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244) Aqua Zone issues $1.2 million, 7% bonds on January 1, 2021, that mature in twenty years.
The market interest rate for bonds of similar risk and maturity is 6% and the bonds issue for
$1,338,689. Interest is paid semi-annually on June 30 and December 31.
Required:
1. Fill in the blanks to the first three rows of the amortization schedule below:
2. Record the issuance of the bonds on January 1, 2021.
3. Record the interest payments on June 30, 2021 and December 31, 2021.
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245) Super Slides has $20 million in bonds payable. As part of the contractual agreement with
bondholders, the company guarantees to keep its debt to equity ratio below 2.0. Super Slides’
total assets are $90 million and its liabilities, other than the bonds payable, are $40 million. The
company needs additional assets and is considering purchasing these assets by issuing a note
payable or by leasing.
Required:
1. Calculate total stockholders’ equity using the balance sheet equation.
2. What is the debt to equity ratio?
3. Explain the difference between the purchase of an asset by issuing a note payable and
obtaining the asset using a lease.
4. Suppose the company can obtain the asset by issuing a $2 million note payable or by signing a
lease agreement requiring payments with a present value of $2 million. Will issuing the note
payable affect the debt to equity ratio? Will the lease agreement affect the debt to equity ratio?
5. Will issuing the note or entering into a lease cause the debt to equity ratio to be in violation of
the contractual agreement with bondholders? Show your calculations.
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246) Selected financial data for two competitors in the construction supply industry are provided
as follows:
Required:
1. Calculate the debt to equity ratio for 2021 for both companies. Which company has the higher
ratio?
2. Calculate the return on assets for 2021 for both companies. Which company appears more
profitable?
3. Calculate the times interest earned ratio for 2021 for both companies. Which company is
better able to meet interest payments as they become due?
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247) What is capital structure? Why would a company choose to borrow money rather than issue
additional stock?
248) Why do some companies issue bonds rather than borrow money directly from a bank?
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249) Contrast the following types of bonds:
(a) Secured and unsecured.
(b) Term and serial.
(c) Callable and convertible.
250) Explain how each of the columns in an amortization schedule is calculated, assuming the
bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a
premium?
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251) What are the potential risks and rewards of carrying additional debt? How does additional
debt affect a company’s return to investors?