I.                  Multiple Choice (Answer the best)

  

   1.    An example of an item which is not a liability is

            a.    dividends payable in stock.

            b.   advances from customers on contracts.

            c.    accrued estimated warranty costs.

            d.   the portion of long-term debt due within one year.

 

    2.     The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

            a.    bond indenture.

            b.   bond debenture.

            c.    registered bond.

            d.   bond coupon.

 

    3.     The term used for bonds that are unsecured as to principal is

            a.    junk bonds.

            b.   debenture bonds.

            c.    indebenture bonds.

            d.   callable bonds.

 

     4.     The interest rate written in the terms of the bond indenture is known as the

            a.    coupon rate.

            b.   nominal rate.

            c.    stated rate.

            d.   coupon rate, nominal rate, or stated rate.

 

    5.     The rate of interest actually earned by bondholders is called the

            a.    stated rate.

            b.   yield rate.

            c.    effective rate.

            d.   effective, yield, or market rate.

 

    6.     Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue.  If the bonds were issued at a premium, this indicates that

            a.    the effective yield or market rate of interest exceeded the stated (nominal) rate.

            b.   the nominal rate of interest exceeded the market rate.

            c.    the market and nominal rates coincided.

            d.   no necessary relationship exists between the two rates.

 

     7.       Under the effective interest method of bond discount or premium amortization, the periodic interest expense is equal to

            a.    the stated (nominal) rate of interest multiplied by the face value of the bonds.

            b.   the market rate of interest multiplied by the face value of the bonds.

            c.    the stated rate multiplied by the beginning-of-period carrying amount of the bonds.

            d.   the market rate multiplied by the beginning-of-period carrying amount of the bonds.

 

    8.     If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

            a.    debit to Interest Payable.

            b.   credit to Interest Receivable.

            c.    credit to Interest Expense.

            d.   credit to Unearned Interest.

 

     9.     Theoretically, the costs of issuing bonds could be

            a.    expensed when incurred.

            b.   reported as a reduction of the bond liability.

            c.    debited to a deferred charge account and amortized over the life of the bonds.

            d.   any of these.

 

   10.     An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates.  At the time of reacquisition

            a.    any costs of issuing the bonds must be amortized up to the purchase date.

            b.   the premium must be amortized up to the purchase date.

            c.    interest must be accrued from the last interest date to the purchase date.

            d.   all of these.

 

    11.     The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

            a.    an adjustment to the cost basis of the asset obtained by the debt issue.

b.   an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.

c.    an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.

d.   a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

 

   12.     Note disclosures for long-term debt generally include all of the following except

a.    assets pledged as security.

            b.   call provisions and conversion privileges.

            c.    restrictions imposed by the creditor.

            d.   names of specific creditors.

 

 

  13.   Which of the following is not a debt security?

            a.    Convertible bonds

            b.   Commercial paper

            c.    Loans receivable

            d.   All of these are debt securities.

 

   14.     A correct valuation is

            a.    available-for-sale at amortized cost.

            b.   held-to-maturity at amortized cost.

            c.    held-to-maturity at fair value.

            d.   none of these.

 

   15.     Securities which could be classified as held-to-maturity are

            a.    redeemable preferred stock.

            b.   warrants.

            c.    municipal bonds.

            d.   treasury stock.

 

   16.     A requirement for a security to be classified as held-to-maturity is

            a.    ability to hold the security to maturity.

            b.   positive intent.

            c.    the security must be a debt security.

            d.   All of these are required.

 

   17.     Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the securities to maturity, the entry to record the investment includes

            a.    a debit to Held-to-Maturity Securities at $300,000.

            b.   a credit to Premium on Investments of $15,000.

            c.    a debit to Held-to-Maturity Securities at $315,000.

            d.   none of these.

 

   18.     Which of the following is not correct in regard to trading securities?

a.    They are held with the intention of selling them in a short period of time.

b.   Unrealized holding gains and losses are reported as part of net income.

            c.    Any discount or premium is not amortized.

            d.   All of these are correct.

 

   19.     Unrealized holding gains or losses which are recognized in income are from securities classified as

            a.    held-to-maturity.

            b.   available-for-sale.

            c.    trading.

            d.   none of these.

     

 20.      An unrealized holding loss on a company's available-for-sale securities should be reflected in the current financial statements as

            a.    an extraordinary item shown as a direct reduction from retained earnings.

            b.   a current loss resulting from holding securities.

            c.    a note or parenthetical disclosure only.

            d.   other comprehensive income and deducted in the equity section of the balance sheet.

 

   21.     An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as

            a.    an extraordinary item shown as a direct increase to retained earnings.

            b.   a current gain resulting from holding securities.

            c.    a note or parenthetical disclosure only.

            d.   other comprehensive income and included in the equity section of the balance sheet.

 

  22.     In accounting for investments in debt securities that are classified as trading securities,

            a.    a discount is reported separately.

            b.   a premium is reported separately.

            c.    any discount or premium is not amortized.

            d.   none of these.

 

  23.     Investments in debt securities are generally recorded at

            a.    cost including accrued interest.

            b.   maturity value.

            c.    cost including brokerage and other fees.

            d.   maturity value with a separate discount or premium account.

 

  24.     Investments in debt securities should be recorded on the date of acquisition at

            a.    lower of cost or market.

            b.   market value.

            c.    market value plus brokerage fees and other costs incident to the purchase.

            d.   face value plus brokerage fees and other costs incident to the purchase.

 

  25.     An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

            a.    debit to Available-for-Sale Securities.

            b.   debit to the discount account.

            c.    debit to Interest Revenue.

            d.   none of these.

 

  26.     APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the

            a.    effective interest method of allocation must be used.

            b.   straight-line method of allocation must be used.

c.    effective interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

            d.   par value method must be used and therefore no allocation is necessary.

 

  27.     When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

            a.    The investor should always use the equity method to account for its       investment.

b.   The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

c.    The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.

            d.   The investor should always use the fair value method to account for its investment.

     

28.       If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

            a.    cost method.

            b.   fair value method.

            c.    divesture method.

            d.   equity method.

 

  29.     Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as

            a.    a reduction of the carrying value of the investment.

            b.   additional paid-in capital.

            c.    an addition to the carrying value of the investment.

            d.   dividend income.

 

 30.         Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

            a.    investor sells the investment.

            b.   investee declares a dividend.

            c.    investee pays a dividend.

            d.   earnings are reported by the investee in its financial statements.

 

 

     

 

 

 

 

 

 

 

 

II. Problem: Bond issue price and amortization.

On January 1, 2004, Lowry Co. issued ten-year bonds with a face value of $2,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

            Present value of 1 for 10 periods at 10% .........................................            .386

            Present value of 1 for 10 periods at 12% .........................................            .322

            Present value of 1 for 20 periods at 5% ...........................................            .377

            Present value of 1 for 20 periods at 6% ...........................................            .312

            Present value of annuity for 10 periods at 10% ...........................          6.145

            Present value of annuity for 10 periods at 12% ...........................         5.650

            Present value of annuity for 20 periods at 5% ............................        12.462

            Present value of annuity for 20 periods at 6% ............................        11.470

 

Instructions (Show computations in good form)

(a) Calculate the issue price of the bonds.

(b) Without prejudice to your solution in part (a), assume that the issue price was $1,768,000.  Prepare the amortization table for 2004 and 2005, assuming that amortization is recorded on interest payment dates.

 

 

III. Problem:Retirement of bonds.

Instructions:   Prepare journal entries to record the following retirement.  (Show computations in good form)

The December 31, 2004 balance sheet of Marin Co. included the following items:

           

          7.5% bonds payable due December 31, 2012…………………………………$800,000

         Unamortized discount on bonds payable……………………………………………….32,000

 

The bonds were issued on December 31, 2002 at 95, with interest payable on June 30 and December 31.  (Use straight-line amortization.)

 

On January 2, 2005, Marin retired $160,000 of these bonds at 101.

 

 

 

 

 

IV. Problem: Entries for Bonds Payable.

 

Instructions:  Prepare journal entries to record the following transactions related to long-term bonds of Renn Co.  Show computations in good form.

(a) On April 1, 2004, Renn issued $900,000, 9% bonds for $968,163 including accrued interest.  Interest is payable annually on January 1, and the bonds mature on January 1, 2014.

(b) On July 1, 2006 Renn retired $270,000 of the bonds at 102 plus accrued interest. Renn uses straight-line amortization.

 

 

 

 

V. Problem: Investment in debt securities

On April 1, 2004, Sean Co. purchased $360,000 of 6% bonds for $374,175 plus accrued interest as an available-for-sale security.   Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2009.

 

Instructions

(a) Prepare the journal entry on April 1, 2004.

     (b)  The bonds are sold on November 1, 2005 at 103 plus accrued interest. Amortization was recorded when interest was received by the straight-line method (by months and round to the nearest dollar). Prepare all entries required to properly record the sale.

 

 

 

 

 

 

 

 

 

 

VI. Problem:  

Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Maxey Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Kerwin Company.

 

 

                                                                                                                    (a) Fair Value Method              (b) Equity Method      

                                                                                                                       Investment       Dividend         Investment     Investment

                                                                                                                         Account          Revenue            Account          Revenue

                                                                                                       —————————————————————————

1.      At the beginning of Year 1, Maxey bought 30% of Kerwin's

 common stock at its book value. Total book value of all Kerwin's

 common stock was $1,800,000 on this date.

—————————                                                                  ——————————————————————————

2.      During Year 1, Kerwin reported $100,000

of net income and paid $50,000 of dividends.

————————                                                                    ———————————————————————————

3.      During Year 2, Kerwin reported $40,000

of net income and paid $50,000 of dividends.

———————                                                                     ————————————————————————————

4.      During Year 3, Kerwin reported a net loss

of $24,000 and paid $10,000 of dividends.

———————                                                                         ————————————————————————————

5.      Indicate the Year 3 ending balance in the

Investment account, and cumulative totals for Years 1, 2, and 3

for dividend revenue and investment revenue.

—————————                                                                    ———————————————————————————

 

 

 

 

 

 

 

 

VII. Problem: Trading equity securities.

Gordon Company has the following securities in its portfolio of trading equity securities on December 31, 2003:

                                                                                                            Cost                   Fair Value

5,000 shares of Milner Corp., Common                                 $160,000              $139,000

10,000 shares of Eddy, Common                                              182,000                190,000

                                                                                                       $342,000             $329,000

 

All of the securities had been purchased in 2003.   In 2004, Gordon completed the following securities transactions:

March 1    Sold 5,000 shares of Milner Corp., Common @ $31 less fees of $1,500.

April 1       Bought 600 shares of Yount Stores, Common @ $50 plus fees of $550.

The Gordon Company portfolio of trading equity securities appeared as follows on December 31, 2004:

                                                                                                            Cost                   Fair Value

10,000 shares of Eddy, Common                                           $182,000              $195,500

600 shares of Yount Stores, Common                                      30,550                  25,500

                                                                                                        $212,550              $221,000

Instructions

Prepare the general journal entries for Gordon Company for:

(a)    the 2003 adjusting entry.

(b)    the sale of the Milner Corp. stock.

(c)    the purchase of the Yount Stores' stock.

(d)    the 2004 adjusting entry.