Bakersfield College

ACG 2021

1)On January 1, 2016, Tiny Tim Industries had outstanding $1,000,000 of 12% bonds with a book amount of $966,130. The indenture specified a call price of $981,000. The bonds were issued previously at a price to yield 14%. Tiny Tim called the bonds (retired them) on July 1, 2016. What is the amount of the loss on early extinguishment?

a.     $0.

b.     $6,932.

c.     $7,241.

d.     $7,629

2. On March 1, 2016, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2026. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2016, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders’ equity?

a.    $            0.

b.   $ 30,000.

c.     $ 90,000.

d.   $120,000.

3. On January 1, 2016, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2021, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

Book value method                           Market value method

1. 1. no gain or loss                                       no gain or loss
   2. no gain or loss                                                  loss
   3. loss                                                  no gain or loss
   4. loss                                                            loss

4. On June 30, 2016, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2021. Interest is payable semiannually every June 30 and December 31. On June 30, 2016, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds

on the open market at 98 and retired them. At June 30, 2016, what amount should K Co. recognize as gain on redemption of bonds before income taxes?

a.    $ 40,000.

b.   $160,000.

c.     $240,000.

d.   $360,000.

5. On January 1, 2011, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2021, but were callable at 101 any time after December 31, 2014. Interest was payable semiannually on July 1 and January 1. On July 1, 2016, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2016 on this early extinguishment of debt was:

a.    $16,000 gain.

b.   $20,000 loss.

c.     $24,000 gain.

d.   $60,000 gain.

6. Crawford Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?
   1. Interest expense and a gain.
   2. Interest expense and a loss.
   3. A gain and no interest expense.
   4. Interest expense and no gain or loss.

7. Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2016. The bonds sold for $739,816 and mature in 2035 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December

31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2016, the fair value of the bonds was $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce’s net income for the year will include:
    1. An unrealized gain from change in the fair value of debt of $10,617.
    2. An unrealized loss from change in the fair value of debt of $10,617.
    3. A gain from change in the fair value of debt of $10,204.
    4. A loss from change in the fair value of debt of $10,204.

8. Markel Inc. has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed. Markel elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?
   1. Interest expense and a gain.
   2. Interest expense and a loss.
   3. A gain and no interest expense.
   4. Interest expense and no gain or loss.

9. Rick’s Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2017. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick’s determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2017, the fair value of the bonds was $365,000, with

$2,000 of the change due to a change in general interest rates. Rick’s statement of comprehensive income will include:

1. 1. An unrealized gain from change in the fair value of debt of $5,412.
   2. An unrealized loss from change in the fair value of debt of $3,412.
   3. An unrealized gain from change in the fair value of debt of $2,000.
   4. An unrealized gain from change in the fair value of debt of $3,412.

10. On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, the bonds were converted into common stock when the market price of Doll’s common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS). On March 1, 2016, cash proceeds from the issuance of the convertible bonds should be reported as:
    1. A liability for the entire proceeds.
    2. Paid-in capital for the entire proceeds.
    3. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
    4. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

11. When a company issues bonds between interest dates, the entry to record the issuance of the bonds will:
    1. Include a credit to interest payable.
    2. Include a debit to interest expense.
    3. Include a debit to cash that has been reduced by interest accrued from the last interest date.
    4. Include a debit to cash that has been increased by interest that will accrue from sale to the next interest date.

12. TMC issued $50 million of its 12% bonds on April 1, 2016, at 98 plus accrued interest. The bonds are dated January 1, 2016, and mature on December 31, 2035. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance?
    1. $50.5 million.
    2. $51.5 million.
    3. $49.0 million.
    4. $49.5 million.

13. On September 1, 2016, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

a.     $378,000.

b.     $364,000.

c.     $354,667

d.     $350,000.

14. When a company issues bonds between interest dates the entry to record the issuance of the bonds will:
    1. Include a debit to cash that has been reduced by accrued interest from the last interest date.
    2. Include a credit to accrued interest payable.
    3. Include a debit to interest expense.
    4. Be unaffected by the timing of issue.