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14. Fiona Corporation has a 7 percent, $600,000 bond issue that originally was issued five years ago.
There are now ten years remaining on the bond issue, and the market interest rate is 12 percent.
Interest is paid semi-annually. Calculate the current market value of the bond issue, using present
value tables.
15. When determining the value of a bond using present value, what are the two components used in the
calculation?
16. On January 1, 2010, Woodvale Corporation issued five-year term bonds with a face value of $700,000.
Interest is payable annually on December 31. The bonds were issued for $727,300. The effective
interest method of amortization is used. Ryan reported Bond Interest Expense of $65,457 on its income
statement for the year ended December 31, 2010. Calculate the effective interest rate for these bonds.
17. Comment on the change in both the carrying value and the balance of the Unamortized Bond Discount
account over the life of a bond issue.
18. Comment on the change in both the carrying value and the balance of the Unamortized Bond Premium
account over the life of a bond issue.
19. Technically, what is meant by the amortization of a bond discount, and why is it necessary?
20. Tatum Corporation has $2,000,000 worth of 7 percent convertible bonds outstanding. On September 1,
20xx, there is $80,000 of unamortized discount associated with these bonds. The bonds are convertible
at the rate of 30 shares of $10 par value common stock for each $1,000 bond. On September 1, 20xx,
an interest payment date, bondholders presented $1,400,000 of the bonds for conversion. Prepare an
entry in journal form without explanation to record the conversion of the bonds.
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21. Valdez Corporation has outstanding $1,500,000 of 10 percent bonds callable at 103. On July 1, a
semi-annual interest payment date, the unamortized bond premium equaled $60,000. On that date,
$900,000 of the bonds were called and retired. Prepare an entry in journal form without explanation to
record the retirement of the bonds on July 1.
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22. On December 31, 2009, the balance sheet of the Gable Corporation reported 1,000 bonds outstanding
with a face value of $500,000 and a related unamortized discount of $35,000. The bonds are
convertible at the rate of 25 shares of common stock for each $1,000 bond. On January 1, 2010, the
bondholders presented $400,000 of the bonds for conversion. The entry to record this conversion
contained a credit to Additional Paid-in Capital for $172,000. Calculate the par value per share of the
common stock.
23. When bonds are converted to common stock, what is the basis for recording (valuing) the stock
issued?
24. On July 1, 20xx, Benchley Corporation issued bonds with a face value of $600,000. The bonds carry a
face interest rate of 8 percent that is payable each June 1 and December 1.
a. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are
issued at 100.
b. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are
issued at 97.
c. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are
issued at 103.
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25. Strathern Corporation issued ten-year term bonds dated January 1, 2009, with a face value of
$800,000. The face interest rate is 10 percent, and interest is payable semi-annually on June 30 and
December 31. The bonds were issued for $708,400 to yield an effective annual rate of 12 percent. Use
the effective interest method of amortization. Round answers to the nearest dollar.
a. Prepare entries in journal form without explanations to record the bond issue on January 1, 2009,
and the payments of interest and amortization on June 30 and December 31, 2009.
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b. Calculate the total amount to be reported as Bond Interest Expense on the income statement for the
year ended 2010.
c. Calculate the carrying value of the bonds on December 31, 2010.
26. According to the long-term debt note in its annual report, the Modern Journal Company, publisher of
the West End Times, Technotes, and other publications, engaged in the following long-term debt
transactions in 2010:
1. On April 1, 2010, the company issued $50,000,000 of ten-year, 8 1/4 percent notes with semiannual
interest payments on April 1 and October 1 at face value.
2. On October 15, 2010, the company redeemed, prior to maturity dates, all of its outstanding 10
percent notes that had been issued in connection with the acquisition of E-Reporter Newspapers, Inc.
The redemption price was $32,500,000 plus accrued interest. The carrying value of the notes on
October 15 was $32,500,000 less an unamortized discount of $3,611,500. The semiannual interest
dates were June 15 and December 15.
3. On December 8, 2010, the company issued $50,000,000 of 8 percent notes due on December 15, ten
years later, with semiannual interest payments on June 15 and December 15. The notes were issued at
face value plus accrued interest.
(Note: Long-term notes are accounted for in a manner similar to that for bonds. Round answers to
nearest dollar)
a. Prepare entries in journal form to record the three transactions described above.
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b. Prepare the entries on the interest payment dates of October 1 and December 15, 2010, and the
year-end adjustment on December 31, 2010.
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c. What was the total interest expense during 2010 for the three long-term notes issued, assuming that
the balance in Unamortized Discount was $3,746,500 at the beginning of the year? Assume the
balance of the outstanding notes in transaction 2 above was $32,500,000 at the beginning of the year.
27. A notice appeared in the Grant Street Times stating that Dollar Savings Association of Texas was
issuing $2.9 billion in zero coupon bonds. “The Bonds do not pay interest periodically. The only
scheduled payment to the holder of a Bond will be the amount at maturity,” the ad read. The details of
two components of the issue were as follows: $500,000,000 Bonds due December 12, 2014, at 3.254;
$500,000,000 Bonds due December 12, 2024, at 1.380; plus accrued amortization, if any, of the
original issue discount from December 12, 1984, to date of delivery.
a. Assuming all the bonds were issued on December 12, 1984, prepare entries in journal form to record
each component shown above.
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b. Determine the approximate market interest rate on each of the two components of the bond issue.
Assume that interest is compounded annually. Use Table 3 in the appendix on future value and present
value tables.
c. Prepare entries in journal form to record bond interest expense for each of the first two years
(December 12, 1985 and 1986) on the component of the bond due in 2014 (ignore effects of fiscal year
ends). What advantages or disadvantages are there to Dollar in issuing zero coupon bonds?
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28. McPherson Corporation has $1,000,000 of 20-year, 9 percent bonds dated October 1, with interest
payment dates of September 30 and March 31. The company's fiscal year ends July 31, and it uses the
effective interest method to amortize premium or discount.
a. Prepare entries in journal form for November 1, March 31, and July 31, assuming that the bonds
were issued at face value plus accrued interest on November 1. Round answers to the nearest dollar
and omit explanations.
b. Prepare entries in journal form for October 1, March 31, and July 31, assuming that the bonds were
issued at 98 on October 1 to yield an effective interest rate of 9.2 percent. Round answers to the
nearest dollar and omit explanations.
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1985
Dec.
12
Bond Interest Expense
1,952,400
Unamortized Bond Discount
1,952,400
To record amortization of bond
discount using effective interest rate
$16,270,000 × 0.12 = $1,952,400
1986
Dec.
12
Bond Interest Expense
2,186,688
Unamortized Bond Discount
2,186,688
To record amortization of bond
discount using effective interest rate
($16,270,000 + $1,952,400) × 0.12 =
$2,186,688
29. On December 31, 2009, the balance sheet of Gamma Corporation reported bonds outstanding with a
face value of $2,000,000 and a related unamortized premium of $60,000. Interest is payable
semiannually on January 1 and July 1.
a. Prepare an entry in journal form without explanations to record the retirement of bonds with a face
value of $1,200,000 on January 1, 2010, assuming the bonds were redeemed at a call price of 104.
b. Prepare an entry in journal form without explanation on January 1, 2010, to record the conversion of
bonds with a face value of $800,000 into common stock. Each $1,000 bond is convertible into 30
shares of $20 par value common stock.
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ANS:
30. On December 31, 2009, the balance sheet of L and H Corporation reported bonds outstanding with a
face value of $1,000,000 and a related unamortized premium of $50,000. Interest is payable
semiannually on January 1 and July 1.
a. Prepare an entry in journal form without explanations to record the retirement of bonds with a face
value of $600,000 on January 1, 2010, assuming the bonds were redeemed at a call price of 103.
b. Prepare an entry in journal form without explanation on January 1, 2010, to record the conversion of
bonds with a face value of $400,000 into common stock. Each $1,000 bond is convertible into 25
shares of $10 par value common stock.
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31. On March 1, 2009, Sklar Corporation issued bonds with a face value of $400,000. The bonds carry a
face interest rate of 12 percent that is payable each June 30 and December 31. The bonds were sold at
100. The corporation's accounting year ends on December 31.
a. Prepare an entry in journal form without explanation to record the issuance of the bonds on March 1,
2009.
b. Prepare an entry in journal form without explanation to record the interest payment on June 30,
2009.
c. Prepare an entry in journal form without explanation to record the interest payment on December
31, 2009.
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d. Calculate the amount that should appear for Bond Interest Expense on Sklar's income statement for
the year ended December 31, 2009. Show your calculations.
e. Calculate the amount that should appear for Bond Interest Expense on Sklar's income statement for
the year ended December 31, 2010. Show your calculations.
