Exam 10: Reporting and Interpreting Bond Securities

On January 1, 2016, Jason Company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually. The following present value factors have been provided: What was the issuance price of the bonds if the market rate of interest was 8%?

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. The interest expense for the six-month period ending December 31, 2016 is closest to:

On May 1, 2016, Jaspo, Inc. issued a $1,000, 5%, five-year bond for $1,092 when the market rate was 3%. The bond was dated on May 1, 2016, and interest is payable each April 30. Jaspo, Inc. has a December 31 year-end and uses the effective interest method of amortization. Jaspro does not use a discount or a premium account for bonds in its accounting records. Required: A. Prepare the journal entry required on May 1, 2016. B. Prepare the journal entry required on December 31, 2016. No adjusting journal entries were made during the year. Round the entry items to whole dollar amounts. C. Prepare the entry required on April 30, 2017. Round the entry items to whole dollar amounts. D. Was the bond issued at par, at a premium, or at a discount? E. What is the carrying value (book value) of the bond at December 31, 2016? Round your answer to a whole dollar amount. F. Where in the financial statements does the carrying value of the bond appear? (Be specific). G. On what date does the bond issue mature?

Mayberry, Inc., issued $100,000 of 10-year, 12% bonds dated April 1, 2016, for $102,360 on April 1, 2016. The bonds pay interest annually on April 1, beginning in 2017. Straight-line amortization is used by the company. What entry is required at April 1, 2017 for the first interest payment?

Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.

Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights.

Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammell Company uses the straight-line method of amortization. What is the amount of the annual interest expense?

The proceeds received from a bond issue will be greater than the bond maturity value when the coupon rate exceeds the market rate of interest.

An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.

Either straight-line or effective-interest amortization may be used for bond premiums or discounts regardless of the amounts involved.

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

On July 1, 2017, immediately after recording interest payments, Salsa, Inc. retired one fifth of its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2012. Which of the following statements is correct?

Harriman Company authorized a $1,000,000, 10-year, 6% bond issue dated January 1, 2016, when the market rate was 8%. Annual interest will be paid each December 31. On January 1, 2016, the bonds were issued for $866,000. Harriman Company has a December 31 year-end. Required: A.Prepare the journal entry to record the sale of the bonds. B.Prepare the required journal entry on December 31, 2016 to record amortization using the effective interest method.No adjusting journal entries were made during the year. C.Was the bond issued at par, at a discount, or at a premium? D.Will interest expense over the life of the bond be greater than, or less than, the total cash payment for interest over the life of the bond?

Amortization of a discount on a bond payable will result in an increase in the book value of the bond liability on the balance sheet.

Halverson's times interest earned ratio was 2.98 in 2016, 2.79 in 2015, and 2.31 in 2014. Which of the following statements about the ratio is possibly correct?

Southridge Company prepared a bond issue dated January 1, 2016. On January 1, 2016, the company issued $100,000 of its par value bonds for $82,700. The bonds mature in thirty years and have a coupon rate of interest of 3% per year and the market rate at the date of issue is 4%. Interest is payable annually on December 31 which is also the year-end date for Southridge. Southridge does not use a discount or a premium account in its records. The effective interest method of amortization is used. Round the entry items to the nearest whole dollar amounts. Required: A.Prepare the journal entry to record the sale of bonds on January 1, 2016. B.Prepare the journal entry to record interest expense at December 31, 2016.No adjusting journal entries have been made during the year. C.Show how the bonds would be reported on the balance sheet of Southridge Company at December 31, 2016.

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. Rounding all calculations to the nearest whole dollar, what is the interest expense for the six-month period ending June 30, 2016?

A bond's interest payments are determined by multiplying the bond's principal amount by the coupon rate.

The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders' equity.

A bond will sell at its par value when the market rate of interest equals the coupon rate of interest.