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Exam 14: Bonds and Long-Term Notes

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Question 51

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At January 1, 2013, TD owed First Bank $300,000, under an 11% note with three years remaining to maturity. Due to financial difficulties, TD was unable to pay the previous year's interest. First Bank agreed to settle TD's debt in exchange for land having a fair value of $225,000. TD purchased the land in 2009 for $162,000. Required: Prepare the journal entry(s) to record the restructuring of the debt by TD.

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Question 52

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Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

A) Both bonds sell for the same amount.
B) Bond X sells for more than bond Y.
C) Bond Y sells for more than bond X.
D) Both bonds sell at a discount.

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

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Question 53

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For a bond issue that sells for more than the bond face amount, the effective interest rate is:

On January 1, 2013, Club Company purchased 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 purchase by Club on January 1, 2013. 3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method.

How should bond issue costs be accounted for on the books of the issuing corporation?

On January 1, 2013, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Ouachita Airlines 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 $335,000 as determined by their fair value in the over-the-counter market. Required: 1. Determine the price of the bonds at January 1, 2013, and prepare the journal entry to record their issuance. Show calculations. 2. Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). Show calculations. 3. Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). Show calculations. 4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. Show calculations.

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

On March 1, 2013, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2023. 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, 2013, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

The rate of return on assets indicates:

On January 31, 2013, B Corp. issued $600,000 face value, 12% bonds for $600,000 cash. The bonds are dated December 31, 2012, and mature on December 31, 2022. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should B report in its September 30, 2013, balance sheet?

Why do companies find the issuance of convertible bonds to be an attractive form of financing?

Required: Why did the carrying amount of the debentures increase during fiscal year 2013?

Required: Explain why the estimated fair value of the debentures exceeds their carrying amount at the end of fiscal year 2013.

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2014, rounded up to the nearest thousand?

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

On January 1, 2013, Shirley Corporation purchased 10% bonds dated January 1, 2013, with a face amount of $10 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 purchase by Shirley 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.

On February 1, 2013, Fox Corporation 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. Fox's fiscal year is the calendar year. Fox uses the straight-line method of amortization. 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. 3. Prepare the necessary journal entry on December 31, 2013. 4. Prepare the necessary journal entry on January 31, 2014.

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

On January 1, 2013, Rare Bird Ltd. purchased 12% 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 10%. 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 purchase by Rare Bird 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.

On June 30, 2013, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2018. Interest is payable semiannually every June 30 and December 31. On June 30, 2013, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2013, what amount should K recognize as gain on redemption of bonds before income taxes?