question(s):
COMPANY
Price
Coupon %
MATURITY
Current
Yield
Fitch
Ratings
IBM
109.62
5.050
22-Oct-2012
4.067
A
Ford MTR
58.00
7.700
15-May-2097
13.276
CCC
60) Refer to the information above. Will IBM’s annual interest expense be higher or lower than
the amount of cash paid to investors for interest?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
61) Refer to the information above. Will Ford MTR’s annual interest expense be higher or lower
than the amount of cash paid to investors for interest?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
62) Refer to the information above. Is the carrying value of IBM’s bonds higher or lower than
the face value of its bonds?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
63) Refer to the information above. Is the carrying value of Ford MTR’s bonds higher or lower
than the face value of its bonds?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
64) Refer to the information above. Will the carrying value of IBM’s bonds increase or decrease
with each interest payment?
A) increase
B) decrease
C) remain the same
D) The answer cannot be determined from the information given.
65) Refer to the information above. Will the carrying value of Ford MTR’s bonds increase or
decrease with each interest payment?
A) increase
B) decrease
C) remain the same
D) The answer cannot be determined from the information given.
66) Refer to the information above. Is IBM’s coupon rate higher or lower than the market rate of
interest for bonds with an A rating?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
67) Refer to the information above. Is Ford MTR’s coupon rate higher or lower than the market
rate of interest for bonds with a CCC rating?
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
68) On January 1, Micha’s Jewelers issued thirty $1,000, ten-year, 6% bonds for $29,400. Using
straight-line amortization, the interest expense for the first year is ________.
A) $1,800
B) $1,764
C) $1,860
D) $1,824
69) A bond is a written agreement that specifies a company’s responsibility to pay interest and to
repay the principal to the bondholders at the end of the term of the bond.
70) Bondholders are considered owners of a company.
71) Zero-interest (zero-coupon) bonds do not provide bondholders with interest payments.
Instead, the face value of the bond is paid to the owner at the bond’s maturity date.
72) Secured loans give the bondholders a claim to a specific asset of the company in case of
default.
73) Convertible bonds give the bondholder the option of exchanging the bond for common stock.
74) Callable bonds give the bondholder the option of exchanging the bond for common stock.
75) At the option of the issuer, callable bonds may be retired prior to maturity for a specified
amount of money.
76) What is a bond, and why do companies issue bonds?
77) Explain the difference between a bond discount and a bond premium.
78) Explain the difference between a secured bond and a debenture.
79) Calculate the cash received by the issuing company:
Issue price
Cash received
a.
103
$
b.
100
$
c.
97
$
80) Calculate the cash received by the issuing company:
Face value
Issue price
Cash received
a.
$35,000
99
$
b.
$85,000
102
$
c.
$55,000
100
$
81) Calculate the proceeds for each of the following bond issues AND put an X in the
appropriate box to show if the bonds sell at a premium, at a discount, or at par:
Proceeds
Premium
Discount
Par
1.
a $1,000 bond selling at
104
2.
a $1,000 bond selling at 98
3.
a $1,000 bond selling at
100
Proceeds
Premium
Discount
Par
1.
a $1,000 bond selling at
104
2.
a $1,000 bond selling at 98
3.
a $1,000 bond selling at
100
82) Put an X in the appropriate box to show whether the bond described will be issued at a
premium, at a discount, or at par:
Premium
Discount
Par
1.
Able Company issued $100,000
worth of bonds with a stated interest
rate of 9% when the market rate of
interest for similar investments was
11%.
2.
Maple Company issued $1,000,000
worth of bonds with a stated interest
rate of 10% when the market rate of
interest for similar investments was
9%.
3.
Ready Company issued $1,000,000
worth of bonds with a stated rate of
7% when the market rate of interest
for similar investments was 7%.
1.
2.
3.
83) Calculate the proceeds for each of the following bond issues AND put an X in the
appropriate box to show if the bonds sell at a premium, at a discount, or at par:
Proceeds
Premium
Discount
Par
1.
Curl Up & Dye, Inc. issued
$50,000 worth of bonds at 98.
$
2.
Dew Drop Inn issued $40,000
worth of bonds at 100.
$
3.
Squid Roe, Inc. issued
$100,000 worth of bonds at 10.
$
84) $100,000 of 9%, 10-year bonds were issued for $106,710 when the market rate of interest
was 8%. The bonds pay interest once a year.
1. How much interest will be paid in cash in the first year?
2. How much interest expense will be reported for the first year, assuming the company uses
effective-interest amortization?
3. How much interest expense will be reported for the first year, assuming the company uses
straight-line amortization?
Proceeds
Premium
1.
Curl Up & Dye, Inc. issued
$50,000 worth of bonds at 98.
2.
Dew Drop Inn issued $40,000
worth of bonds at 100.
3.
Squid Roe, Inc. issued $100,000
worth of bonds at 10.
85) Part A: Show the effect on the accounting equation of each of the events listed below:
Daily Kneads Company:
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
1
June 30, 2011: issued
$100,000 worth of 8%
bonds at 100. Interest
will be paid annually on
June 30.
2
Dec. 31, 2011: made an
adjusting entry to accrue
interest on the bonds.
3
June 30, 2012: made the
interest payment.
4
Dec. 31, 2012: made an
adjusting entry to accrue
interest on the bonds.
5
June 30, 2013: made the
interest payment.
6
Dec. 31, 2013: made an
adjusting entry to accrue
interest.
Part B: For each item listed below, fill in the correct dollar amount, even if it is $0, in the
column that represents the financial statement where the item will appear:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.
Interest expense for 2011
2.
Interest paid in 2011
3.
Bonds payable at December 31,
2011
4.
Interest payable at December 31,
2011
5.
Interest expense for 2012
6.
Interest paid in 2012
7.
Bonds payable at December 31,
2012
8.
Interest payable at December 31,
2012
9.
Interest expense for 2013
10.
Interest paid in 2013
11.
Bonds payable at December 31,
2013
12.
Interest payable at December 31,
2013
Answer: Part A:
86) Part A: Show the effect on the accounting equation of each of the events listed below:
Jean’s Garment Shoppe, Inc.:
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
1
Oct. 31, 2011: issued $500,000 of
6% bonds at 100. Interest will be
paid SEMIANNUALLY on April
30 and October 31.
2
Dec. 31, 2011: made an adjusting
entry to accrue interest on the
bonds.
3
April 30, 2012: made the interest
payment.
4
Oct. 31, 2012: made the interest
payment.
5
Dec. 31, 2012: made an adjusting
entry to accrue interest on the
bonds.
6
April 30, 2013: made the interest
payment.
7
Oct. 31, 2013: made the interest
payment.
8
Dec. 31, 2013: made an adjusting
entry to accrue interest on the
bonds.
Part B: For each item listed below, fill in the correct dollar amount, even if it is $0, in the
column that represents the financial statement where the item will appear:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.
Interest expense for 2011
2.
Interest paid in 2011
3.
Bonds payable at December 31, 2011
4.
Interest payable at December 31, 2011
5.
Interest expense for 2012
6.
Interest paid in 2012
7.
Bonds payable at December 31, 2012
8.
Interest payable at December 31, 2012
9.
Interest expense for 2013
10.
Interest paid in 2013
11.
Bonds payable at December 31, 2013
12.
Interest payable at December 31, 2013
87) Tina’s Wear issued 10-year bonds with a face value of $50,000. The bonds carry a 7% stated
interest rate and pay interest once a year. They were issued when the market interest rate was 8%
and sold for $46,644.78.
Required:
a. Complete the amortization schedule for the first two years of the bond issue using the effective
interest method.
Beginning
carrying
value
Cash
payment
Interest expense
Amortization
of discount
Ending carrying
value
Year 1
$46,644.78
Year 2
b. Put an X in the appropriate box to describe how each of these items will behave with each
additional interest payment:
Increase
Decrease
Remain the same
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
c. Fill in the correct dollar amounts:
At maturity, after the last interest payment has been made, the unamortized discount on the
bonds will be $________ and the carrying value of the bonds will be $________.
88) Team Shirts issued 10-year bonds with a face value of $100,000. The bonds carry a 7%
carrying
value
Cash
payment
Year 1
$46,644.78
Year 2
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 6% and sold for $107,360.
Required:
a. Complete the amortization schedule for the first two years of the bond issue using the effective
interest method. Round to the nearest dollar.
Beginning
carrying value
Cash
payment
Interest
expense
Amortization
of discount
Ending carrying
value
Year 1
$107,360
Year 2
b. Put an X in the appropriate box to describe how each of these items will behave with each
additional interest payment:
Increase
Decrease
Remain the same
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
c. Fill in the correct dollar amounts:
At maturity, after the last interest payment has been made, the unamortized premium on the
bonds will be $______________ and the carrying value of the bonds will be $_______________.
Beginning
carrying value
Cash payment
Amortization
of discount
Year 1
Year 2
Increase
Decrease
Remain the same
1
Cash payment for interest
2
Interest expense
X
3
Bond carrying value
X
89) Prima, Inc. issued 15-year bonds with a face value of $50,000. The bonds carry a 7% stated
interest rate and pay interest once a year. They were issued when the market interest rate was 6%
and sold for $54,856.38.
Required:
a. Complete the amortization schedule for the first two years of the bond issue using the effective
interest method.
Beginning
carrying value
Cash payment
Interest
expense
Amortization of
discount
Ending carrying
value
Year 1
$54,856.38
Year 2
b. Put an X in the appropriate box to describe how each of these items will behave with each
additional interest payment:
Increase
Decrease
Remain the
same
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
c. Fill in the correct dollar amounts:
At maturity, after the last interest payment has been made, the unamortized premium on the
bonds will be $______________ and the carrying value of the bonds will be $_______________.
Beginning
carrying value
Cash payment
Amortization
Ending carrying
value
Year 1
$54,856.38
Year 2
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
90) Junque Bondz, Inc. issued 15-year bonds with a face value of $50,000. The bonds carry a 7%
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 8% and sold for $45,720.18.
Required:
a. Complete the amortization schedule for the first two years of the bond issue using the effective
interest method.
Beginning
carrying
value
Cash
payment
Interest
expense
Amortization
of discount
Ending
carrying
value
Year 1
$45,720.18
Year 2
b. Put an X in the appropriate box to describe how each of these items will behave with each
additional interest payment:
Increase
Decrease
Remain the same
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
c. Fill in the correct dollar amounts:
At maturity, after the last interest payment has been made, the unamortized discount on the
bonds will be $______________ and the carrying value of the bonds will be $_______________.
Beginning
Cash
payment
Ending carrying
Year 1
$3,657.61
Year 2
Decrease
1
Cash payment for interest
2
Interest expense
3
Bond carrying value
91) On January 1, 2011, BondZ, Inc. issued $100,000 worth of 9%, 20-year bonds at 100.
Interest is paid annually on December 31. Complete the table below for the first TWO YEARS
of the bonds. Fill in the correct dollar amount AND put an X in the appropriate box to indicate
the financial statement where the amount will be found.
Amount
At or for the Year
ended 12/31/11
Amount
At or for the YEAR
ended 12/31/12
IS
BS
SOCF
Interest expense
$
$
Bonds payable
$
$
Cash paid for interest
$
$
92) On September 30, 2010, Burrows, Inc. issued $100,000 worth of 30-year, 8% bonds at 100.
The interest is paid annually on September 30. Burrow’s yearend is December 31. Fill in the
correct dollar amount AND put an X in the appropriate box to indicate the financial statement
where the amount will be found.
Amount At or for the Year
ended 12/31/10
Amount At or for the YEAR
ended 12/31/11
IS
BS
SOCF
Interest payment
$
$
Interest payable
$
$
Interest expense
$
$
ended 12/31/10
Amount At or for the YEAR
ended 12/31/11
IS
BS
SOCF
Interest payment
Interest payable
Interest expense
Amount
At or for the Year
ended 12/31/11
Amount
At or for the YEAR
ended 12/31/12
IS
BS
SOCF
Interest expense
Bonds payable
Cash paid for interest
93) Match each of the following items with the appropriate consequence.
a. par value
b. bond discount
c. bond premium
______ 1. occurs when the stated rate of interest is greater than the market rate of interest
______ 2. occurs when the stated rate of interest is the same as the market rate of interest
______ 3. occurs when the stated rate of interest is less than the market rate of interest
94) Match each of the following items with the appropriate situation below
a. secured bonds
b. unsecured bonds
c. term bonds
d. serial bonds
______ 1. Team Shirts sells bonds backed by the value of its printing machines.
______ 2. Team Shirts issued bonds that mature in 2011, 2012, 2013, and 2014.
______ 3. Team Shirts issued bonds that mature in 2015.
______ 4. Team Shirts issued bonds that are backed by the credit rating of Team Shirts.
95) Match each of the following terms with the appropriate situation below.
a. callable bonds
b. convertible bonds
c. term bonds
d. serial bonds
______ 1. Tom’s Wear issued bonds that can be converted into Tom’s Wear stock.
______ 2. Tom’s Wear issued bonds that mature in 2011, 2010, 2011, and 2012.
______ 3. Tom’s Wear issued bonds that mature in 2015.
______ 4. Tom’s Wear issued bonds that can be recalled and redeemed by Toms’ Wear
beginning in 2011.
96) Match each of the following terms with the appropriate situation below. Each term is used
only once.
a. zero-interest bonds
b. bond premium
c. bond discount
d. par value
______ 1. Jon-med Company sold $40,000 worth of bonds for $40,500.
______ 2. Jon-med Company sold $40,000 worth of bonds for $39,500.
______ 3. Jon-med Company sold $40,000 worth of bonds for $40,000.
______ 4. Jon-med Company issued bonds that sold at a discount and will not pay interest
during the life of the bond issue.
97) Match each of the following terms with the appropriate situation below.
a. discount
b. premium
c. maturity
d. interest
______ 1. Team Shirts issued bonds that will be paid back in 2018.
______ 2. Team Shirts issued bonds that make regular annual payments of 6%.
______ 3. Team Shirts issued bonds with a face value of $50,000 that sold for $49,780.
______ 4. Team Shirts issued bonds with a face value of $50,000 that sold for $52,520.
98) Match each of the following situations with the appropriate term below. Terms may be used
more than once.
a. maturity
b. interest
c. premium
d. discount
______ 1. Bank, Rupp & Baroque, Inc. issued bonds that sold for $101,000.
______ 2. Bank, Rupp & Baroque, Inc. bonds carried a stated rate of 6.5%.
______ 3. Bank, Rupp & Baroque, Inc. bonds will be due in 2030.
______ 4. Bank, Rupp & Baroque, Inc. issued bonds that sold for $99,000.
______ 5. The semi-annual payment to bondholders is $6,000.
Learning Objective 7-5
1) On November 1, 2011, The Mane Event, Inc. borrowed $40,000 from a local bank for 24
months at 11% annual interest. Both principal and interest are due when the note matures. Which
statement below is TRUE?
A) The note is a current-term liability on the balance sheet at Dec. 31, 2011.
B) The note is a long-term liability on the balance sheet at Dec. 31, 2012.
C) The transaction represents an investing activity.
D) The transaction represents a financing activity.
2) Borrowing cash is ________ activity.
A) an operating
B) an investing
C) a financing
D) both an investing activity and a financing
3) On January 1, 2011, Dew Drop Inn borrowed $80,000 at 8% interest. The loan will be repaid
with equal annual installment payments of $8,900 made on the last day of each year, which is the
companys yearend. Notes payable at December 31, 2011 equals ________.
A) $80,000 on the income statement
B) $80,000 on the balance sheet
C) $75,958 on the balance sheet
D) $77,500 on the balance sheet
4) On January 1, 2011, Dew Drop Inn borrowed $80,000 at 8% interest. The loan will be repaid
with equal annual installment payments of $8,900 made on the last day of each year, which is the
companys yearend. Compared to the prior year’s interest expense on this note, interest expense
for the year ended December 31, 2012 (2nd year) is ________.
A) more because the note payable balance at January 1, 2012 is less
B) less because the note payable balance at January 1, 2012 is less
C) more because the note payable balance at January 1, 2012 is more
D) the same