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Exam 14: Bonds and Long-Term Notes

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Question 31

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On January 1, 2018, Morton Sales Co. issued zero-coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100. -Required: What amount of interest expense on these bonds would Morton Sales Co. report in its 2018 income statement?

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$213,507
Interest ex...

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Question 32

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On January 1, 2018, Whittington Stoves issued $800 million of its 8% bonds for $736 million. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Whittington records interest at the effective rate and elected the option to report these bonds at their fair value. One million dollars of the increase in fair value was due to a change in the general (risk-free) rate of interest. On December 31, 2018, the fair value of the bonds was $752 million as determined by their market value on the NYSE. Required: 1. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment). 2. Prepare the journal entry to record interest on December 31, 2018 (the second interest payment). 3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet.

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Requirement 1
June 30, 2018
Interest exp...

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Question 33

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On January 1, 2018, an investor paid $291,000 for bonds with a face amount of $300,000. The contract 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 2019 (assume annual interest payments and amortization) ?

Straight-line amortization of bond discount or premium:

DCL Industries purchased a supply of mechanical components from E Corporation on November 1, 2018. In payment for the $48,000 purchase, DCL issued a one-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. Required: 1. Prepare the journal entry for DCL's purchase of the components on November 1, 2018. 2. Prepare the journal entry for the first installment payment on November 30, 2018. 3. What is the amount of interest expense that DCL will report in its income statement for the year ended December 31, 2018?

How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to accounting for convertible debt?

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%. -How much cash interest does Auerbach pay on March 31, 2019?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Zero-coupon bonds

On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. 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 Bishop on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

On March 1, 2018, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2028. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2018, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

The interest rate that determines the amount of cash interest paid each interest date is referred to as the:

On September 1, 2018, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

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. -Times interest earned ratio

Comet Products prepares its financial statements according to International Financial Reporting Standards (IFRS). On January 1, 2018, Comet Products issued $80 million of 6%, 10-year convertible bonds at a net price of $81.6 million. Comet recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Comet's no par common stock. Comet records interest by the straight-line method. On June 1, 2020, Comet notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2020. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Comet paid the semiannual interest and issued the requisite number of shares for the bonds being converted. Required: 1. Prepare the journal entry for the issuance of the bonds by Comet. 2. Prepare the journal entry for the June 30, 2018, interest payment. 3. Prepare the journal entries for the June 30, 2020, interest payment by Comet and the conversion of the bonds (book value method).

On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face amount of $20 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 Mania on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

The book value of zero-coupon bonds increases by the periodic amount of interest recognized.

On January 31, 2018, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2017, and mature on December 31, 2027. Interest will be paid semiannually on June 30 and December 31. - What amount of accrued interest payable should B report in its September 30, 2018, balance sheet?

Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

The interest rate that determines the amount of interest expense each interest date is referred to as the:

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 5%. Using a financial calculator or Excel, what is the issue price of the bonds?