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Exam 14: Bonds and Long-Term Notes

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Question 61

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Zero-coupon bonds

A) offer a return in the form of a deep discount off the face value.
B) result in zero interest expense for the issuer.
C) result in zero interest revenue for the investor.
D) are reported as shareholders' equity by the issuer.

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

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Question 62

Multiple Choice

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What is the interest expense on the bonds in 2010?

A) $700,700.
B) $600,000.
C) $351,337.
D) $100,700.Semiannual effective rate = $345,639 / $8,640,967 = 4% Interest expense = $349,363 + ($8,783,433 4%) = $700,700

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

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Question 63

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On June 30, 2009, 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, 2009, and mature on June 30, 2016. 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 6 months ended December 31, 2009?

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

What is the effective interest rate on the bonds?

Distinguish between: (a) Secured and unsecured bonds. (b) Coupon and registered bonds.

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

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest

At January 1, 2009, BB Industries, Inc. owed Second Bank $24 million, under a 10% note due December 31, 2010. Interest was paid last on December 31, 2007. 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, 2010, 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, 2009, (b) December 31, 2010, and (c) December 31, 2011.

When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

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

The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized.

On January 1, 2009, Shirley Corporation purchased 10% bonds dated January 1, 2009, with a face amount of $10 million. The bonds mature in 2018 (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, 2009. 2. Prepare the journal entry to record the bond purchase by Shirley on January 1, 2009. 3. Prepare the journal entry to record interest on June 30, 2009, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2009, using the effective interest method.

During 2009 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2007, payable to Third Bank. Interest was last paid on December 31, 2008. On December 31, 2009, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2009 income statement?

Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

Most corporate bonds are:

On January 1, 2009, Cool Universe issued 10% bonds dated January 1, 2009, with a face amount of $20 million. The bonds mature in 2018 (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, 2009. 2. Prepare the journal entry to record their issuance by Cool on January 1, 2009. 3. Prepare the journal entry to record interest on June 30, 2009, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2009, using the straight-line method.

On January 1, 2009, 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, 2009, in the amount of:

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:

When bonds are sold at a discount, 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 discount is: