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Exam 14: Bonds and Long-Term Notes

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Question 41

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On March 31, 2018, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

A) Shareholders' equity is increased.
B) Additional paid-in capital is decreased.
C) Retained earnings is increased.
D) A loss is recognized.

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

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Question 42

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On January 1, 2018, Shark Company sold $800,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $708,000, priced to yield 12%. Shark records interest at the effective rate. Required: Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.

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Under the effective interest method, the...

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Question 43

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When a company issues bonds between interest dates the entry to record the issuance of the bonds will:

When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to:

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. - For how many months will there be interest expense for the year ended September, 30, 2018?

When an equipment dealer receives a long-term note in exchange for equipment, and the stated rate of interest is indicative of the market rate of interest at the time of the transaction, the present value of the future cash flows received on the notes:

On January 1, 2018, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, which of the following would be true?

In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness: In addition, the company disclosed the following: We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28, 2017, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively. The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands) -Required: What amount of interest expense will Health Foods accrue on the debentures during fiscal year 2019?

A zero-coupon bond pays no interest. Explain.

The times interest earned ratio indicates:

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 effective annual rate of interest on the bonds?

On March 1, 2018, Doll Co. issued 10-year convertible bonds at 106. During 2021, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Financial Reporting Standards (IFRS) . On March 1, 2018, cash proceeds from the issuance of the convertible bonds should be reported as:

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. -Coupon bonds

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

On January 1, 2018, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. -Legion should pay cash interest for the six months ended June 30, 2018, in the amount of:

Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2018. Miranda paid for the machine by issuing a $200,000, three-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest. Required: 1. Prepare the journal entry by Miranda to record the purchase of equipment. 2. Prepare journal entries to record interest for each of the first two years.

On September 1, 2018, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus accrued interest. The bonds are dated June 1, 2018, and mature on May 30, 2028. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Blue would receive cash of:

On February 1, 2018, Nell purchased $600,000 in zero-coupon bonds that mature on February 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%. Required: Calculate the price Nell paid for the bonds.

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. -Call feature

Prescott Corporation 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 would be the total interest expense recognized for the bond issue over its full term?