1. On January 1, 2013, Legion Company sold $270,000 of 8% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $236,352, priced to yield 10%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2013, in the amount of (Round your answer to the nearest dollar amount):
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$13,500
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$11,818
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$10,800
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$43,200
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2. A bond issue with a face amount of $800,000 bears interest at the rate of 6%. The current market rate of interest is 7%. These bonds will sell at a price that is:
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The answer cannot be determined from the information provided.
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Less than $800,000.
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More than $800,000.
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Equal to $800,000
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3. On January 1, 2013, Solo Inc. issued 1,800 of its 9%, $1,000 bonds at 99. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Solo paid $69,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for the year is:
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$172,500
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$162,000
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$170,700
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$163,800
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4. On January 31, 2013, B Corp. issued $600,000 face value, 9% bonds for $600,000 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 B report in its September 30, 2013, balance sheet? (Do not round your intermediate calculation.)
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$13,500.
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$27,000.
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$40,500.
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$36,000.
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5. Auerbach Inc. issued 5% bonds on October 1, 2013. The bonds have a maturity date of September 30, 2023 and a face value of $400 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2014. The effective interest rate established by the market was 7%.
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How much cash interest does Auerbach pay on March 31, 2014? (Round your answer in millions to two decimal places.)
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$14.00 million
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$28.00 million
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$10.00 million
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$20.00 million
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6. Cramer Company sold 5-year, 8% bonds on October 1, 2013. The face amount of the bonds was $190,000, while the issue price was $202,000. 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, 2013, income statement (assume straight-line amortization)? (Do not round your intermediate calculation.)
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$4,040
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$3,800
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$2,600
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$3,200
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7. Nickel Inc. bought $300,000 of 3-year, 7% bonds as an investment on December 31, 2012 for $321,000. Nickel uses straight-line amortization. On May 1, 2013, $60,000 of the bonds were redeemed at 119. How much, and what type of gain or loss, most likely results from this redemption? (Do not round your intermediate calculation.)
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$7,667 ordinary loss.
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$7,667 extraordinary gain.
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$7,667 ordinary gain.
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$7,667 extraordinary loss.
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Lopez Plastics Co. (LPC) issued callable bonds on January 1, 2013. LPC's accountant has projected the following amortization schedule from issuance until maturity:
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Date
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Cash interest
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Effective interest
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Decrease in balance
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Outstanding balance
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1/1/2013
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$207,020
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6/30/2013
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$7,000
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$6,211
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$789
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206,230
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12/31/2013
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7,000
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6,187
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813
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205,417
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6/30/2014
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7,000
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6,163
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837
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204,580
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12/31/2014
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7,000
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6,137
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863
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203,717
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6/30/2015
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7,000
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6,112
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888
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202,829
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12/31/2015
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7,000
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6,085
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915
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201,913
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6/30/2016
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7,000
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6,057
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943
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200,971
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12/31/2016
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7,000
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6,029
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971
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200,000
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8. What is the annual stated interest rate on the bonds?
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3.5%.
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6%.
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7%.
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None of the above is correct.
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9. What is the annual effective interest rate on the bonds?
10. Bonds are issued on June 1 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2013, is for a period of:
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Three months.
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Four months.
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Six months.
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Seven months.
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11. How would the carrying value of bonds payable be affected by the amortization of each of the following?
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Premium
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Discount
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a.
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No effect
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No effect
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b.
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No effect
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Increase
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c.
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Increase
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Decrease
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d.
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Decrease
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Increase
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Option a
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Option b
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Option c
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Option d
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12. For a bond issue that sells for more than the bond face amount, the effective interest rate is:
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The rate printed on the face of the bond.
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The Wall Street Journal prime rate.
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More than the rate stated on the face of the bond.
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Less than the rate stated on the face of the bond.
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13. Auerbach Inc. issued 4% bonds on October 1, 2013. The bonds have a maturity date of September 30, 2023 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2014. The effective interest rate established by the market was 6%
How much cash interest does Auerbach pay on March 31, 2014?
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$6.0 million
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$12.0 million
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$9.0 million
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$18.0 million
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14. 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 carrying value, respectively?
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Understated, understated.
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Understated, overstated.
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Overstated, understated.
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Overstated, overstated.
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15. In each succeeding payment on an installment note:
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The amount of interest paid increases.
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The amount of principal paid increases.
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The amount of interest paid is unchanged.
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The amounts paid for both interest and principal increase proportionately.
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16. 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:
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Not be required.
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Be for six months.
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Be for four months.
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Be for 10 months.
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17. Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:
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Face amount price less any unamortized discount or plus any unamortized premium.
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Current bond market price.
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Face amount less any unamortized premium or plus any unamortized discount.
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Face amount less accrued interest since the last interest payment date.
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18. MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2012 for $106,000. MSG uses straight-line amortization. On May 1, 2013, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?
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$667 ordinary loss.
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$667 extraordinary loss.
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$667 ordinary gain.
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$667 extraordinary gain.
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