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Exam 14: Bonds and Long-Term Notes

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Question 21

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Griggs Co. failed to amortize the premium on an outstanding five-year bond issue. What is the resulting effect on interest expense and the bond book value, respectively?

A) Understated, understated.
B) Understated, overstated.
C) Overstated, understated.
D) Overstated, overstated.

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

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Question 22

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On January 1, 2018, Cool Universe 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 Cool 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.

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Question 23

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For the issuer of 20-year bonds, the amount of amortization using the effective interest method would decrease each year if the bonds are sold at a:

On February 1, 2017, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2018, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

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 report bond interest expense for the six months ended June 30, 2018, in the amount of:

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond?

On February 1, 2018, Sanford & Son issued 10% bonds dated February 1, 2018, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Sanford & Son's fiscal year is the calendar year. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2018. 2. Prepare the entry to record interest on July 31, 2018, using the straight-line method 3. Prepare the necessary journal entry on December 31, 2018. 4. Prepare the necessary journal entry on January 31, 2019.

In a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:

On January 1, 2018, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should:

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

Gene Poole Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the book value of the bonds on December 31, 2019?

Bonds are issued on June 1, 2018 that have interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2018, is for a period of:

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 was the annual effective interest rate in the market when the bonds were issued?

Determine the price of a $500,000 bond issue under each of the following independent assumptions:

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. -Promises made to bondholders

On January 1, 2018, Club Company purchased 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 purchase by Club 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.

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

On January 1, 2018, Rare Bird Ltd. purchased 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 purchase by Rare Bird 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.

Green Industries purchased a machine from Cyan Corporation on October 1, 2018. In payment for the $144,000 purchase, Green 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%. Monthly installment payments are closest to: