 10 years to repay the loan. Which of the following relationships can you
expect to apply to the situation?
The amount of interest expense will decrease each period the loan is
outstanding, while the portion of the annual payment applied to the loan
principal will increase each period.
S
44. A debt instrument with no ready market is exchanged for property whose fair
market value is currently indeterminable. When such a transaction takes place
the present value of the debt instrument must be approximated using an
imputed interest rate.

45. When a note payable is issued for property, goods, or services, the present value
of the note is measured by
the fair value of the property, goods, or services.
the market value of the note.
using an imputed interest rate to discount all future payments on the note.

46. When a note payable is exchanged for property, goods, or services, the stated
interest rate is presumed to be fair unless
no interest rate is stated.
the stated interest rate is unreasonable.
the stated face amount of the note is materially different from the current
cash sales price for similar items or from current market value of the
note.

47. Discount on Notes Payable is charged to interest expense

using the effective-interest method.

48. Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
All of these are examples of "off-balance-sheet financing."
S
49. When a business enterprise enters into what is referred to as off-balance-sheet
financing, the company
can enhance the quality of its financial position and perhaps permit credit
to be obtained more readily and at less cost.
S
50. Long-term debt that matures within one year and is to be converted into stock
should be reported
as noncurrent and accompanied with a note explaining the method to be
used in its liquidation.

51. Which of the following must be disclosed relative to long-term debt maturities and
sinking fund requirements?
The amount of future payments for sinking fund requirements and long-
term debt maturities during each of the next five years.

52. Note disclosures for long-term debt generally include all of the following except
names of specific creditors.

53. The times interest earned ratio is computed by dividing

income before income taxes and interest expense by interest expense.

54. The debt to total assets ratio is computed by dividing

total liabilities by total assets.
*55. In a troubled debt restructuring in which the debt is continued with modified terms
and the carrying amount of the debt is less than the total future cash flows,
a new effective-interest rate must be computed.

*56. A troubled debt restructuring will generally result in a

gain by the debtor and a loss by the creditor.

*57. In a troubled debt restructuring in which the debt is settled by a transfer of assets
with a fair market value less than the carrying amount of the debt, the debtor
would recognize
a gain on the settlement.

*58. In a troubled debt restructuring in which the debt is continued with modified
terms, a gain should be recognized at the date of restructure, but no interest
expense should be recognized over the remaining life of the debt, whenever the
carrying amount of the pre-restructure debt is greater than the total future
cash flows.

*59. In a troubled debt restructuring in which the debt is continued with modified terms
and the carrying amount of the debt is less than the total future cash flows, the
creditor should
calculate its loss using the historical effective rate of the loan.

Use the following information for questions 60 through 62:

On January 1, 2010, Ellison Co. issued eight-year bonds with a face value of $1,000,000
and a stated interest rate of 6%, payable semiannually on June 30 and December 31.
The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6%........................................... .627
Present value of 1 for 8 periods at 8%........................................... .540
Present value of 1 for 16 periods at 3%......................................... .623
Present value of 1 for 16 periods at 4%......................................... .534
Present value of annuity for 8 periods at 6%................................. 6.210
Present value of annuity for 8 periods at 8%................................. 5.747
Present value of annuity for 16 periods at 3%............................... 12.561
Present value of annuity for 16 periods at 4%............................... 11.652

60. The present value of the principal is

$534,000.
$1,000,000 × .534 = $534,000

61. The present value of the interest is

$349,560.
($1,000,000 × .03) × 11.652 = $349,560

62. The issue price of the bonds is

$883,560.
$534,000 + $349,560 = $883,560
 63. Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2010
on January 1, 2010. 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?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.2123
6
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.3600
9

$5,218,809
($5,000,000 × .78120) + ($150,000 × 8.75206) = $5,218,809

64. Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2010 at

97 plus accrued interest. The bonds are dated January 1, 2010, and pay interest
on June 30 and December 31. What is the total cash received on the issue date?
$19,700,000
($20,000,000 × .97) + ($1,800,000 × 2/12) = $19,700,000

65.Everhart Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2010 on
January 1, 2010. The bonds pays interest semiannually on June 30 and
December 31. The bonds are issued to yield 5%. What are the proceeds from the
bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.2123
6
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.3600
9

$10,437,618
($10,000,000 × .78120) + ($300,000 × 8.75206) = $10,437,618

66. Farmer Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2010 at

97 plus accrued interest. The bonds are dated January 1, 2010, and pay interest
on June 30 and December 31. What is the total cash received on the issue date?
$9,850,000
($10,000,000 × .97) + ($900,000 × 2/12) = $9,850,000

67. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $19,604,145. Using effective-interest amortization, how much interest
expense will be recognized in 2010?
$1,568,498
($19,604,145 × .04) + ($19,608,310 × .04) = $1,568,498
68. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1,
2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $19,604,145. Using effective-interest amortization, what will the
carrying value of the bonds be on the December 31, 2010 balance sheet?
$19,612,643
$19,604,145 + [($19,604,145 × .04) – $780,000]+ [$19,608,310 × .04) –
$780,000] = $19,612,643.

69. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2009. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $19,604,145. Using straight-line amortization, what is the carrying
value of the bonds on December 31, 2011?
$19,663,523
$19,604,145 + ($395,855 × 3/20) = $19,663,523

70. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $19,604,145. What is interest expense for 2011, using straight-line
amortization?
$1,579,793
($20,000,000 × .078) + ($395,855 ÷ 20) = $1,579,793

71. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $4,901,036. Using effective-interest amortization, how much interest
expense will be recognized in 2010?
$392,124
($4,901,036 × .04) + ($4,902,077 × .04) = $392,124

72. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $4,901,036. Using effective-interest amortization, what will the
carrying value of the bonds be on the December 31, 2010 balance sheet?
$4,903,160
$4,901,036 + [($4,901,036 × .04) – $195,000] + [($4,902,077 × .04) – $195,000] =
$4,903,160

73. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2009. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $4,901,036. Using straight-line amortization, what is the carrying value
of the bonds on December 31, 2011?
$4,915,881
$4,901,036 + ($98,964 × 3/20) = $4,915,881

74. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2010. Interest is paid on June 30 and December 31. The proceeds from the
bonds are $4,901,036. What is interest expense for 2011, using straight-line
amortization?
 $394,948
($5,000,000 × .078) + ($98,964 ÷ 20) = $394,948
75. On January 1, 2010, Huber Co. sold 12% bonds with a face value of $600,000.
The bonds mature in five years, and interest is paid semiannually on June 30 and
December 31. The bonds were sold for $646,200 to yield 10%. Using the
effective-interest method of amortization, interest expense for 2010 is
$64,436.
$646,200 × .05 = $32,310
[$646,200 – ($36,000 – $32,310)] × .05 = 32,126
$64,436

76. On January 2, 2010, a calendar-year corporation sold 8% bonds with a face

value of $600,000. These bonds mature in five years, and interest is paid
semiannually on June 30 and December 31. The bonds were sold for $553,600
to yield 10%. Using the effective-interest method of computing interest, how
much should be charged to interest expense in 2010?
$55,544.
$553,600 × .05 = $27,680
[$553,600 + ($27,680 – $24,000)] × .05 = 27,864
$55,544

The following information applies to both questions 77 and 78. On October 1, 2010
Macklin Corporation issued 5%, 10-year bonds with a face value of $1,000,000 at 104.
Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a
straight-line basis.

77. The entry to record the issuance of the bonds would include a credit of
$40,000 to Premium on Bonds Payable.
($1,000,000 × 1.04) – $1,000,000 = $40,000 premium

78. Bond interest expense reported on the December 31, 2010 income statement of
Macklin Corporation would be
$11,500
[($1,000,000 × .05) × 3/12] – [($40,000 ÷ 10) × 3/12] = $11,500

The following information applies to both questions 79 and 80. On October 1, 2010
Bartley Corporation issued 5%, 10-year bonds with a face value of $500,000 at 104.
Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a
straight-line basis.

79. The entry to record the issuance of the bonds would include a
credit of $20,000 to Premium on Bonds Payable.
($500,000 × 1.04) – $500,000 = $20,000 premium

80. Bond interest expense reported on the December 31, 2010 income statement of
Bartley Corporation would be
$5,750
[($500,000 × .05) × 3/12] – [($20,000 ÷ 10) × 3/12] = $5,750
81. At the beginning of 2010, Wallace Corporation issued 10% bonds with a face
value of $900,000. These bonds mature in the five years, and interest is paid
semiannually on June 30 and December 31. The bonds were sold for 833,760 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 2010? (Round your answer to the nearest dollar.)
$100,353
($833,760 × .06) = $50,026; [$50,026 – ($900,000 × .05)] = $5,026
($833,760 + $5,026) × .06 = $50,327
$50,026 + $50,327 = $100,353

82. 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
$285,500.
($4,695,000 × .10) – ($5,000,000 × .09) = $19,500
($5,000,000 – $4,695,000) – $19,500 = $285,500

83. On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. 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:
$184,500
($3,000,000 × .11) – ($3,195,000 × .10) = $10,500
($3,195,000 – $3,000,000) – $10,500 = $184,500

84. At the beginning of 2010, Winston Corporation issued 10% bonds with a face
value of $600,000. These bonds mature in five years, and interest is paid
semiannually on June 30 and December 31. The bonds were sold for 555,840 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 2010? (Round your answer to the nearest dollar.)
$66,901
($555,840 × .06) = $33,350; [$33,350 – ($600,000 × .05)] = $3,350
($555,840 + $3,350) × .06 = $33,551
$33,350 + $33,551 = $66,901

85. Kant Corporation retires its $100,000 face value bonds at 102 on January 1,
following the payment of interest. The carrying value of the bonds at the
redemption date is $96,250. The entry to record the redemption will include a
credit of $3,750 to Discount on Bonds Payable.
$100,000 – $96,250 = $3,750 discount
86. Carr Corporation retires its $100,000 face value bonds at 105 on January 1,
following the payment of interest. The carrying value of the bonds at the
redemption date is $103,745. The entry to record the redemption will include a
debit of $3,745 to Premium on Bonds Payable.
$103,745 – $100,000 = $3,745 premium.
87. At December 31, 2010 the following balances existed on the books of Foxworth
Corporation:
Bonds Payable $2,000,000
Discount on Bonds Payable 160,000
Interest Payable 50,000
Unamortized Bond Issue Costs 120,000

If the bonds are retired on January 1, 2011, at 102, what will Foxworth report as a
loss on redemption?
$320,000
($2,000,000 × 1.02) – ($2,000,000 – $160,000 – $120,000) = $320,000

88. At December 31, 2010 the following balances existed on the books of Rentro
Corporation:
Bonds Payable $1,500,000
Discount on Bonds Payable 120,000
Interest Payable 37,000
Unamortized Bond Issue Costs 90,000

If the bonds are retired on January 1, 2011, at 102, what will Rentro report as a
loss on redemption?
$240,000
($1,500,000 × 1.02) – ($1,500,000 – $120,000 – $90,000) = $240,000

89. The December 31, 2010, balance sheet of Hess Corporation includes the
following items:
9% bonds payable due December 31, 2019 $1,000,000
Unamortized premium on bonds payable 27,000
The bonds were issued on December 31, 2009, at 103, with interest payable on
July 1 and December 31 of each year. Hess uses straight-line amortization. On
March 1, 2011, Hess retired $400,000 of these bonds at 98 plus accrued interest.
What should Hess record as a gain on retirement of these bonds? Ignore taxes.
$18,600.

= $410,600 (CV of retired bonds)

  $27, 000 2 
 $1, 027, 000      .4
  18 6 

$410,600 – ($400,000 × .98) = $18,600.

90. On January 1, 2004, Hernandez Corporation issued $4,500,000 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, 2010, when the fair market value of the bonds was 96,
Hernandez repurchased $1,000,000 of the bonds in the open market at 96.
Hernandez has recorded interest and amortization for 2010. Ignoring income
taxes and assuming that the gain is material, Hernandez should report this
reacquisition as
a gain of $49,000.
= $1,009,000 (CV of retired bonds)
  $135,000  
 $4,500,000x1.03   10
 7  2/9
 


$1,009,000 – ($1,000,000  .96) = $49,000.

91. The 10% bonds payable of Nixon Company had a net carrying amount of
$570,000 on December 31, 2010. The bonds, which had a face value of
$600,000, 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, 2011, several years before their maturity, Nixon retired the bonds at 102.
The interest payment on July 1, 2011 was made as scheduled. What is the loss
that Nixon should record on the early retirement of the bonds on July 2, 2011?
Ignore taxes.
$37,800.
$570,000 + [($570,000 × .06) – ($600,000 × .05)] = $574,200 (CV of bonds)
$574,200 – ($600,000 × 1.02) = $37,800.

92. A corporation called an outstanding bond obligation four years before maturity. At
that time there was an unamortized discount of $300,000. To extinguish this debt,
the company had to pay a call premium of $100,000. Ignoring income tax
considerations, how should these amounts be treated for accounting purposes?
Charge $400,000 to a loss in the year of extinguishment.
$300,000 + $100,000 = $400,000

93. The 12% bonds payable of Nyman Co. had a carrying amount of $832,000 on
December 31, 2010. The bonds, which had a face value of $800,000, 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, 2011,
several years before their maturity, Nyman retired the bonds at 104 plus accrued
interest. The loss on retirement, ignoring taxes, is
$6,400.
$832,000 – [($800,000 × .06) – ($832,000 × .05)] = $825,600 (CV of bonds)
($800,000 × 1.04) – $825,600 = $6,400

94. Didde Company issues $10,000,000 face value of bonds at 96 on January 1,

2009. The bonds are dated January 1, 2009, 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, 2012, $6,000,000 of the
bonds are called at 102 plus accrued interest. What gain or loss would be
recognized on the called bonds on September 1, 2012?
$272,000 loss
 {$9,600,000 + [$400,000 × (3 2/3 ÷ 10)]} × .60 = $5,848,000
$6,120,000 – $5,848,000 = $272,000.

95. Cortez Company issues $5,000,000 face value of bonds at 96 on January 1,

2009. The bonds are dated January 1, 2009, 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, 2012, $3,000,000 of the
bonds are called at 102 plus accrued interest. What gain or loss would be
recognized on the called bonds on September 1, 2012?
$136,000 loss
{$4,800,000 + [$200,000 × (3 2/3 ÷ 10)]} × .60 = $2,924,000
$3,060,000 – $2,924,000 = $136,000

96. On January 1, 2010, Ann Price loaned $45,078 to Joe Kiger. A zero-interest-
bearing note (face amount, $60,000) was exchanged solely for cash; no other
rights or privileges were exchanged. The note is to be repaid on December 31,
2012. The prevailing rate of interest for a loan of this type is 10%. The present
value of $60,000 at 10% for three years is $45,078. What amount of interest
income should Ms. Price recognize in 2010?
$4,508.
$45,078 × .10 = $4,508

97. On January 1, 2010, Jacobs Company sold property to Dains Company which
originally cost Jacobs $760,000. There was no established exchange price for
this property. Danis gave Jacobs a $1,200,000 zero-interest-bearing note
payable in three equal annual installments of $400,000 with the first payment due
December 31, 2010. The note has no ready market. The prevailing rate of
interest for a note of this type is 10%. The present value of a $1,200,000 note
payable in three equal annual installments of $400,000 at a 10% rate of interest
is $994,800. What is the amount of interest income that should be recognized by
Jacobs in 2010, using the effective-interest method?
$99,480.
$994,800 × .10 = $99,480

98. On January 1, 2010, Crown Company sold property to Leary Company. There
was no established exchange price for the property, and Leary gave Crown a
$2,000,000 zero-interest-bearing note payable in 5 equal annual installments of
$400,000, with the first payment due December 31, 2010. The prevailing rate of
interest for a note of this type is 9%. The present value of the note at 9% was
$1,442,000 at January 1, 2010. What should be the balance of the Discount on
Notes Payable account on the books of Leary at December 31, 2010 after
adjusting entries are made, assuming that the effective-interest method is used?
$428,220
$2,000,000 – $1,442,000 – ($1,442,000 × .09) = $428,220
99. Putnam Company’s 2010 financial statements contain the following selected
data:
Income taxes $40,000
Interest expense 20,000
Net income 60,000
Putnam’s times interest earned for 2010 is
6 times.
$60,000 + $40,000 + $20,000
————————————— = 6 times.
$20,000

100. In the recent year Hill Corporation had net income of $140,000, interest expense
of $40,000, and tax expense of $20,000. What was Hill Corporation's times
interest earned ratio for the year?
5.0
($140,000 + $40,000 + $20,000) ÷ $40,000 = 5.0

101. In recent year Cey Corporation had net income of $250,000, interest expense of
$50,000, and a times interest earned ratio of 9. What was Cey Corporation's
income before taxes for the year?
$400,000
($250,000 + $50,000 + X) ÷ $50,000 = 9
($300,000 + X) = 9 × $50,000
X = $150,000; IBT = $400,000 ($250,000 + $150,000

102. The adjusted trial balance for Lifesaver Corp. at the end of the current year,
2010, contained the following accounts.
5-year Bonds Payable 8% $1,500,000
Bond 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 Payable 18,000
Taxes Payable (due 3/15 of 2011) 25,000

The total long-term liabilities reported on the balance sheet are

$1,950,000.
$1,500,000 + $100,000 + $165,000 + ($200,000 – $15,000) = $1,950,000

Use the following information for questions *103 through *105:

On December 31, 2008, Nolte Co. is in financial difficulty and cannot pay a note due that
day. It is a $600,000 note with $60,000 accrued interest payable to Piper, Inc. Piper
agrees to accept from Nolte equipment that has a fair value of $290,000, an original cost
of $480,000, and accumulated depreciation of $230,000. Piper also forgives the accrued
interest, extends the maturity date to December 31, 2011, reduces the face amount of
the note to $250,000, and reduces the interest rate to 6%, with interest payable at the
end of each year.

*103. Nolte should recognize a gain or loss on the transfer of the equipment of
$40,000 gain.
$290,000 – ($480,000 – $230,000) = $40,000

*104. Nolte should recognize a gain on the partial settlement and restructure of the
debt of
$75,000.
($600,000 + $60,000) – [$290,000 + $250,000 + ($250,000 × 06 × 3)]
= $75,000.

*105. Nolte should record interest expense for 2011 of

$0.
0. The effective-interest rate is 0%

106. On July 1, 2010, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus
accrued interest. The bonds are dated April 1, 2010 and mature on April 1, 2020.
Interest is payable semiannually on April 1 and October 1. What amount did
Spear receive from the bond issuance?
$1,015,000
($1,000,000 × .99) + ($1,000,000 × .10 × 3/12) = $1,015,000

107. On January 1, 2010, Solis Co. issued its 10% bonds in the face amount of
$3,000,000, which mature on January 1, 2020. The bonds were issued for
$3,405,000 to yield 8%, resulting in bond premium of $405,000. Solis uses the
effective-interest method of amortizing bond premium. Interest is payable
annually on December 31. At December 31, 2010, Solis's adjusted unamortized
bond premium should be
$377,400.
$405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400

108. On July 1, 2009, Noble, Inc. issued 9% bonds in the face amount of $5,000,000,
which mature on July 1, 2015. The bonds were issued for $4,695,000 to yield
10%, resulting in a bond discount of $305,000. Noble uses the effective-interest
method of amortizing bond discount. Interest is payable annually on June 30. At
June 30, 2011, Noble's unamortized bond discount should be
$264,050.
2009–2010:$4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]
= $4,714,500.
2010–2011: $4,714,500 + ($471,450 – $450,000) = $4,735,950
$5,000,000 – $4,735,950 = $264,050.
109. On January 1, 2010, Huff Co. sold $1,000,000 of its 10% bonds for $885,296 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,
2010?
$53,118
$885,296 × .06 = $53,118

110. On January 1, 2011, Doty Co. redeemed its 15-year bonds of $2,500,000 par
value for 102. They were originally issued on January 1, 1999 at 98 with a
maturity date of
January 1, 2014. The bond issue costs relating to this transaction were
$150,000. 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)?
$90,000
($2,500,000 × 1.02) – = $90,000
  $200, 000  
 $2, 300, 000    12
  15  

111. On its December 31, 2010 balance sheet, Emig Corp. reported bonds payable of
$6,000,000 and related unamortized bond issue costs of $320,000. The bonds
had been issued at par. On January 2, 2011, Emig retired $3,000,000 of the
outstanding bonds at par plus a call premium of $70,000. What amount should
Emig report in its 2011 income statement as loss on extinguishment of debt
(ignore taxes)?
$230,000
($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000

112. On January 1, 2006, Goll Corp. issued 1,000 of its 10%, $1,000 bonds for
$1,040,000. These bonds were to mature on January 1, 2016 but were callable
at 101 any time after December 31, 2009. Interest was payable semiannually on
July 1 and January 1. On
July 1, 2011, Goll called all of the bonds and retired them. Bond premium was
amortized on a straight-line basis. Before income taxes, Goll's gain or loss in
2011 on this early extinguishment of debt was
$8,000 gain.
– ($1,000,000 × 1.01) = $8,000
  $40, 000  
 $1, 040,000    11
  20  

113. On June 30, 2011, Omara Co. had outstanding 8%, $3,000,000 face amount, 15-
year bonds maturing on June 30, 2021. Interest is payable on June 30 and
December 31. The unamortized balances in the bond discount and deferred
bond issue costs accounts on June 30, 2011 were $105,000 and $30,000,
respectively. On June 30, 2011, Omara acquired all of these bonds at 94 and
retired them. What net carrying amount should be used in computing gain or loss
on this early extinguishment of debt?
 $2,865,000.
$3,000,000 – ($105,000 + $30,000) = $2,865,000

114. A ten-year bond was issued in 2009 at a discount with a call provision to retire
the bonds. When the bond issuer exercised the call provision on an interest date
in 2011, the carrying amount of the bond was less than the call price. The amount
of bond liability removed from the accounts in 2011 should have equaled the
face amount less unamortized discount.

115. Paige Co. took advantage of market conditions to refund debt. This was the
fourth refunding operation carried out by Paige within the last three years. The
excess of the carrying amount of the old debt over the amount paid to extinguish
it should be reported as a
part of continuing operations.

*116. Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated
December 31, 2009. Because of Eddy's financial difficulties developing in 2011,
Eddy owed accrued interest of $48,000 on the note at December 31, 2011.
Under a troubled debt restructuring, on December 31, 2011, Cole agreed to settle
the note and accrued interest for a tract of land having a fair value of $360,000.
Eddy's acquisition cost of the land is $290,000. Ignoring income taxes, on its
2011 income statement Eddy should report as a result of the troubled debt
restructuring
Gain on Disposal Restructuring Gain
$70,000 $88,000

$360,000 – $290,000 = $70,000

($400,000 + $48,000) – $360,000 = $88,000