Chapter 14: Long-Term Liabilities: Bonds and Notes
152.
A company issued $1,000,000 of 30-year, 8% callable bonds on April 1, with interest payable on April 1 and
October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following
selected transactions:
Year 1
Apr. 1 Issued the bonds for cash at their face amount.
Oct. 1 Paid the interest on the bonds.
Year 3
Oct. 1 Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry
for
payment of interest.)
Chapter 14: Long-Term Liabilities: Bonds and Notes
153.
Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30
and
December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the
following
selected transactions:
Year 1
July 1 Issued the bonds for cash at their face amount.
Dec. 31 Paid the interest on the bonds.
Year 5
Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry
for
payment of interest.)
Chapter 14: Long-Term Liabilities: Bonds and Notes
154.
On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000.
Present
entries to record the following transactions.
(1)
Issuance of bonds.
(2)
Payment of first semiannual interest on December 31 (record separate entry from premium
amortization).
(3)
Amortization by straight-line method of bond premium on December 31.
155.
Calculate the total amount of interest expense over the life of the bonds for the following independent situations.
a)
$100,000 face value, 10%, 10-year bonds issued at 101.
b)
$240,000 face value, 5%, 5-year bonds issued at 100.
c)
$300,000 face value, 9%, 6-year bonds issued at 98.
Chapter 14: Long-Term Liabilities: Bonds and Notes
156.
Given the following data, prepare the journal entry to record interest expense and any related amortization on
December 31 of the first year using the effective interest rate method. Assume interest is paid annually on
January 1. The bonds were issued on January 1 for $7,411,233.
Bonds payable, maturing in 10 years = $8,000,000
Contract interest rate = 5%
Market (effective) interest rate = 6%
Round answers to nearest dollar.
157. (a.) Prepare the journal entry to issue $100,000 bonds that sold for $94,000.
(b.) Prepare the journal entry to issue $100,000 bonds that sold for $104,000.
Chapter 14: Long-Term Liabilities: Bonds and Notes
158.
Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on
September 1 and March 1. The bonds were issued on March 1, at 97. Glover’s yearend is December 31.
a)
Were the bonds issued at a premium, a discount, or at par?
b)
Was the market rate of interest higher, lower, or the same as the contract rate of interest?
c)
If the company uses the straight-line method of amortization, what is the amount of interest expense
Glover
Corporation will show for the year ended December 31?
d)
What is the carrying value of the bonds on December 31?
159.
On January 1, Yeargan Company obtained a $125,000, 7-year 5% installment note from Farmers Bank. The note
requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first
payment consists of $6,250 interest and principal repayment of $15,352.
Requirement:
(1)
Journalize the following entries:
a.
Issued the installment notes for cash on January 1.
b.
Paid the first annual payment on the note.
Chapter 14: Long-Term Liabilities: Bonds and Notes
160.
On January 1, Luther Co. issued a $1,000,000, 5 year, 8% installment note payable with payments of
$200,000
principal plus interest due on January 1 of each year for the next 5 years.
1.
Prepare the adjusting journal entry at December 31 to accrue interest for the year.
2.
Show the account(s) and amount(s) and where it will appear on a multi-step income statement prepared on
December 31.
3.
Show the account(s) and amount(s) and where they will appear on a classified balance sheet prepared on
December 31.
Chapter 14: Long-Term Liabilities: Bonds and Notes
161.
On January 1, Year 1, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30
and
December 31 to yield 6%. Use the following format and round figures to nearest dollar.
The bonds were issued for $1,851,234.
1.
Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method.
Date Cash Paid Interest Expense Amortization Bond Carry Value
2.
Show how this bond would be reported on the balance sheet at December 31, Year 2.
Chapter 14: Long-Term Liabilities: Bonds and Notes
162.
On January 1, Marshall Co. issued a $360,000, 3-year, 6% installment note payable with payments of
$120,000
principal and interest due on January 1 for each of the next 3 years.
1.
Prepare the adjusting journal entry to accrue interest at December 31, Year 2.
2.
Show the account(s) and amount(s) and where they will appear on a classified balance sheet prepared on
December 31, Year 2.
163.
Given the following data, determine the number of times interest charges are earned ratio.
Net income, $70,000
Bonds payable, issued at face value, 8%, $5,000,000
Preferred Stock, $50 par value, 6%, 10,000 shares issued & outstanding
Tax rate is 30%
Chapter 14: Long-Term Liabilities: Bonds and Notes
164.
Balance sheet and income statement data indicate the following:
Bonds payable, 8% (issued 2000, due 2024)
Company A
$1,200,000
Company B
$ 900,000
Preferred 5% stock, $100 par
(no change during year)
300,000
400,000
Common stock, $50 par
(no change during year)
1,000,000
1,000,000
Income before income tax for year
495,000
130,000
Income tax for year
75,000
12,000
Common dividends paid
50,000
0
Preferred dividends paid
21,000
28,000
(a)
For each company, what is the number of times bond interest charges were earned (round
to one decimal place)?
(b)
Which company gives potential creditors the most protection?
Chapter 14: Long-Term Liabilities: Bonds and Notes
165.
Use the following tables to calculate the present value of a $25,000, 7%, 5-year bond that pays $1,750 ($25,000 ×
7%) interest annually, if the market rate of interest is 7%
Present Value of $1 at Compound Interest
Periods
5%
6%
7%
10%
1
0.95238
0.94340
0.93458
0.90909
2
0.90703
0.89000
0.87344
0.82645
3
0.86384
0.83962
0.81630
0.75132
4
0.82270
0.79209
0.76290
0.68301
5
0.78353
0.74726
0.71299
0.62092
6
0.74622
0.70496
0.66634
0.56447
7
0.71068
0.66506
0.62275
0.51316
8
0.67684
0.62741
0.58201
0.46651
9
0.64461
0.59190
0.54393
0.42410
10
0.61391
0.55840
0.50835
0.38554
Present Value of Annuity of $1 at Compound Interest
Periods
5%
6%
7%
10%
1
0.95238
0.94340
0.93458
0.90909
2
1.85941
1.83339
1.80802
1.73554
3
2.72325
2.67301
2.62432
2.48685
4
3.54595
3.46511
3.38721
3.16987
5
4.32948
4.21236
4.10020
3.79079
6
5.07569
4.91732
4.76654
4.35526
7
5.78637
5.58238
5.38929
4.86842
8
6.46321
6.20979
5.97130
5.33493
9
7.10782
6.80169
6.51523
5.75902
10
7.72174
7.36009
7.02358
6.14457
Chapter 14: Long-Term Liabilities: Bonds and Notes
166.
Using the following table, what is the present value of $15,000 to be received in 10 years, if the market rate is
5%
compounded annually?
Periods
5%
6%
7%
10%
1
0.95238
0.94340
0.93458
0.90909
2
0.90703
0.89000
0.87344
0.82645
3
0.86384
0.83962
0.81630
0.75132
4
0.82270
0.79209
0.76290
0.68301
5
0.78353
0.74726
0.71299
0.62092
6
0.74622
0.70496
0.66634
0.56447
7
0.71068
0.66506
0.62275
0.51316
8
0.67684
0.62741
0.58201
0.46651
9
0.64461
0.59190
0.54393
0.42410
10
0.61391
0.55840
0.50835
0.38554
167.
Using the following table, what is the present value of $40,000 to be received in 5 years, if the market rate is
7%
compounded annually?
Periods
5%
6%
7%
10%
1
0.95238
0.94340
0.93458
0.90909
2
0.90703
0.89000
0.87344
0.82645
3
0.86384
0.83962
0.81630
0.75132
4
0.82270
0.79209
0.76290
0.68301
5
0.78353
0.74726
0.71299
0.62092
6
0.74622
0.70496
0.66634
0.56447
7
0.71068
0.66506
0.62275
0.51316
8
0.67684
0.62741
0.58201
0.46651
9
0.64461
0.59190
0.54393
0.42410
10
0.61391
0.55840
0.50835
0.38554
Chapter 14: Long-Term Liabilities: Bonds and Notes
Match each description below to the appropriate term (a-g).
a.
contract rate
b.
effective rate
c.
bond discount
d.
bond premium
e.
bond
f.
bond indenture
g.
principal
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.14-01 – 14–01
ACCT.WARD.16.14-02 – 14–02
ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements
ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
ACCT.AICPA.FN.04 – Reporting
BUSPROG: Reflective Thinking
168.
The face amount of each bond
169.
A form of an interest-bearing note
170.
The return required by the market on the day of issuance
171.
If the contract rate exceeds the effective rate
172.
The rate printed on the bond certificate
173.
If the contract rate is less than the effective rate
Chapter 14: Long-Term Liabilities: Bonds and Notes
174.
The contract between bond issuer and bond purchaser
Match each description below to the appropriate term (a-g).
a.
EPS
b.
face value
c.
callable bond
d.
indenture
e.
term bond
f.
convertible bond
g.
serial bond
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.14-01 – 14–01
ACCT.WARD.16.14-02 – 14–02
ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 – Long-Term Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
ACCT.AICPA.FN.04 – Reporting
BUSPROG: Reflective Thinking
175.
A measure of income earned by each share of common stock
176.
The entire principal of the bond is paid back on maturity date
177.
The value of a bond stated on the bond certificate
178.
The legal contract between issuer and bond holder
179.
Allows the issuer to redeem bonds before maturity date
Chapter 14: Long-Term Liabilities: Bonds and Notes
180.
The principal of the bond issue is paid back in installments
181.
Allows the bond holder to exchange bond for shares of stock