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Multiple choice questions on bond valuation.

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1) Long-term debt that matures within one year and is to be converted into stock should be reported

  1. as a current liability.
  2. in a special section between liabilities and stockholders’ equity.
  3. as noncurrent.
  4. As noncurrent and accompanied with a note explaining the method to be used in its liquidation.

2 ) Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

  1. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
  2. The present value of scheduled interest payments on long-term debt during each of the next five years.
  3. The amount of scheduled interest payments on long-term debt during each of the next five years.
  4. The amount of future payments for sinking fund requirement and long-term debt maturities during each of the next five years.

3) Limeway Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2007 on January 1, 2007. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

  2.50% 3.00% 5.00% 6.00%
Present value of a single sum for 5 periods 0.88385 0.86261 0.78353 0.74726
Present value of a single sum for 10 periods 0.7812 0.74409 0.61391 0.55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.5302 7.72173 7.36009
  1. $5,000,000
  2. $5,216,494
  3. $5,218,809
  4. $5,217,308

4 ) Amstop Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

  1. $19,400,000
  2. $20,450,000
  3. $19,700,000
  4. $19,100,000

5 ) A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using effective-interest amortization, how much interest expense will be recognized in 2007?

  1. $780,000
  2. $1,560,000
  3. $1,568,498
  4. $1,568,332

6 ) The December 31, 2006, balance sheet of Eddy Corporation includes the following items:

9% bonds payable due December 31, 2015  $1,000,000
Unamortized premium on bonds payable   27,000

The bonds were issued on December 31, 2005, at 103, with interest payable on July 1 and December 31 of each year. Eddy uses straight-line amortization. On March 1, 2007, Eddy retired $400,000 of these bonds at 98 plus accrued interest. What should Eddy record as a gain on retirement of these bonds? Ignore taxes.

  1. $18,800.
  2. $10,800.
  3. $18,600.
  4. $20,000.

7) The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on December 31, 2006. The bonds, which had a face value of $600,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest payment on July 1, 2007 was made as scheduled. What is the loss that Klein should record on the early retirement of the bonds on July 2, 2007? Ignore taxes.

  1. $12,000.
  2. $37,800.
  3. $33,600.
  4. $42,000.

8) On January 1, 2007, Ann Rosen loaned $45,078 to Joe Grant. A zero-interest-bearing note (face amount, $60,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2009. The prevailing rate of interest for a loan of this type is 10%. The present value of $60,000 at 10% for three years is $45,078. What amount of interest income should Ms. Rosen recognize in 2007?

  1. $4,508.
  2. $6,000.
  3. $18,000.
  4. $13,524.

9) Nyland Company’s 2007 financial statements contain the following selected data:

Income taxes $40,000
Interest expense 20,000
Net income 60,000
  1. 3 times.
  2. 4 times.
  3. 5 times.
  4. 6 times.

10) On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of $3,000,000, which mature on January 1, 2017. The bonds were issued for $3,405,000 to yield 8%, resulting in bond premium of $405,000. Gomez uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2007, Gomez’s adjusted unamortized bond premium should be

  1. $405,000.
  2. $377,400.
  3. $364,500.
  4. $304,500

11) On January 1, 2002, Pine Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2012 but were callable at 101 any time after December 31, 2005. Interest was payable semiannually on July 1 and January 1. On July 1, 2007, Pine called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Pine’s gain or loss in 2007 on this early extinguishment of debt was

  1. $30,000 gain.
  2. $12,000 gain.
  3. $10,000
  4. $8,000 gain.

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