Question

The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study long-term debt while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
a. Less the present value of all future interest payments at the rate of interest stated on the bond.
b. Plus the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Less the present value of all future interest payments at the market (effective) rate of interest.
2. A bond issue on June 1, 2013, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2013, is for a period of
a. Three months
b. Four months
c. Six months
d. Seven months
3. On July 1, 2013, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, 2023, and pay interest semiannually on June 30 and December 31.
Using the effective interest method, Pell recorded bond discount amortization of $1,800 for the six months ended December 31, 2013. From this long-term investment, Pell should report 2013 revenue of
a. $16,800
b. $18,200
c. $20,000
d. $21,800
4. The following information pertains to Camp Corp.'s issuance of bonds on July 1, 2013:

.:.
What should be the issue price for each $1,000 bond?
a. $ 700
b. $ 807
c. $ 864
d. $1,000
5. For a bond issue that sells for less than its face value, the market rate of interest is
a. Higher than the rate stated on the bond.
b. Dependent on the rate stated on the bond.
c. Equal to the rate stated on the bond.
d. Less than the rate stated on the bond.
6. On January 31, 2013, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, 2012, and mature on December 31, 2022. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, 2013, balance sheet?
a. $ 9,000
b. $18,000
c. $27,000
d. $24,000
7. On January 1, 2008, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2018, but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox's gain or loss in 2013 on this early extinguishment of debt was
a. $ 8,000 gain
b. $10,000 loss
c. $12,000 gain
d. $30,000 gain
8. On April 30, 2013, Witt Corp. had outstanding 8%, $1,000,000 face amount, convertible bonds maturing on April 30, 2021. Interest is payable on April 30 and October 31. On April 30, 2013, all these bonds were converted into 40,000 shares of $20 par common stock. On the date of conversion:
• Unamortized bond discount was $30,000.
• Each bond had a market price of $1,080.
• Each share of stock had a market price of $28.
Using the book value method, how much of a gain or loss should be recognized?
a. $ 0
b. $150,000
c. $110,000
d. $ 30,000
9. On June 30, 2013, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, 2018.
Interest was payable semiannually every June 30 and December 31. On June 30, 2013, after amortization was recorded for the period, the unamortized bond premium and bond issuance costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2013, what amount should King recognize as gain before income taxes on redemption of bonds?
a. $ 20,000
b. $ 80,000
c. $120,000
d. $180,000
10. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray's common stock. Total proceeds from the issue amounted to $240,000. The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000.
The bonds were issued at a discount of (rounding the allocation percentage to two decimal places):
a. $ 0
b. $ 800
c. $ 4,000
d. $33,898 Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for long-term debt.
11. On May 1, 2013, Maine Co. issued 10-year convertible bonds at 103. During 2015, the bonds were converted into common stock. Maine prepares its financial statements according to International Accounting Standards (IFRS). On May 1, 2013, cash proceeds from the issuance of the convertible bonds should be reported as
a. A liability for the entire proceeds.
b. Paid-in capital for the entire proceeds.
c. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
d. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.
12. When bonds and other debt securities are issued, payments such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Rushing International prepares its financial statements using IFRS:
a. The recorded amount of the debt is increased by the transaction costs.
b. The decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense.
c. The transaction costs are recorded separately as an asset.
d. The increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.



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