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Exam 14: Bonds and Long-Term Notes

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Question 21

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On March 1, 2013, Doll Co. issued 10-year convertible bonds at 106. During 2016, 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, 2013, cash proceeds from the issuance of the convertible bonds should be reported as:

A) A liability for the entire proceeds.
B) Paid-in capital for the entire proceeds.
C) Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
D) A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

E) A) and B)
F) A) and C)

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Question 22

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On April 1, 2013, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

A) $285,000.
B) $300,000.
C) $315,000.
D) $0.

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

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Question 23

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On January 1, 2008, F Corp. issued 2,000 of its 10%, $1,000 bonds for $2,080,000. These bonds were to mature on January 1, 2018, but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, F called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, F's gain or loss in 2013 on this early extinguishment of debt was:

On January 1, 2013, 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. On December 31, 2013, 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, 2013 (the first interest payment). 2. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). 3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet.

How would the carrying value of bonds payable be affected by the amortization of each of the following?

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

What is the annual effective interest rate on the bonds?

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

On January 1, 2013, 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 2013 (assume annual interest payments and amortization) ?

Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:

What is the effective annual rate of interest on the bonds?

Zero-coupon bonds:

On February 1, 2013, Lagune & Sons issued 9% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31. Lagune's fiscal year is the calendar year. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2013. 2. Prepare the entry to record interest on July 31, 2013, using the effective interest method. 3. Prepare the necessary journal entry on December 31, 2013. 4. Prepare the necessary journal entry on January 31, 2014.

Required: What will Morton Sales Co. report on these bonds in its December 31, 2013, balance sheet?

Required: What amount of interest expense on these bonds would Morton Sales Co. report in its 2013 income statement?

On January 1, 2013, Bishop Company issued 10% bonds dated January 1, 2013, with a face amount of $20 million. The bonds mature in 2022 (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, 2013. 2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2013. 3. Prepare the journal entry to record interest on June 30, 2013, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2013, using the effective interest method.

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

On January 1, 2013, BBX issued $400,000 of its 8% bonds for $368,000. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. BBX records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $370,000 as determined by their market value on the NYSE. Required: 1. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). 2. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). 3. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet.

What is the carrying value of the bonds as of December 31, 2014?

MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2012 for $106,000. MSG uses straight-line amortization. On May 1, 2013, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?