1.

A company issues 1,000 bonds payable each with a face value of $1,000. Each bond also
has 3 stock options. These options allow the buyer to acquire a share of the company's stock
for $22 per share at any time over the next 24 months. Similar stock options are currently
being actively traded on the market at $7 each. The company receives total proceeds for
these bonds and options of $1,015,000. By what amount (rounded) should the company
increase its reported liability balance?
A $994,000
B $994,123
C $1,000,000
D $1,015,000

2.

On November 30, Year One, a company borrows $1 million from a bank on a seven-month
note paying an annual stated interest rate of 6 percent (the prime interest rate on that date).
When the note comes due on June 30, Year Two, the company pays the bank the interest and
refinances the $1 million with a new seven-month note at the current prime rate. The
company and the bank continue to follow this pattern for years: The interest is paid every
seven months and a new note is signed for $1 million to refinance the principal. On December
31, Year Five, the latest interest payment and note signing take place. Once again, this note is
for seven months. The company will issue its Year Five financial statements on March 4, Year
Six. Which of the following is true concerning the reporting of this liability at the end of Year
Five?
A The note should be reported as a current liability in all cases because it is due in seven
months.
B If the company and the bank sign a non-cancelable agreement on March 1, Year Six that
states that the note will continue to be refinanced through the end of Year Six, the company
must report the note as a long-term liability.
C The note should be reported as a long-term liability in all cases because there is sufficient
evidence that the note will not be paid with cash or any other current asset.
D If the company and the bank sign a non-cancelable agreement on February 26, Year Six
that states that the note will continue to be refinanced through the end of Year Six, the
company may report the note as a long-term liability

3.

On June 1, Year One, Braxton Company issues $100,000 in bonds payable with a stated
annual interest rate of 9 percent at face value plus accrued interest. These bonds pay interest
every February 1 and August 1. What amount does Braxton receive and what interest expense
is recognized for Year One?
A Braxton receives $103,000 and interest expense for Year One is recognized as $5,250
B Braxton receives $103,000 and interest expense for Year One is recognized as $8,250
C Braxton receives $101,500 and interest expense for Year One is recognized as $5,250
D Braxton receives $101,500 and interest expense for Year One is recognized as $8,250

4.

On May 1, Year One, Bennington Company issues bonds payable with a face value of
$100,000 and a stated annual interest rate of 12 percent. They are issued at this face value
plus accrued interest. These bonds pay interest every March 1 and September 1. Bond
issuance cost such as printing, legal, and registration costs amount to $5,000. What amount of
cash will Bennington collect as a result of this bond issuance?
A $97,000
B $99,000

C $101,000
D $103,000

5.

On January 1, Year One, to acquire a machine that has a 10 year life and no residual value,
the March Company agrees to pay $40,000 annually for three years with the first payment on
December 31, Year One. Interest of 3 percent is also paid each December 31 on the unpaid
balance for the period although a reasonable rate is 8 percent. The present value of $1 at an 8
percent annual rate is assumed to be .926 (one year), .857 (two years) and .794 (three years).
The present value of a $1 ordinary annuity over three years at an 8 percent annual rate is
assumed to be 2.577. The present value of a $1 annuity due over three years at an 8 percent
annual rate is assumed to be 2.783. What liability does this company recognize on January 1,
Year One? (Round all computations to the nearest dollar.)
A $108,764
B $109,424
C $110,116
D $110,876

6.

At the start of Year One, Bellview Corporation issues 100 bonds, each with a face value of
$1,000 and a stated annual cash interest rate of 6 percent (payable every December 31), for
$86,000 to yield an effective interest rate of 8 percent. Interest expense will be recognized by
Bellview using the effective rate method. These bonds were issued to the public at a time
when companies in the same industry as Bellview were selling similar bonds at a 7 percent
yield rate. Which of the following is not true?
A To the investors who acquired these bonds, this company and its bond contract looked
relatively safe.
B This company will recognize interest expense for Year One as $6,880 (rounded).
C This company will recognize interest expense for Year Two as $6,950 (rounded).
D The 7 percent rate has no impact on the accounting recorded by Bellview.

7.

On January 1, Year One, Big Company offers to sell a $100,000 bond coming due in exactly
10 years. This bond pays cash interest of 2 percent at the end of each year. A buyer is found
who wants to earn 5 percent interest each year. After some negotiation, Big agrees to the 5
percent effective rate. The present value of a single amount of $1 in ten years at 2 percent
annual interest is .80 whereas the present value of a single amount of $1 in ten years at 5
percent annual interest is .63. The present value of an annuity of $1 in ten years at 2 percent
annual interest is 8.75 whereas the present value of an annuity of $1 in ten years at 5 percent
annual interest is 7.70. What is the sales price for this bond?
A $78,400
B $80,500
C $95,400
D $97,500

8.

A company issues 1,000 bonds with a face value of $1,000 each. Each bond is sold with four
stock warrants which allow the owner to buy a share of the companys common stock for $9 at
any time in the next 24 months. The common stock was selling for $10 per share on that date.

The options are traded in the market at $6 each. What is the initial reported value of these
bonds if the cash received by the company was $990,000?
A $954,000
B $966,000
C $986,000
D $990,000
9.

The Simi Company has $10 million in long-term bonds coming due on August 9, Year Two.
The company is currently preparing a balance sheet as of December 31, Year One. The
financial statements will be issued to the public on February 27, Year Two. Which of the
following statements is true?
A The bond must be reported as a current liability.
B The company can only report the bond as a noncurrent liability if it is refinanced prior to
December 31, Year One.
C The company can only report the bond as a noncurrent liability if it is refinanced prior to
February 27, Year Two.
D If the company signs a non-cancellable agreement with a bank on January 17, Year Two
indicating that the bond will be refinanced when it comes due, the bond is reported on the
December 31, Year One, balance sheet as noncurrent.