答案和详解如下：

1．Retiring non-callable debt by funding a trust that will be used to meet the interest and principal payments on the debt is called:

A)   effective retirement.

B)   trust retirement.

C)   de facto termination.

D)   defeasance.

The correct answer was D)

The correct term to describe the effective retirement of non-callable debt via the funding of a trust is defeasance.

2．When debt has been issued at par, and called at a price that is above par but below the present value of the bond liability, the firm will record an accounting:

A)   loss, and experience an economic loss.

B)   loss, but experience an economic gain.

C)   gain, but experience an economic loss.

D)   gain, and experience an economic gain.

The correct answer was B)

Because the call price exceeds the issuance price, the firm will record an accounting loss. Because the call price is less than the present value of the liability, the firm will actually experience an economic gain.

3．Which of the following statements concerning early debt retirement is least accurate?

A)   When debt is retired prior to maturity at its book value, no gain or loss is reported on the transaction.

B)   Under U.S. GAAP, an accounting gain or loss will usually be recorded for in substance defeasance.

C)   If a firm retires non-callable debt because interest rates have changed, there is usually no economic gain on the transaction.

D)   When callable debt is retired because of a call, the accounting treatment will usually differ from the economic outcome.

The correct answer was B)

Under U.S. GAAP, there is no accounting gain or loss recorded for pre-refunding via defeasance. Losses or gains are only recorded if the debt is actually terminated. When callable debt is called, the call price is ordinarily above par value. Since most debt is issued at par, there is usually an accounting loss, but an economic gain on the transaction. There are usually no economic gains or losses resulting from the retirement of non-callable debt because interest rates have changed. There is no gain or loss on any debt retired at its book value.

4．On January 1, 2005, Rawls Incorporated issued a 10-year, $1,000,000, 9% bond. The bond was issued for $937,689 to yield 10%. Interest is payable semi-annually and the bond is callable after 3 years at 102 percent of par. During 2007, interest rates declined to 8% and Rawls called the bond on December 31, 2007 and issued a new bond at the lower rate. Calculate Rawls’ accounting gain or loss from the bond redemption and determine whether this gain or loss should be included or excluded from income from continuing operations for analytical purposes.

A)  $69,493 gain                        Include

B)  $82,311 loss                        Exclude

C)  $82,311 gain                        Include

D)  $69,493 loss                        Exclude

The correct answer was D)

The carrying value of the bonds on the call date was $950,507 (N=14, I=5, PMT=45,000, FV=1,000,000, solve for PV). Rawls will report a loss on the call date of $69,493 ($1,020,000 call price – $950,507 carrying value). The loss should be excluded from income from continuing operations for analytical purposes since the loss is an accounting loss that resulted from a decline in interest rates. Calling the bonds may actually result in an economic gain to Rawls as the firm can reduce its interest expense by refinancing the bonds at a lower rate.

5．Would the following debt transactions be reported in the income statement of the debtor as a part of income from continuing operations?
Transaction #1 – Reacquisition of debt for less than its net carrying (book) value.
Transaction #2 – In-substance defeasance of outstanding debt whereby the debtor is still the primary obligor.

A)  Yes                                     Yes

B)  No                                       No

C)  No                                       Yes

D)  Yes                                     No

The correct answer was D)

Reacquiring debt for less than its carrying value would be reported as a gain in the income statement of the debtor as a part of continuing operations. No accounting gain or loss is recognized from an in-substance defeasance until the debtor is legally released as the primary obligor (i.e., until the bonds are actually repaid).

6．Interest rates declined throughout 20X7 and on December 31, 20X7, Cutlass Company called its $1,000,000, 8 percent bonds at 102. The bonds had a carrying value on the call date of $980,000. Compute Cutlass’ accounting gain or loss from the reacquisition of the bonds and determine whether the gain or loss should be included or excluded from continuing operations for analytical purposes.

A)  $40,000 gain                        Include

B)  $40,000 loss                        Exclude

C)  $20,000 loss                        Exclude

D)  $20,000 gain                         Include

The correct answer was B)

Reacquiring the bonds for more than the carrying value will result in an accounting loss of $40,000 ($1,020,000 call price – $980,000 carrying value). The loss should be excluded for analytical purposes since the loss is merely an accounting loss that resulted from a decline in interest rates. Reacquiring the bonds may actually result in an economic gain to Cutlass as the firm can lower interest expense by refinancing the debt at a lower rate.