Bakersfield College

ACG 2021

1)What is the interest expense on the bonds in 2017?

a.$700,700.

b.     $600,000.

c.     $347,464.

d.     $100,700.

2. What is the book value of the bonds as of December 31, 2017? a.       $8,834,770.

b.     $8,686,606.

c.     $8,734,070.

d.     $8,783,433.

3. What would be the total interest cost of the bonds over their full term? a.       $1,359,033.

b.     $4,640,967.

c.     $6,000,000.

d.     $7,359,033.

Use the following to answer questions:

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2016. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

4. What is the stated annual rate of interest on the bonds? a.         3%.

b.     4%.

c.     6%.

d.     8%.

5. What is the effective annual rate of interest on the bonds? a.   3%.

b.     4%.

c.     6%.

d.     8%.

6. What is the interest expense on the bonds in 2017? a.         $800,000.

b.     $680,759.

c.     $342,971.

d.     $119,241.

7. What is the book value of the bonds as of December 31, 2017? a.         $11,432,379.

b.     $11,375,350.

c.     $11,316,611.

d.     $11,256,109.

8. What would be the total interest expense recognized for the bond issue over its full term? a.   $ 6,512,253.

b.     $ 8,000,000.

c.     $ 9,487,747.

d.     $11,487,747.

Use the following to answer questions:

Auerbach Inc. issued 4% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 6%.

9. Auerbach issued the bonds:
   1. At par.
   2. At a premium.
   3. At a discount.
   4. Cannot be determined from the given information.

10. How much cash interest does Auerbach pay on March 31, 2017?
    1. $ 6.0 million
    2. $12.0 million
    3. $ 9.0 million
    4. $18.0 million

11. Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2016 income statement?

a.     $0.

b.     $3,830,535.

c.     $5,107,380.

d.     $7,661,070.

12. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2016, rounded up to the nearest thousand?

a.     $252,369,000.

b.     $256,369,000.

c.     $256,200,000.

d.     $257,030,070.

13. Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2017, rounded up to the nearest thousand?

a.     $252,369,000.

b.     $256,369,000.

c.     $256,300,000.

d.     $257,030,000.

14. During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid

$100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

a.     $330,000.

b.     $300,000.

c.     $120,000.

d.     $ 20,000.

15. Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond book value, respectively?
    1. Understated, understated.
    2. Understated, overstated.
    3. Overstated, understated.
    4. Overstated, overstated.

16. Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays interest at 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?
    1. Both bonds sell for the same amount.
    2. Both bonds sell for more than $100,000.
    3. Bond X sells for more than bond Y.
    4. Bond Y sells for more than bond X.

17. Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?
    1. Both bonds sell for the same amount.
    2. Bond X sells for more than bond Y.
    3. Bond Y sells for more than bond X.
    4. Both bonds sell at a discount.

18. On June 30, 2016, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016, and mature on June 30, 2026. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2016?

a.       $32,000.

b.       $40,000.

c.        $46,000.

d.       $60,000.

19. On January 1, 2016, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2026. Zebra paid

$50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond book value reported in the December 31, 2016, balance sheet?

a.     $1,045,000.

b.     $1,040,000.

c.     $987,000.

d.     $982,000.

20. On January 1, 2016, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2017 (assume annual interest payments and amortization)?

a.     $23,280.

b.     $25,140.

c.     $29,100.

d.     $29,610.

21. Cramer Company sold five-year, 8% bonds on October 1, 2016. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2016, income statement (assume straight-line amortization)? a. $ 2,000.

b.     $ 1,900.

c.     $ 1,778.

d.     $ 2,040.

22. In each succeeding payment on an installment note:
    1. The amount of interest paid increases.
    2. The amount of principal paid increases.
    3. The amount of principal paid decreases.
    4. The amounts paid for both interest and principal increase proportionately.

23. When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:
    1. The invoice price.
    2. The wholesale price.
    3. The present value of cash outflows discounted at the stated rate.
    4. The present value of the note payments discounted at the market rate.

24. When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:
    1. Not be required.
    2. Be for six months.
    3. Be for four months.
    4. Be for 10 months.