On January 2, Year 7, Drew company issued 9% term bonds dated January 2, Year7,
ID: 2457182 • Letter: O
Question
On January 2, Year 7, Drew company issued 9% term bonds dated January 2, Year7, at an effective annual interest rate (yield) of 10%. Drew uses the effective interest method of amortization. On July 1, year 9, the bonds were extinguished early when Drew acquired them in the open market for a price greater than their face amount.
On September 1, Year 9, Drew issued for cash 7% nonconvertible bonds dated September 1, year 9, with detachable stock purchase warrants. Immediately after issuance, both the bonds and the warrants had separately determined market values.
Using the information provided to the right, check the appropriate box to indicate which answer best completes each statement below.
Statement
Answer
1
The bonds were issued at a
Premium
Discount
2
The amount of interest expenses was higher in
Year 7
Year 8
3
The extinguishment resulted in a
Gain
Loss
4
The gain/loss on extinguishment is a component of
Operating Income
Net Income
5
The portion of the proceeds allocable to the stock warrants is accounted for as
Stock warrants outstanding
Paid-in capital
Statement
Answer
1
The bonds were issued at a
Premium
Discount
2
The amount of interest expenses was higher in
Year 7
Year 8
3
The extinguishment resulted in a
Gain
Loss
4
The gain/loss on extinguishment is a component of
Operating Income
Net Income
5
The portion of the proceeds allocable to the stock warrants is accounted for as
Stock warrants outstanding
Paid-in capital
Explanation / Answer
1. The bonds are issued at a Discount
2. The amount of interst expenses was higher in Year 7
3. The extinguishment resulted in a gain
4. The gain /loss on extinguishment is a component of operating income
5. The portion of the proceeds allocable to the stock warrants is accounted for as paid in capital.
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