Solution to Midterm Exam #1.
Part 1: Multiple-choice questions
Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated
December 31, 2009. Because of Eddy's financial difficulties developing in 2011, Eddy owed
accrued interest of $48,000 on the note at December 31, 2011. Under a troubled debt
restructuring, on December 31, 2011, Cole agreed to settle the note and accrued interest for a tract
of land having a fair value of $360,000. Eddy's acquisition cost of the land is $290,000. Ignoring
income taxes, on its 2011 income statement Eddy should report as a result of the troubled debt
Gain on Disposal
$360,000 – $290,000 = $70,000
($400,000 + $48,000) – $360,000 = $88,000.
2. On July 1, 2002., Pell Co. purchased Green Corp. 10-year, 6% bonds with a face amount of $500,000
for $420,000. The bonds mature on June 30, 2012 and pay interest semiannually on June 30 end
December 31. Using the effective interest method, Pall recorded bond discount amortization of $1,800 for
the 6 months ended December 31, 2002. From this long-term investment, Pell should report 2002 revenue
Answer (A) Interest income for a bond issued at a discount is equal to the sum of the periodic cash flows
and the amount of bond discount amortized during the interest period. The periodic cash flows ,are equal
to $15,000 ($500,000 face amount x 6% coupon rate x 1/2 year), The, discount amortization is given as
$1,800, Thus, revenue for the 6-month period from July 1 to December 31, 2002 is $16,800 ($15,000 +
3. An investor purchased a bond as a long-term investment between interest dates at a premium. At the
purchase date, the cash paid to the seller is
Choose one answer.
A. The same as the face amount of the bond
B. The same as the face amount of the bond plus ccrued interest.
C. More than the face amount of the bond
Less than the face amount of the bond.
Answer (C) is correct.