(Multiple Choice)
1. Should the following bond issue costs be expensed as incurred?
Underwriting
Legal Fees Costs
a. No .......... No
b. No .......... Yes
c. Yes .......... No
d. Yes .......... Yes

2. On December 31, 2006 Dumont Corporation had outstanding 8%, $2,000,000 face value convertible bonds maturing on December 31, 2010. Interest is payable annually on December 31. Each $1,000 bond is convertible into 60 shares of Dumont’s $10 par value common stock. The unamortized balance on December 31, 2007 in the Premium on Bonds Payable account was $45,000. On December 31, 2007 an individual holding 200 of the bonds exercised the conversion privilege when the market value of Dumont’s common stock was $18 per share. Using the book value method, Dumont’s entry to record the conversion should include a credit to additional paid-in capital of
a. $80,000
b. $84,500
c. $96,000
d. $125,000

3. On January 1, 2007 when the market rate for bond interest was 14%, Luba Corporation issued bonds in the face amount of $500,000, with interest at 12% payable semiannually. The bonds mature on December 31, 2017, and were issued at a discount of $53,180. How much of the discount should be amortized by the effective interest method at July 1, 2007?
a. $1,277
b. $2,659
c. $3,191
d. $3,723

4. When the cash proceeds from a bond issued with detachable stock purchase warrants exceed the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to
a. Additional paid-in capital
b. Retained earnings
c. Premium on bonds payable
d. Detachable stock warrants outstanding

5. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a(n)
a. Extraordinary loss
b. Extraordinary gain
c. Loss from continuing operations
d. Loss from discontinued operations

6. Peterson Company has a $500,000, 15%, three year note dated January 1, 2006, payable to Forest National Bank. On December 31, 2007 the bank agreed to settle the note and unpaid interest of $75,000 for 2007 for $50,000 cash and marketable securities having a current market value of $375,000. Peterson’s acquisition cost of the securities is $385,000. Ignoring income taxes, what amount should Peterson report as a gain from the debt restructuring in its 2007 income statement?
a. $65,000
b. $75,000
c. $140,000
d. $150,000

7. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
a. Increased by accrued interest from June 1 to November 1
b. Increased by accrued interest from May 1 to June 1
c. Decreased by accrued interest from June 1 to November 1
d. Decreased by accrued interest from May 1 to June 1

8. On January 1, 2007 Parke Company borrowed $360,000 from a major customer evidenced by a noninterest-bearing note due in three years. Parke agreed to supply the customer’s inventory needs for the loan period at lower than market price. At the 12% imputed interest rate for this type of loan, the present value of the note is $255,000 at January 1, 2007. What amount of interest expense should be included in Parke’s 2007 income statement?
a. $43,200
b. $35,000
c. $30,600
d. $0

9. For the issuer of a 10-year term bond, the amount of amortization using the effective interest method would increase each year if the bond was sold at a
Discount Premium
a. No ....... No
b. Yes ....... Yes
c. No ....... Yes
d. Yes ....... No

10. On April 1, 2007 Girard Corporation issued at 98 plus accrued interest, 200 of its 10%, $1,000 bonds. The bonds are dated January 1, 2007, and mature on January 1, 2017. Interest is payable semiannually on January 1 and July 1. From the bond issuance Girard would realize net cash receipts of
a. $191,000
b. $196,000
c. $198,500
d. $201,000