Chapter 14 Bonds and Long-Term Notes
108. On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, 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, 2016, 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.
109. When a company issues bonds between interest dates, the entry to record the issuance of the
bonds will:
a. Include a credit to interest payable.
b. Include a debit to interest expense.
c. Include a debit to cash that has been reduced by interest accrued from the last interest
date.
d. Include a debit to cash that has been increased by interest that will accrue from sale to the
next interest date.
110. TMC issued $50 million of its 12% bonds on April 1, 2016, at 98 plus accrued interest. The
bonds are dated January 1, 2016, and mature on December 31, 2035. Interest is payable
semiannually on June 30 and December 31. What amount did TMC receive from the bond
issuance?
a. $50.5 million.
b. $51.5 million.
c. $49.0 million.
Chapter 14 Bonds and Long-Term Notes
d. $49.5 million.
111. On September 1, 2016, Sam’s Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest
semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount.
How much cash did Sam’s receive upon sale of the bonds?
a. $378,000.
b. $364,000.
c. $354,667
d. $350,000.
112. When a company issues bonds between interest dates the entry to record the
issuance of the bonds will:
a. Include a debit to cash that has been reduced by accrued interest from the last
interest date.
b. Include a credit to accrued interest payable.
c. Include a debit to interest expense.
d. Be unaffected by the timing of issue.
113. Brown Co. issued $100 million of its 10% bonds on April 1, 2016, at 99 plus
accrued interest. The bonds are dated January 1, 2016, and mature on December
31, 2035. Interest is payable semiannually on June 30 and December 31. What
amount did Brown receive from the bond issuance?
a. $ 87.8 million
b. $ 99.0 million
c. $100.0 million
d. $101.5 million
114. On September 1, 2016, Blue Co., issued $1,600,000 of its 10% bonds at 98 plus
accrued interest. The bonds are dated June 1, 2016, and mature on May 30, 2026.
Interest is payable semiannually on June 1 and December 1. At the time of
issuance, Blue would receive cash of:
a. $1,640,000
b. $1,608,000
c. $1,607,200
d. $1,568,000
115. On September 1, 2016, Red Co., issued $48 million of its 10% bonds at face value.
The bonds are dated June 1, 2016, and mature on May 30, 2026. Interest is
payable semiannually on June 1 and December 1. At the time of issuance, Red
would receive cash proceeds that would include accrued interest of:
a. Zero.
b. $ 600,000.
c. $1,200,000.
d. $4,800,000.
Chapter 14 Bonds and Long-Term Notes
116. On January 1, 2016, 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:
a. Debit discount on bonds payable $100,000.
b. Credit premium on bonds payable $100,000.
c. Credit equity $100,000.
d. Credit bonds payable $10,100,000.
117. Patrick Rach International issued 5% bonds convertible into shares of the company’s common
stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should record:
a. The proceeds of the bond issue as part debt and part equity.
b. The proceeds of the bond issue entirely as debt.
c. The proceeds of the bond issue entirely as equity.
d. The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
118. During 2016 Marquis Company was encountering financial difficulties and seemed likely to
default on a $300,000, 10%, four-year note dated January 1, 2014, payable to Third Bank.
Interest was last paid on December 31, 2015. On December 31, 2016, 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 2016 income statement?
a. $20,000.
b. $50,000.
Chapter 14 Bonds and Long-Term Notes
c. $80,000.
d. $0.
119. On January 1, 2016, Ozark Minerals issued $20 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. Ozark applies International Financial
Reporting Standards (IFRS). Upon issuance, Ozark should:
a. Credit bonds payable $19,800,000.
b. Credit premium on bonds payable $200,000.
c. Credit equity $200,000.
d. Credit bonds payable $20,200,000.
120. Patrick Rach International issued 5% bonds convertible into shares of the company’s common
stock. Rach applies International Financial Reporting Standards (IFRS). Upon issuance,
Patrick Rach International should record:
a. The proceeds of the bond issue as part debt and part equity.
b. The proceeds of the bond issue entirely as debt.
c. The proceeds of the bond issue entirely as equity.
d. The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
121. When bonds and other debt are issued, costs such as legal costs, printing costs, and
underwriting fees are referred to as debt issuance costs (called transaction costs under IFRS).
If Brown Imports prepares its financial statements using IFRS:
a. The increase in the effective interest rate caused by the transaction costs is reflected in the
interest expense.
b. The decrease in the effective interest rate caused by the transaction costs is reflected in the
interest expense.
c. The transaction costs are recorded separately as an asset.
d. The recorded amount of the debt is increased by the transaction costs.
Chapter 14 Bonds and Long-Term Notes
Matching Pair Questions
122. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Interest expense
Used when the rate is not stated or is materially
different from the market rate.
____
2. Mortgage bond
Used by a trustee to repurchase bonds in the open
market.
____
3. Bond indenture
Conceptually equal to effective rate times balance.
____
4. Sinking fund
Secured by real property.
____
5. Implicit rate of interest
Promises made to bondholders.
____
TERM
1. Interest expense
Used when the rate is not stated or is materially
different from the market rate.
2. Mortgage bond
Used by a trustee to repurchase bonds in the open
market.
3. Bond indenture
Conceptually equal to effective rate times balance.
4. Sinking fund
Secured by real property.
5. Implicit rate of interest
Promises made to bondholders.
Chapter 14 Bonds and Long-Term Notes
123. Listed below are 4 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
1. Loss on extinguishment
Protects the debt issuer if rates fall.
2. Call feature
The amount by which the reacquisition price of
debt exceeds book value.
3. Fair value option
Gain or loss reported in the income statement.
4. Stock warrant
Right of an investor to purchase a specific number
shares at a fixed price.
TERM
1. Loss on extinguishment
Protects the debt issuer if rates fall.
2. Call feature
The amount by which the reacquisition price of debt
3. Fair value option
Gain or loss reported in the statement of
4. Stock warrant
Right of an investor to purchase a specific number
shares at a fixed price.
124. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Times interest earned ratio
No specific assets pledged.
____
2. Debenture bonds
Name of owner not registered.
____
3. Debt to equity ratio
Measures default risk.
____
4. Coupon bonds
Measures ability to service debt.
____
5. Convertible bonds
May become stock.
____
TERM
1. Times interest earned ratio
No specific assets pledged.
2. Debenture bonds
Name of owner not registered.
3. Debt to equity ratio
Measures default risk.
4. Coupon bonds
Measures ability to service debt.
5. Convertible bonds
May become stock.
125. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Premium on bonds
Market rate less than stated rate.
____
2. Discount on bonds
Market rate higher than stated rate.
____
3. Serial bonds
No maturity payment.
____
4. Installment notes
Legal, accounting, printing.
____
5. Debt issue costs
Many separate maturity dates.
____
TERM
1. Premium on bonds
Market rate less than stated rate.
2. Discount on bonds
Market rate higher than stated rate.
3. Serial bonds
No maturity payment.
4. Installment notes
Legal, accounting, printing.
5. Debt issue costs
Many separate maturity dates.
126. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Induced conversion
Requires(s) no cash outflow before maturity.
____
2. Book value method
Often traded separately from associated bonds.
____
3. Warrants
A practical expediency when not misleading.
____
4. Zero-coupon bonds
Additional consideration is recorded as an expense.
____
5. Straight-line method
No gain or loss recorded when convertible bond
option is exercised.
____
TERM
1. Induced conversion
Requires(s) no cash outflow before maturity.
2. Book value method
Often traded separately from associated bonds.
3. Warrants
A practical expediency when not misleading.
4. Zero-coupon bonds
Additional consideration is recorded as an expense.
Chapter 14 Bonds and Long-Term Notes
127. 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.
List A List B
____ Materiality concept A. Bond price
____ Convertible bonds B. Discount
____ Present value of interest plus C. Liquidation payments after other
present value of principal claims satisfied
____ Call feature D. Name of owner not registered
____ Debt issue costs E. Premium
____ Market rate higher than stated rate F. Checks are mailed directly
____ Coupon bonds G. No specific assets pledged
____ Promises made to bondholders H. Bond indenture
____ Stated rate higher than market rate I. Backed by a lien
____ Face amount times stated rate J. Interest expense
____ Registered bonds K. May become stock
____ Debenture bond L. Legal, accounting, printing
____ Mortgage bond M. Protection against falling rates
____ Balance times effective rate N. Periodic cash payments
____ Subordinated debenture O. Straight-line method
Chapter 14 Bonds and Long-Term Notes
Problems
128. On May 1, 2016, Joe purchased $200,000 in zero-coupon bonds that mature on May 1, 2036.
The bonds pay no interest during the period of time they are outstanding. The interest rate for
such borrowings is at 9%. Interest compounds annually.
Required: Calculate the price Joe paid for the bonds.
129. On February 1, 2016, Nell purchased $600,000 in zero-coupon bonds that mature on February
1, 2036. The bonds pay no interest during the period of time they are outstanding. The interest
rate for such borrowings is at 12%.
Required: Calculate the price Nell paid for the bonds.
Use the following to answer questions 130–134:
On January 1, 2016, 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.
130. Required: How much interest will Morton Sales Co. pay on these bonds in 2016?
131. Required: What was the annual effective interest rate in the market when the bonds were
issued?
132. Required: What amount of interest expense on these bonds would Morton Sales Co. report in
its 2016 income statement?
133. Required: What will Morton Sales Co. report on these bonds in its December 31, 2016,
balance sheet?
134. Required: What total interest expense will Morton Sales Co. report over the 10-year life of
these bonds?
135. Determine the price of a $200,000 bond issue under each of the following independent
assumptions:
Maturity
Interest Paid
Stated Rate
Effective Rate
1.
10 years
annually
10%
12%
2.
10 years
semiannually
10%
12%
3.
20 years
semiannually
12%
12%
1.
Interest
$ 20,000 x 5.65022 =
Principal
200,000 x 0.32197 =
2.
Interest
$ 10,000 x 11.46992 =
Principal
200,000 x 0.31180 =
3.
Since the stated rate and the effective rate are the same, the price is equal to the face amount
$200,000.
Chapter 14 Bonds and Long-Term Notes
136. Determine the price of a $500,000 bond issue under each of the following independent
assumptions:
Maturity
Interest Paid
Stated Rate
Effective Rate
1.
10 years
annually
10%
12%
2.
10 years
semiannually
10%
12%
3.
20 years
semiannually
12%
10%
Answer:
1.
Interest
$ 50,000 x 5.65022 =
Principal
500,000 x 0.32197 =
2.
Interest
$25,000 x 11.46992 =
Principal
500,000 x 0.31180 =
3.
Interest
$30,000 x 12.46221 =
Principal
500,000 x 0.37689 =
Chapter 14 Bonds and Long-Term Notes
137. On January 1, 2016, Bishop Company issued 10% bonds dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (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, 2016.
2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer:
Chapter 14 Bonds and Long-Term Notes
138. On January 1, 2016, Mania Enterprises issued 12% bonds dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (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, 2016.
2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer:
Chapter 14 Bonds and Long-Term Notes
139. On January 1, 2016, Shirley Corporation purchased 10% bonds dated January 1, 2016, with a
face amount of $10 million. The bonds mature in 2025 (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, 2016.
2. Prepare the journal entry to record the bond purchase by Shirley on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer:
Chapter 14 Bonds and Long-Term Notes
140. On January 1, 2016, Rare Bird Ltd. purchased 12% bonds dated January 1, 2016, with a face
amount of $20 million. The bonds mature in 2025 (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, 2016.
2. Prepare the journal entry to record the bond purchase by Rare Bird on January 1, 2016.
3. Prepare the journal entry to record interest on June 30, 2016, using the effective interest
method.
4. Prepare the journal entry to record interest on December 31, 2016, using the effective
interest method.
Answer: