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Exam 14: Bonds and Long-Term Notes

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Question 51

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A $500,000 bond issue sold at 98. Therefore, the bonds:

A) Sold at a discount because the stated rate of interest was lower than the effective rate.
B) Sold for the $500,000 face amount less $10,000 of accrued interest.
C) Sold at a premium because the stated rate of interest was higher than the yield rate.
D) Sold at a discount because the effective interest rate was lower than the face rate.

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

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Question 52

Multiple Choice

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When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?

A) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.
B) The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.
C) A nominal amount is allocated to the warrants.
D) All of the proceeds are allocated to the bonds.

E) B) and D)
F) A) and B)

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Question 53

Multiple Choice

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Air Destinations 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 present value tables, calculate the issue price of the bonds.

Kelly Industries issued 11% bonds, dated January 1, with a face value of $100,000 on January 1, 2018. The bonds mature in 2028 (10 years) . Interest is paid semiannually on June 30 and December 31. For bonds of similar risk and maturity the market yield is 12%. What was the issue price of the bonds?

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. -Debenture bond

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. -Market rate higher than stated rate

Nickel Inc. bought $100,000 of 3-year, 6% bonds as an investment on December 31, 2017 for $106,000. The investment receives interest annually and Nickel uses straight-line amortization. On May 1, 2018, the issuer retired $10,000 of the bonds at 110. As a result of the retirement, Nickel will report a:

Determine the price of a $200,000 bond issue under each of the following independent assumptions:

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. -Coupon bonds

At January 1, 2018, BB Industries, Inc., owed Second Bank $24 million, under a 10% note due December 31, 2019. Interest was paid last on December 31, 2016. BB was experiencing severe financial difficulties and asked Second Bank to modify the terms of the debt agreement. After negotiation Second Bank agreed to: • Forgive the interest accrued for the year just ended, • Reduce the remaining two years' interest payments to $2 million each and delay the first payment until December 31, 2019, and • Reduce the principal amount to $22 million. Required: Prepare the journal entries by BB Industries, Inc. necessitated by the restructuring of the debt at (A) January 1, 2018, (B) December 31, 2019, and (C) December 31, 2020.

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 total interest expense will Morton Sales Co. report over the 10-year life of these bonds?

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

List at least three ways that bonds may be taken off the market prior to maturity.

On January 1, 2018, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2023, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:

On January 1, 2018, Anne Teak Furniture issued $100,000 of 8% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 10 years. The annual market rate for bonds of similar risk and maturity is 10%. What was the issue price of the bonds?

The debt to equity ratio indicates:

Mountain Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using a financial calculator or Excel, calculate the issue price of the bonds.

On June 30, 2018, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2018, and mature on June 30, 2028. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the six months ended December 31, 2018?

Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $40,000. If the effective annual rate of interest is 10%, what is the issue price of the bonds? Some relevant and irrelevant present value factors: * PV of ordinary annuity of $1: n = 20; i = 10% is 8.51356 **PV of $1: n = 20; i = 10% is 0.14864 * PV of ordinary annuity of $1: n = 40; i = 5% is 17.5909 **PV of $1: n = 40; i = 5% is 0.14205