151) On January 1, a company issues bonds dated January 1 with a par value of $300,000. The
bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry
to record the first interest payment using the effective interest method of amortization is:
A) Debit Bond Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit
Cash $13,500.00.
B) Debit Interest Payable $13,500; credit Cash $13,500.00.
C) Debit Bond Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit
Cash $13,500.00.
D) Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
E) Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit
Cash $13,500.00.
152) Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and
semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%.
What is the bond’s issue (selling) price, assuming the following Present Value factors:
n=
i=
Present Value of an
Annuity
(series of payments)
Present value of 1
(single sum)
5
8
%
0.6806
10
4
%
0.6756
5
6
%
0.7473
10
3
%
0.7441
A) $1,000,000
B) $789,244
C) $1,341,208
D) $1,085,308
E) $658,792
153) Sharmer Company issues 5%, 5-year bonds with a par value of $1,000,000 and semiannual
interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the
bond’s issue (selling) price, assuming the following factors:
n=
i=
Present Value of an
Annuity
(series of payments)
Present value of 1
(single sum)
5
5
%
4.3295
0.7835
10
3
%
8.7521
0.7812
5
6
%
4.2124
0.7473
10
3
%
8.5302
0.7441
A) $957,355
B) $1,000,000
C) $1,250,000
D) $786,745
E) $1,213,255
154) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry
to record the issuance of the bond is:
A) Debit Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$416,207.
B) Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable
$400,000.
C) Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.
D) Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable
$400,000.
E) Debit Cash $383,793; credit Bonds Payable $383,793.
155) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry
to record the first interest payment using straight-line amortization is:
A) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B) Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
D) Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash
$14,000.00.
E) Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash
$14,000.00.
156) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry
to record the first interest payment using the effective interest method of amortization is:
A) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash
$14,000.00.
B) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
D) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
E) Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash
$14,000.00.
157) On January 1, a company issues bonds dated January 1 with a par value of $200,000. The
bonds mature in 3 years. The contract rate is 4%, and interest is paid semiannually on June 30
and December 31. The market rate is 5%. Using the present value factors below, the issue
(selling) price of the bonds is:
n=
i=
Present Value of an
Annuity
(series of payments)
Present value of 1
(single sum)
3
4.0
%
2.7751
0.8890
6
2.0
%
5.6014
0.8880
3
5.0
%
2.7232
0.8638
6
2.5
%
5.5081
0.8623
A) $205,607.
B) $194,492.
C) $200,000.
D) $22,032.
E) $172,460.
Cash flow
Present Value
Present value of 1
200,000
172,460
194,492
158) On January 1, a company issues bonds dated January 1 with a par value of $600,000. The
bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The bonds are sold for $564,000. The journal entry to record the first interest
payment using straight-line amortization is:
A) Debit Interest Payable $21,000; credit Cash $21,000.
B) Debit Interest Expense $21,000; credit Cash $21,000.
C) Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash
$21,000.
D) Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash
$21,000.
E) Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash
$15,000.
159) On January 1, a company issues bonds dated January 1 with a par value of $400,000. The
bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30
and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry
to record the second interest payment using the effective interest method of amortization is:
A) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash
$14,000.00.
B) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
D) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash
$14,000.00.
E) Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash
$14,000.00.
160) All of the following statements regarding convertible bonds are true except:
A) Holders of convertible bonds can generally decide whether to convert to stock.
B) Holders of convertible bonds have the potential to profit from increases in stock price.
C) Holders of convertible bonds can choose when to convert to stock.
D) Holders of convertible bonds have the option to not convert and continue receiving bond
interest payments and par value at maturity.
E) Holders of convertible bonds can choose how many shares of stock to receive at conversion.
161) On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted
to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds
includes all of the following entries except:
A) Debit to Bonds Payable $310,000.
B) Debit to Premium on Bonds Payable $10,000.
C) Credit to Common Stock $250,000.
D) Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
E) Debit to Bonds Payable $300,000.
162) On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually.
On the issue date, the annual market rate of interest is 6%. The following information is taken
from present value tables:
Present value of an annuity (series of payments) for 10 periods at 3%
8.5302
Present value of an annuity (series of payments) for 10 periods at 4%
8.1109
Present value of 1 (single sum) due in 10 periods at 3%
0.7441
Present value of 1 (single sum) due in 10 periods at 4%
0.6756
What is the issue (selling) price of the bond?
A) $420,000
B) $402,362
C) $300,010
D) $308,107
E) $325,592
163) Match each of the following terms with the appropriate definitions.
(a) Discount on bonds
(b) Callable bonds
(c) Market rate
(d) Debt-to-equity ratio
(e) Sinking fund bonds
(f) Secured bonds
(g) Carrying value
(h) Premium on bonds
(i) Bond indenture
(j) Contract rate
________ (1) Bonds that have specific assets of the issuer pledged as collateral.
________ (2) The rate that borrowers are willing to pay and lenders are willing to accept.
________ (3) The amount by which the bond issue (selling) price exceeds the bond par
value.
________ (4) Bonds that give the issuer an option of retiring them at a stated dollar amount
before maturity.
________ (5) The interest rate specified in the bond indenture.
________ (6) The contract between the bond issuer and the bondholder(s) that identifies the
rights and obligations of the parties.
________ (7) Bonds that require the issuer to set aside assets to pay the debt.
________ (8) The net amount at which bonds are reported on the balance sheet.
________ (9) The ratio of total liabilities to total stockholders’ equity.
________ (10) The amount by which the bond par value exceeds the bond issue (selling)
price
164) Match each of the following terms with the appropriate definitions.
(a) Term bonds
(b) Coupon bonds
(c) Market rate
(d) Bond indenture
(e) Convertible bonds
(f) Bearer bonds
(g) Installment note
(h) Unsecured bonds
(i) Serial bonds
(j) Effective interest rate method
________ (1) A liability requiring a series of periodic payments to the lender.
________ (2) Bonds that are payable to whoever holds them; also called unregistered bonds.
________ (3) Bonds that are backed by the issuer’s general credit standing.
________ (4) Bonds that are scheduled for maturity on one specified date.
________ (5) The contract between the bond issuer and the bondholders; it identifies the
rights and obligations of the parties.
________ (6) An accounting method that allocates interest expense over the bonds’ life in a
way that yields a constant rate of interest.
________ (7) Bonds with interest coupons attached to their certificates; the bondholders
detach the coupons when they mature and present them to a bank or broker for collection.
________ (8) The interest rate that borrowers are willing to pay and lenders are willing to
accept for a particular bond at its risk level.
________ (9) Bonds that can be exchanged by the bondholders for a fixed number of shares
of the issuing corporation’s common stock.
________ (10)Bonds that mature at more than one date and are usually paid over a number
of periods.
165) What is a bond? Identify and discuss the different characteristics and features bonds may
possess.
166) Describe installment notes and the nature of the typical payment pattern.
167) On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to
be repaid with 4 equal year-end payments of $21,607. The amount borrowed is $70,000 and 4
years of interest at 9% equals $25,200, for a total of $95,200, yet the total payments on the note
amount to only $86,428. Explain.
168) Explain the present value concept as it applies to long-term liabilities.
169) What is a lease? Explain the difference between an operating lease and a finance lease.
170) Identify the advantages and disadvantages of bond financing.
171) A corporation plans to invest $1 million in oil exploration. The corporation is considering
two plans to raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would
be issued. Under Plan #2, 50,000 additional shares of common stock would be issued at $20 per
share. The corporation currently has 300,000 shares of stock outstanding, and it expects to earn
$700,000 per year before bond interest and income taxes. The net income and return on
investment for both plans is shown below:
Plan #1
Plan #2
Earnings before bond interest and taxes
$ 700,000
$ 700,000
Bond interest expense
(60,000)
Income before taxes.
$ 640,000
$ 700,000
Income taxes
(224,000)
(245,000)
Net income
$ 416,000
$ 455,000
Equity
$8,000,000
$9,000,000
Return on Equity
5.2%
5.06%
Comment on the relative effects of each alternative, including when one form of financing is
preferred to another.
172) Describe the journal entries required to record the issuance of bonds at par and the payment
of bond interest.
173) Describe the journal entries required to record the issuance of bonds at a premium and the
payment of bond interest, including any applicable amortization.
174) Describe the journal entries required to record the issuance of bonds at a discount and the
payment of bond interest, including any applicable amortization.
175) Explain the amortization of a bond discount. Identify and describe the amortization methods
available.
176) How are bond issue prices determined?
177) Explain the amortization of a bond premium. Identify and describe the amortization
methods available.
178) What are methods that a company may use to retire its bonds?
179) Describe the recording procedures for the issuance, retirement, and payment of interest for
installment notes.