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Exam 14: Bonds and Long-Term Notes

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Question 101

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On February 28, 2018, Pujols Industries issued 10% bonds, dated January 1, with a face amount of $48 million. The bonds were priced at $42 million (plus accrued interest) to yield 12%. Interest is paid semiannually on June 30 and December 31. Pujols' fiscal year ends October 31. Required: 1. What would be the amount(s) related to the bonds Pujols would report in its balance sheet at October 31, 2018? 2. What would be the amount(s) related to the bonds that Pujols would report in its income statement for the year ended October 31, 2018? 3. What would be the amount(s) related to the bonds that Pujols would report in its statement of cash flows for the year ended October 31, 2018?

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1. Liabilities at October 31, 2018
Bonds...

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Question 102

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To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

A) Bond ratings provided by financial investment services such as Moody's.
B) Newspaper articles.
C) Bond interest payments.
D) The company's audit report.

E) C) and D)
F) None of the above

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Question 103

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On January 1, 2017, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an investment. On July 1, 2021, Fuzz converted all of its bonds into common stock of Slug. The market price per share for Slug was $32 at the time of the conversion. Both companies use the straight-line method for amortization. Required: 1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books. 2. Prepare the journal entries for the conversion on the books of the issuer and the investor.

The method used to pay interest depends on whether the bonds are:

On January 1, 2018, an investor paid $291,000 for bonds with a face amount of $300,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2018 (assume annual interest payments and amortization) ?

On January 1, 2018, Boomer Universal issued 12% bonds dated January 1, 2018, with a face amount of $200 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2018. 2. Prepare the journal entry to record the bond issuance by Boomer on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2018, using the straight-line method.

How are bonds and notes the same? How do they differ?

Listed below are 4 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Loss on extinguishment

Rick's Pawn Shop issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2019. The bonds sold for $370,000. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Rick's determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2019, the fair value of the bonds was $365,000, with $2,000 of the change due to a change in general interest rates. Rick's statement of comprehensive income will include:

MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2017 for $106,000. The bonds pay interest annually and MSG uses straight-line amortization. On May 1, 2018, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:

Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 6%. -Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2018, rounded up to the nearest thousand?

Listed below are several terms and phrases associated with long-term debt. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. -Mortgage bond

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense:

Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n) :

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Debt to equity ratio

On January 1, 2013, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2023, but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F Corp.'s gain or loss in 2018 on this early extinguishment of debt was:

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. Using a financial calculator or Excel, calculate the issue price of the bonds.

Pierce Company issued 11% bonds, dated January 1, with a face amount of $800,000 on January 1, 2018. The bonds sold for $739,816 and mature in 2037 (20 years) . For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Pierce determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $730,000. The entire change in fair value was due to a change in the general (risk-free) rate of interest. Pierce's net income for the year will include:

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. - What is the stated annual rate of interest on the bonds?

The rate of return on assets indicates: