The following questions are used in the Kaplan CPA Review Course to study long-term liabilities 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, 2011, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2011, is for a period of
a. Three months
b. Four months
c. Six months
d. Seven months
3. On July 1, 2011, 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, 2019, and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the six months ended December 31, 2011. From this long-term investment, Pell should report 2011 revenue of
4. The following information pertains to Camp Corp.'s issuance of bonds on July 1, 2011:
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, 2011, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, 2010, and mature on December 31, 2020. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, 2011, balance sheet?
a. $ 9,000
7. On January 1, 2006, Fox 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, 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 2011 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, 2011, Witt Corp. had outstanding 8%, $1,000,000 face amount, convertible bonds maturing on April 30, 2019. Interest is payable on April 30 and October 31. On April 30, 2011, 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
d. $ 30,000
9. On June 30, 2011, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, 2016. Interest was payable semiannually every June 30 and December 31. On June 30, 2011, 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, 2011, what amount should King recognize as gain before income taxes on redemption of bonds?
a. $ 20,000
b. $ 80,000
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