FAR Unit 4

Paisley Incorporated borrowed $2,000,000 from State Bank on March 1, Year 1, at a rate of 6 percent. According to the loan agreement, Paisley must make principal payments of $200,000 plus appropriate interest payments every March 1 until the loan balance is paid off. Paisley has made timely principal and interest payments since the loan began. The interest payable balance to report in the December 31, Year 3, balance sheet should total:

a. $80,000

b. $96,000

c. $100,000

d. $98,000

a. $80,000

Acme Co.'s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:

• At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme's specifications.

• Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2, the invoice cost was $45,000.

In its December 31 balance sheet, what amount should Acme report as accounts payable?

a. $900,000

b. $850,000

c. $895,000

d. $945,000

a. $900,000

Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data:

Escrow liability beginning of year	500,000
Escrow receipts during the year	1,200,000
Real estate taxes paid during the year	1,450,000
Interest earned during the year	40,000

What amount represents the escrow liability balance on Hemple's books?

a. $290,000

b. $286,000

c. $210,000

d. $214,000

b. $286,000

On December 31, Year 1, Largo, Inc. had a $750,000 note payable outstanding, due July 31, Year 2. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 2. In February Year 2, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during Year 2. On March 3, Year 2, Largo issued its Year 1 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, Year 1, balance sheet?

a. $0

b. $750,000

c. $250,000

d. $500,000

c. $250,000

On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense?

a. $60,000

b. $95,000

c. $80,000

d. $75,000

c. $80,000

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

a. current liabilities of $30,000, long-term liabilities of $100,000

b. current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan

c. long-term liabilities of $130,000

d. current liabilities of $130,000

a. current liabilities of $30,000, long-term liabilities of $100,000

At the beginning of Year 1, a company hired an executive whose contract included the promise of payment of $100,000 in each of Years 6, 7, and 8, if the executive is employed at the end of Year 5. How should the compensation expense associated with this contract be recorded?

a. $37,500 in each of Years 1 through 8

b. $60,000 in each of Years 1 through 5

c. $100,000 in each of Years 6 through 8

d. $300,000 when the contract is signed

b. $60,000 in each of Years 1 through 5

The following information pertains to Dash Co.'s utility bills:

Period covered	Amount	Date paid
April 16–May 15	$5,000	June 1
May 16–June 15	$6,000	July 1
June 16–July 15	$8,000	August 1

What is the amount that Dash should report as a liability in its June 30 balance sheet?

a. $6,000

b. $10,000

c. $7,000

d. $14,000

b. $10,000

Under state law, Boca Co. may reimburse the state directly for actual unemployment claims or it may pay 3 percent of eligible gross wages. Boca believes that actual unemployment claims will be 2 percent of eligible gross wages, and has chosen to reimburse the state. Eligible gross wages are defined as the first $15,000 of gross wages paid to each employee. Boca had four employees, each of whom earned $20,000 during the year. What amount should Boca report as accrued liability for unemployment claims in its year-end balance sheet?

a. $1,200

b. $1,800

c. $2,400

d. $1,600

a. $1,200

During the current year, Casual Wear Co. had total retail sales of $800,000 and collected a 5 percent state sales tax on all sales. At the end of the prior year, Casual Wear had $4,500 in sales taxes that had not been remitted to the state authorities. During the current year, Casual Wear remitted $39,500 in state sales tax. What amount should be recorded in Casual Wear's current year financial statements?

a. $40,000 in sales tax revenue

b. $840,000 in sales revenue

c. $39,500 in sales tax expense

d. $5,000 in sales tax payable

d. $5,000 in sales tax payable

Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during the current year. In its December 31, balance sheet, what amount should Acme report as accrued liability for unemployment claims?

a. $3,000

b. $1,500

c. $2,000

d. $1,000

d. $1,000

The vacation policy for a company is as follows:

Years of Service	Annual Vacation (in Days)
1‒5	6
6‒10	12
11+	18

Employee information for the company is as follows:

Employee	Years of Service
A	1
B	6
C	12

The calendar-year company is closing its three-month period ended March 31. Each employee's gross pay is $100 per day, and no employee has taken any vacation time as of March 31. What amount should be accrued for vacation pay for the three-month period ended March 31?

a. $900

b. $450

c. $300

d. $150

a. $900

A company with a calendar year-end provides its 10 hourly employees with 12 paid vacation days per year that are earned at a rate of one day per month based on an eight-hour workday. The company believes that it is probable that the hourly employees will use 90 percent of their vacation days and forfeit the remaining 10 percent. In addition, the employees earn $15 per hour and have used a total of 50 vacation days through September 30, Year 1. Assuming that the company records adjusting journal entries monthly, what amount of vacation expense should the company have recognized for the nine months ended September 30, Year 1?

a. $6,000

b. $12,960

c. $14,400

d. $9,720

d. $9,720

Which of the following is a cost associated with exit and disposal activities?

a. costs to relocate employees

b. benefits related to voluntary employee termination

c. costs associated with the retirement of a fixed asset

d. costs to terminate a capital lease

a. costs to relocate employees

A company completes construction of a $400 million offshore oil platform and places it into service on January 1. State law requires that the platform be dismantled and removed at the end of its useful life, which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be $20 million. The discounted value of the liability is $9 million using the company's credit-adjusted, risk-free rate. The company has already capitalized the $400 million construction cost of the platform. What amounts should the company record as liability and expense when the asset is placed into service?

a. liability, $9,000,000; expense, $0

b. liability, $20,000,000; expense, $20,000,000

c. liability, $0; expense, $0

d. liability, $9,000,000; expense, $9,000,000

a. liability, $9,000,000; expense, $0

On November 30, Year 1, a company communicated a plan to close a distribution facility and terminate all 50 employees of the facility in 10 months, on September 30, Year 2. The company offered the employees working at the facility a termination benefit of $10,000 each if they would stay until September 30, Year 2, but no benefit will be paid to employees who terminate voluntarily before that date. The company estimates that 40 employees will receive the termination benefit. What amount, if any, should be recognized as a liability related to the termination benefit on December 31, Year 1?

a. $0

b. $40,000

c. $50,000

d. $400,000

b. $40,000

A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized?

a. the change in the liability is recognized in other comprehensive income

b. the change in the decommissioning liability is not recognized until it is settled

c. the change in the liability is recognized as a change in the carrying amount of the property if the liability increases but is otherwise recognized in profit and loss

d. the change in the liability is recognized in profit or loss

d. the change in the liability is recognized in profit or loss

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

a. $100,000

b. $10,000

c. $95,000

d. $50,000

b. $10,000

During Year 1, Smith Co. filed suit against West Inc. seeking damages for patent infringement. At December 31, Year 1, Smith's legal counsel believed that it was probable that Smith would be successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts in the range considered equally likely. In March Year 2, Smith was awarded $100,000 and received full payment thereof. In its Year 1 financial statements, issued in February Year 2, how should this award be reported?

a. as a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000

b. as a receivable and deferred revenue of $100,000

c. as a receivable and revenue of $100,000

d. as a disclosure of a contingent gain of $100,000

a. as a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000

During Year 1, Haft Co. became involved in a tax dispute with the IRS. At December 31, Year 1, Haft's tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the Year 1 financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000.

What amount of accrued liability should Haft have reported in its December 31, Year 1 balance sheet?

a. $275,000

b. $300,000

c. $250,000

d. $200,000

d. $200,000

On November 10, Year 1, a Garry Corp. truck was in an accident with an auto driven by Dacey. On January 10, Year 2, Garry received notice of a lawsuit seeking $800,000 in damages for personal injuries suffered by Dacey. Garry Corp.'s counsel believes it is reasonably possible that Dacey will be awarded an estimated amount in the range between $250,000 and $500,000, and that $400,000 is a better estimate of potential liability than any other amount. Garry's accounting year ends on December 31, and the Year 1 financial statements were issued on March 6, Year 2. What amount of loss should Garry accrue at December 31, Year 1?

a. $500,000

b. $400,000

c. $250,000

d. $0

d. $0

At December 31, Date Co. awaits judgment on a lawsuit for a competitor's infringement of Date's patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Date's December 31 financial statements?

a. by accrual for the lowest amount of the range of possible awards

b. in note disclosure only

c. neither in note disclosure nor by accrual

d. by accrual for the most likely award

b. in note disclosure only

Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martin's best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin report on its financial statements as a result of these two lawsuits?

a. $0

b. $20 million expense

c. $5 million income

d. $15 million expense

a. $0

Tiger Rags is evaluating its financial statement disclosures relating to gain contingencies. When should Tiger Rags recognize the gain on the contingency?

a. when reasonably possible and the amount can be estimated

b. when probable and the amount can be estimated

c. when clearly defined

d. when realized

d. when realized

Which of the following is an example of a loss contingency?

a. pledged assets

b. pending or threatened litigation

c. receivables sold without recourse

d. consigned goods

b. pending or threatened litigation

Which of the following is a loss contingency that generally does not require recognition in the financial statements?

a. obligations due to cash rebate offers

b. manufacturers’ product guarantees

c. claims by government agencies with probable negative outcomes

d. a threatened strike

d. a threatened strike

Butterfield Technologies has been named in a lawsuit relative to product defects that may have caused injuries to one of its customers. The plaintiff has requested a settlement of $500,000. Butterfield's attorney has determined that an unfavorable settlement is probable but estimates that the liability ranges between $150,000 and $300,000. In connection with this liability, Butterfield is most likely to:

a. record a liability for $300,000

b. record a liability for $500,000

c. record no liability but disclose pertinent liability exposure in the notes to the financial statements

d. record a liability for $150,000

d. record a liability for $150,000

On December 31, Year 1, Andover Co. acquired Barrelman Inc. Before the acquisition, a product lawsuit seeking $10 million in damages was filed against Barrelman. As of the acquisition date, Andover believed that it was probable that a liability existed and that the fair value of the liability was $5 million. What amount should Andover record as a liability as of December 31, Year 1?

a. $0

b. $10,000,000

c. $7,500,000

d. $5,000,000

d. $5,000,000

Paxton Co. signed contracts for the purchase of raw materials to be executed the following year at a firm price of $5 million. The market price of the materials dropped to $3 million on December 31. What amount should Paxton record as an estimated liability on purchase commitments as of December 31?

a. $5,000,000

b. $3,000,000

c. $2,000,000

d. $0

c. $2,000,000

Dari Inc. guaranteed the debt of a related party. In December, Dari learned that it is probable it will be required to pay between $150,000 and $200,000 within the next six months in satisfaction of its guarantee, but no amount within that range is more likely. What amount of contingent liability should Dari accrue in its December 31 balance sheet?

a. $0

b. $150,000

c. $175,000

d. $200,000

b. $150,000

A defendant has three outstanding lawsuits at the end of Year 1. The estimated loss for the first, second, and third cases are $5,000,000, $2,000,000, and $1,000,000, respectively. The likelihood that the defendant will lose the first case is highly probable. The chance of losing the second case is reasonably possible, but not probable. The chance of losing the third case is remote. What amount should the defendant accrue as a contingent liability at the end of Year 1?

a. $7,000,000

b. $2,000,000

c. $8,000,000

d. $5,000,000

d. $5,000,000

Which of the following methods should a company use to account for a contingent liability when the loss is probable but not reasonably estimated?

a. the liability should be reported as a short-term liability

b. the liability should only be disclosed in the notes to the financial statements

c. the liability should not be reported

d. the liability should be reported as a long-term liability

b. the liability should only be disclosed in the notes to the financial statements

During Year 2, a former employee of Dane Co. began a suit against Dane for wrongful termination in November year 1. After considering all of the facts, Dane's legal counsel believes that the former employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being the most likely amount. Dane's financial statements for the year ended December 31, Year 1, will not be issued until February Year 2. In its December 31, Year 1, balance sheet, what amount should Dane report as a liability with respect to the suit?

a. $1,000,000

b. $1,500,000

c. $0

d. $1,300,000

d. $1,300,000

In June, Northan Retailers sold refundable merchandise coupons. Northan received $10 for each coupon redeemable from July 1 to December 31 for merchandise with a retail price of $11. At June 30, how should Northan report these coupon transactions?

a. unearned revenues at the cash received amount

b. unearned revenues at the merchandise’s retail price

c. revenues at the merchandise’s retail price

d. revenues at the cash received amount

a. unearned revenues at the cash received amount

Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?

a. $0

b. $5,000

c. $20,000

d. $25,000

b. $5,000

Delect Co. provides repair services for the AZ195 TV set. Customers prepay the fee on the standard one-year service contract. The Year 1 and Year 2 contracts were identical, and the number of contracts outstanding was substantially the same at the end of each year. However, Delect's December 31, Year 2, deferred revenues' balance on unperformed service contracts was significantly less than the balance at December 31, Year 1. Which of the following situations might account for this reduction in the deferred revenue balance?

a. the Year 2 contract contribution margin was greater than the Year 1 contract contribution margin

b. the Year 2 contract contribution margin was less than the Year 2 contract contribution margin

c. most Year 2 contracts were signed earlier in the calendar year than were the Year 1 contracts

d. most Year 2 contracts were signed later in the calendar year than were the Year 1 contracts

c. most Year 2 contracts were signed earlier in the calendar year than were the Year 1 contracts

Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of Year 3, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and $96,000 were reported in Year 1 and Year 2, respectively. Sales for Year 3 were $5,000,000. What amount should be disclosed in Oak's Year 3 financial statements as warranty expense?

a. $88,000

b. $100,000

c. $138,000

d. $50,000

d. $50,000

Hill Corp. began production of a new product. During the first calendar year, 1,000 units of the product were sold for $1,200 per unit. Each unit had a two-year warranty. Based on warranty costs for similar products, Hill estimates that warranty costs will average $100 per unit. Hill incurred $12,000 in warranty costs during the first year and $22,000 in warranty costs during the second year. The company uses the expense warranty accrual method. What should be the balance in the estimated liability under warranties account at the end of the first calendar year?

a. $112,000

b. $66,000

c. $100,000

d. $88,000

d. $88,000

On December 30, Year 1, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note requiring 10 annual payments of $10,000. Door made the first payment on December 30, Year 1. The market interest rate for similar notes at date of issuance was 8 percent. Information on present value factors is as follows:

Period	Present value of $1 at 8%	Present value of ordinary annuity of of $1 at 8%
9	0.50	6.25
10	0.46	6.71

In its December 31, Year 1, balance sheet, what amount should Chang report as note receivable?

a. $67,100

b. $46,000

c. $62,500

d. $45,000

c. $62,500

On September 30, World Co. borrowed $1,000,000 on a 9 percent note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

a. $758,300

b. $750,000

c. $735,800

d. $825,800

a. $758,300

In accordance with Sam Company's loan agreement with First Bank, Sam Company must maintain a debt-to-equity ratio of 0.60 or less. At year-end, Sam Company's balance sheet includes total liabilities of $55,000 and total stockholders' equity of $95,500. What is Sam Company's debt-to-equity ratio at year-end, and has Sam Company met the bank's debt covenant requirement?

a. Sam Company’s debt-to-equity ratio at year-end is 1.74 and has not satisfied the bank’s debt convenant

b. Sam Company’s debt-to-equity ratio at year-end of 0.63 and has not satisfied the bank’s debt convenant

c. Sam Company’s debt-to-equity ratio at year-end is 0.37 and has satisfied the bank’s debt convenant

d. Sam Company’s debt-to-equity ratio at year-end is 0.58 and has satisfied the bank’s debt convenant

d. Sam Company’s debt-to-equity ratio at year-end is 0.58 and has satisfied the bank’s debt convenant

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance six months after the sale?

A. less than 75% of the original sales price

b. the present value of the remaining monthly payments discounted at 12%

c. less than the present value of the remaining monthly payments discounted at 12%

d. 75% of the original sales price

b. the present value of the remaining monthly payments discounted at 12%

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2.

In its December 31, Year 1, balance sheet, what amount should House report as note payable-contest winner, net of current portion?

a. $900,000

b. $418,250

c. $950,000

d. $368,250

b. $418,250

On August 15, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The four-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased?

a. prepaid interest

b. unearned discount

c. interest revenue

d. interest receivable

d. interest receivable

Which of the following is reported as interest expense?

a. postretirement healthcare benefits interest

b. interest incurred to finance construction of machinery for own use

c. imputed interest on non-interest bearing note

d. pension cost interest

c. imputed interest on non-interest bearing note

The discount resulting from the determination of a note payable's present value should be reported on the balance sheet as a (an):

a. addition to the face amount of the note

b. deferred charge separate from the note

c. deferred credit separate from the note

d. direct reduction from the face amount of the note

d. direct reduction from the face amount of the note

On December 31, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in nine months at 8% is .944. At what amount should the note payable be reported in Roth's December 31 balance sheet?

a. $10,300

b. $9,652

c. $10,000

d. $9,440

c. $10,000

On December 31, Key Co. received two $10,000 non-interest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key's December 31 balance sheet?

		Alpha	Omega
	A.	$9,440	$8,570
	B.	$10,000	$10,000
	C.	$9,440	$10,000
	D.	$10,000	$8,570

d. $10,000, $8,570

Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in three years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?

a. $100,000

b. $75,132

c. $110,000

d. $85,132

d. $85,132

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?

a. at the face amount with a separate deferred credit for the discount calculated at the imputed interest rate

b. at the face amount

c. at the face amount with a separate deferred asset for the discount calculated at the imputed interest rate

d. at the face amount minus a discount calculated at the imputed interest rate

d. at the face amount minus a discount calculated at the imputed interest rate

A company issued a financial instrument that unconditionally requires the company to settle the obligation by issuing common stock with a value of $500,000 on the settlement date. How should the company report this instrument in its financial statements?

a. as a liability in the balance sheet

b. by only disclosing an equity instrument in the notes

c. as an equity instrument in the balance sheet

d. by only disclosing a liability in the notes

a. as a liability in the balance sheet

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note?

a. $5,560

b. $8,000

c. $9,000

d. $5,045

a. $5,560

On January 1, Year 1, in exchange for receiving machinery from Trolley Co., Stockman Co. issued a $100,000 noninterest bearing note which is payable to Trolley in five years. Based on the value of the machinery, the imputed interest rate is 10%. The present value of the note on January 1, Year 1, is $62,092. What amount, if any, should Stockman record as interest expense for the year ended December 31, Year 1?

a. $6,209

b. $0

c. $10,000

d. $2,000

a. $6,209

Barr Co. has total debt of $420,000 and stockholders' equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?

a. $525,000

b. $330,000

c. $750,000

d. $225,000

b. $330,000

The market price of a bond issued at a premium is equal to the present value of its principal amount:

a. only, at the stated interest rate

b. and the present value of all future interest payments, at the market (effective) interest rate

c. only, at the market (effective) interest rate

d. and the present value of all future interest payments, at the stated interest rate

b. and the present value of all future interest payments, at the market (effective) interest rate

On January 2, Year 1, West Co. issued 9 percent bonds in the amount of $500,000, which mature on January 2, Year 11. The bonds were issued for $469,500 to yield 10 percent. Interest is payable annually on December 31. West uses the effective interest method of amortizing bond discount. In its June 30, Year 1 balance sheet, what amount should West report as bonds payable?

a. $469,500

b. $470,475

c. $471,025

d. $500,000

b. $470,475

What type of bonds mature in installments?

a. debenture

b. term

c. variable rate

d. serial

d. serial

A company issued bonds with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and face value of the bonds. The fair value of the bonds cannot be determined. What value, if any, should be assigned to the warrants?

a. no amount, because the total proceeds should be assigned to the bonds

b. the excess of the proceeds over the face value of the bonds

c. the proportion of the proceeds that the warrant’s fair value bears to the face value of the bonds

d. the fair value of the warrants

d. the fair value of the warrants

A corporation recently issued $4 million of 10-year, 3 percent bonds at 101. There were 200,000 detachable stock warrants included as part of the sale. Each warrant allows the bondholder to purchase one share of no par common stock for $12 per share. On the date of issuance, the stock warrants had a fair value of $1 per warrant. By what amount did the corporation's long-term debt increase as a result of this issuance?

a. $4,000,000

b. $4,040,000

c. $4,200,000

d. $3,840,000

d. $3,840,000

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

a. serial bonds

b. term bonds

c. sinking fund bonds

d. debenture bonds

a. serial bonds

A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-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 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over the 15-year bond's:

a. carrying amount

b. face amount

c. face amount less the deferred loss on bond retirement

d. carrying amount less the deferred loss on bond retirement

a. carrying amount

Which of the following statements is incorrect regarding a bond issued at par ($100,000) paying a 4.5% coupon and maturing in 7 years?

a. amortization is equal to zero each period

b. the present value of interest payments will be equal to the present value of the principal

c. interest expense is equal to interest payable each period

d. the market rate of interest will equal the coupon rate on the bonds

b. the present value of interest payments will be equal to the present value of the principal

Young Co. issues $800,000 of 10% bonds dated January 1, Year 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in five years. The current market for similar bonds is 8%. The entire issue is sold on the date of issue. The following values are given:

	Present value of ordinary annuity	Present value of $1
N = 10; i = 0.04	8.11090	0.67556
N = 10; i = 0.05	7.72173	0.61391

What amount of proceeds on the sale of bonds should Young report?

a. $864,884

b. $815,564

c. $799,997

d. $849,317

a. $864,884

A company issues bonds at 98, with a 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 credit to bond premium of $1,000

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

d. a debit to bond discount of $1,000

d. a debit to bond discount of $1,000

Bex Inc. issues a 7% coupon, $100,000 bond maturing in 10 years. The bond pays interest semiannually, and market rates at the time of issuance are 8%.

PV of $1 at 7% for 10 periods	0.5083
PV of $1 at 8% for 10 periods	0.4632
PV of $1 at 3.5% for 20 periods	0.5026
PV of $1 at 4% for 20 periods	0.4564
PV of an annuity of $1 at 7% for 10 periods	7.0236
PV of an annuity of $1 at 8% for 10 periods	6.7101
PV of an annuity of $1 at 3.5% for 20 periods	14.2124
PV of an annuity of $1 at 4% for 20 periods	13.5903

Using the factor table above, what is the approximate discount/premium amount at bond issuance?

a. $6,710

b. $7,100

c. $7,020

d. $6,795

d. $6,795

Grant Co. issued $500,000 face-value, five-year, 8 percent bonds on December 31, Year 1. The bonds pay interest annually, and were sold to yield 7 percent. Present value factors are as follows:

	7%	8%
Present value of $1, five periods	0.712986	0.680583
Present value of ordinary annuity of $1, five periods	4.100197	3.992710
Present value of annuity due of $1, five periods	4.387211	4.312127

What amount of long-term liability should Grant report on December 31, Year 1, for this sale?

a. $500,000

b. $512,777

c. $520,501

d. $531,981

c. $520,501

Which of the following statements describes the relationship of interest expense related to bonds payable when a discount on bonds payable has been recorded using the effective interest method?

a. interest expense will be the same each year

b. interest expense will increase by a larger amount each year

c. interest expense will increase by the same amount each year

d. interest expense will decrease each year

b. interest expense will increase by a larger amount each year

If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders' equity?

		Interest expense	Total stockholders' equity
	A.	Overstated	Understated
	B.	Understated	Understated
	C.	Overstated	Overstated
	D.	Understated	Overstated

a. overstated, understated

Converge Corp. sold a $100,000 bond at 95 and incurred $3,000 of bond issuance costs. Which of the following statements is correct?

a. the discount of $8,000 is amortized using the effective interest method over the life of the bond

b. the discount of $5,000 is amortized using the straight-line method over the life of the bond

c. a debit to cash is booked for $100,000

d. an asset is booked for $3,000

a. the discount of $8,000 is amortized using the effective interest method over the life of the bond

On December 31, Year 1, Todd Corporation issued 500 of its 10%, $1,000 bonds at 105. The bonds were issued through an underwriter to whom Todd paid bond issuance costs of $15,000. On the December 31, Year 1 balance sheet, Todd should report the bond liability at:

a. $510,000

b. $515,000

c. $525,000

d. $500,000

a. $510,000

On July 1, Year 1, Eagle Corp. issued 600 of its 10 percent, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 1 and mature on April 1, Year 11. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance?

a. $579,000

b. $609,000

c. $594,000

d. $600,000

b. $609,000

On January 31, Year 2, Beau Corp. issued $300,000 maturity value, 12 percent bonds for $300,000 cash. The bonds are dated December 31, Year 1, and mature on December 31, Year 11. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 2, balance sheet?

a. $18,000

b. $9,000

c. $24,000

d. $27,000

b. $9,000

On January 2, Year 1, Nast Co. issued 8% bonds with a face amount of $1,000,000 that mature on January 2, Year 7. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How is the carrying amount of the bonds affected by the error?

		At December 31, Year 1	At January 2, Year 7
	A.	Overstated	Understated
	B.	Overstated	No effect
	C.	Understated	Overstated
	D.	Understated	No effect

b. overstated, no effect

On July 1, Year 7, Dean Co. issued, at a premium, bonds with a due date of July 1, Year 12. Dean incorrectly used the straight-line method instead of the effective interest method to amortize the premium. How were the following amounts affected by the error at June 30, Year 12?

		Bond carrying amount	Retained earnings
	A.	Understated	Overstated
	B.	No effect	No effect
	C.	Overstated	Understated
	D.	Overstated	No effect

b. no effect, no effect

Which of the following is reported as interest expense?

a. pension cost interest

b. amortization of discount of a note

c. deferred compensation plan interest

d. interest incurred to finance a software development for internal use

b. amortization of discount of a note

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

a. carrying value of the bonds at the beginning of the period by the effective interest rates

b. face value of the bonds at the beginning of the period by the effective interest rates

c. face value of the bonds at the beginning of the period by the contractual interest rate

d. carrying value of the bonds at the beginning of the period by the contractual interest rate

c. face value of the bonds at the beginning of the period by the contractual interest rate

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

a. minus discount

b. minus discount minus par value

c. plus discount

d. plus discount plus par value

c. plus discount

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 2, the carrying amount of the outstanding bond was $105,000. Assuming annual interest payments, what amount of unamortized premium on bond should Webb report in its June 30, Year 3, balance sheet?

a. $3,950

b. $1,050

c. $4,300

d. $4,500

c. $4,300

On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. Greendale uses the effective interest method for amortizing premiums on bonds payable. What is the balance of the premiums on bonds payable account immediately following the first interest payment?

a. $22,960

b. $34,440

c. $33,691

d. $23,709

d. $23,709

Novastar Corporation issued 2,000 of its $1,000, 10% ten-year bonds dated July 1, Year 1 on July 1, Year 1, at a time when the market paid 9% for bonds of similar risk. Interest is payable annually. The bonds were properly carried at $2,134,000 upon issue. On its December 31, Year 1 financial statements, Novastar Corporation would display the following balances:

		Bonds Payable	Unamortized  Premium	Accrued Interest  Payable	Interest  Expense
	A.	$2,000,000	$126,060	$200,000	$192,060
	B.	$2,000,000	$141,940	$200,000	$192,060
	C.	$2,000,000	$137,970	$100,000	$ 96,030
	D.	$2,000,000	$130,030	$100,000	$ 96,030

d. $2,000,000, $130,030, $100,000, $96,030

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
1	Year	Cash paid	Interest expense	Discount amortization	Carrying amount
2	1				$86,580
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 + D3

b. E2 + C3

c. E2 - C3

d. E2 - D3

a. E2 + D3

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?

a. a debit to the unamortized bond discount

b. an interest expense that is less than the cash payment made to bondholders

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

d. a debit to the unamortized bond premium

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

On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds?

a. $360,000

b. $480,000

c. $476,400

d. $367,200

a. $360,000

On January 1, Year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available:

	5%	8%
Present value of $1 (n = 5)	0.78353	0.68058
Present value of an ordinary annuity (n = 5)	4.32948	3.99271

What amount is the value of net bonds payable at the end of Year 1?

a. $90,064

b. $88,022

c. $110,638

d. $100,000

a. $90,064

On January 1, 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?

a. $46,446

b. $47,106

c. $46,768

d. $46,139

c. $46,768

A bond issued on June 1, of the current year, has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 31 is for a period of:

a. seven months

b. six months

c. four months

d. three months

a. seven months

On January 1, Year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $8,000. On January 1, Year 2, what amount should Oak report as bonds payable, net of discount?

a. $388,000

b. $388,300

c. $380,000

d. $392,000

a. $388,000

Septer Corporation issued 2,000 of its $1,000, 8% ten-year bonds dated July 1,Year 1 on September 1, Year 1, at a time when the market paid 9% for bonds of similar risk. The bonds were quoted at 94 and pay interest quarterly on September 30 and December 31. What were the total proceeds of the bond issue at the time of sale?

a. $2,000,000

b. $1,880,000

c. $1,906,667

d. $1,893,333

c. $1,906,667

On April 1, Martin Co. issued 1,000 of its $1,000 face amount 10 percent bonds at 97. The bonds are dated January 1 of the same year and will mature in 10 years. Martin pays interest semiannually on January 1 and July 1. What amount of cash did Martin receive at the time of issuance?

a. $970,000

b. $971,500

c. $995,000

d. $1,050,000

c. $995,000

On July 31, Year 1, Dome Co. issued $1,000,000 of 10 percent, 15-year bonds at par and (as a typical risk-management strategy to Dome Co.) used a portion of the proceeds to call its 600 outstanding 11 percent, $1,000 face value bonds, due on July 31, Year 11, at 102. On that date, unamortized bond premium relating to the 11 percent bonds was $65,000. In its Year 1 income statement, what amount should Dome report as gain or loss from retirement of bonds?

a. $(77,000) loss

b. $(65,000) loss

c. $0

d. $53,000 gain

d. $53,000 gain

On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. The amount is material and considered to be unusual in nature and infrequently occurring with respect to Somar Co. How should Somar report the bond retirement on its Year 6 income statement under U.S. GAAP?

a. a loss in other comprehensive income

b. a gain in other comprehensive income

c. a loss in continuing operations

d. a gain in continuing operations

c. a loss in continuing operations

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene:

Carrying amount of liability liquidated	150,000
Carrying amount of real estate transferred	100,000
Fair value of real estate transferred	90,000

What amount should Knob report as a pretax gain (loss) on restructuring of payables under U.S. GAAP?

a. $50,000

b. ($10,000)

c. $60,000

d. $0

c. $60,000

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene:

Carrying amount of liability liquidated	150,000
Carrying amount of real estate transferred	100,000
Fair value of real estate transferred	90,000

What amount should Knob report as gain (loss) on transfer of real estate?

a. ($10,000)

b. $0

c. $50,000

d. $60,000

a. ($10,000)

During Year 2, Colt Co. experienced financial difficulties and is likely to default on a $1,000,000, 15%, 3-year note dated January 1, Year 1, payable to Cain National Bank. On December 31, Year 2, the bank agreed to settle the note and unpaid Year 2 interest of $150,000 for $820,000 cash payable on January 31, Year 3. What is the amount of gain, before income taxes, from the debt restructuring?

a. $150,000

b. $180,000

c. $0

d. $330,000

d. $330,000

Anchor Co. is experiencing financial difficulties. Anchor negotiated a settlement of $100,000 in debt owed to Bowden Inc. in exchange for Anchor’s gross receivables of $100,000. The receivables have an allowance for uncollectible accounts of $25,000. The impact of this transaction on Anchor’s net income is a $25,000:

a. loss on restructuring of payables

b. decrease in bad debt expense

c. gain on restructuring of payables

d. increase in bad debt expense

c. gain on restructuring of payables

Which of the following statements is correct regarding callable bonds?

a. the call price is often set at a discount to par

b. an issuer is more likely to call a bond when interest rates move lower

c. a callable bond provides an option for the bondholder

d. bondholders will typically require a lower rate of return for callable bonds

b. an issuer is more likely to call a bond when interest rates move lower

Weald Co. took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a (an):

a. part of continuing operations

b. deferred credit to be amortized over life of new debt

c. a reduction of interest expense for the year

d. separate item, net of income taxes

a. part of continuing operations

Which of the following statements is correct regarding a 10-year bond issued at 96 and fully redeemed at 102 three years later?

a. the unamortized discount will be added to the carrying value to determine gain/loss

b. a loss will be reported in income from continuing operations

c. the unamortized premium will be subtracted from the carrying value to determine gain/loss

d. a gain will be reported in income from continuing operations

b. a loss will be reported in income from continuing operations

A bond is issued at a premium and redeemed at a discount to par. Any gain or loss as a result of extinguishment prior to maturity will be booked as a:

a. gain in retained earnings as an accounting adjustment

b. loss in retained earnings as an accounting adjustment

c. gain in income from continuing operations

d. loss in income from continuing operations

c. gain in income from continuing operations

Which of the following statements is correct regarding a discount bond redeemed at a premium to par under U.S. GAAP?

a. had a gain been booked when the bond was redeemed, it would have gone to other comprehensive income

b. the bond payable account will be debited at the premium price paid to redeem the issue

c. bond issuance costs not fully amortized will increase the size of the loss booked

d. the greater the discount at issuance, the lower the loss upon extinguishment

c. bond issuance costs not fully amortized will increase the size of the loss booked