Deck 14: Long-Term Liabilities: Bonds and Notes

Question 1

Effect of financing on earnings per share
Domanico Co., which produces and sells biking equipment, is financed as follows:

Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $10,500,000, (b) $11,800,000, and (c) $13,000,000.

Answer 1

Computation of Earnings per share of alternative financing plan

Question 2

Preferred stock vs. bonds
Xentec Inc. has decided to expand its operations to owning and operating golf courses. The following is an excerpt from a conversation between the chief executive officer, Peter Kilgallon, and the vice president of finance, Dan Baron:

Discuss the advantages and disadvantages of issuing preferred stock versus bonds.

Answer 2

Analysis:
The Company is going to acquire Bluff Golf Course. Now the company has to finance the acquisition either with debt or preferred stock. The nature of industry itself is volatile when it comes to income and cash flow generation.
Debt financing :
When the income and cash flows are more volatile, the company should not opt for debt issue. Interest on debt is a legal obligation. Irrespective of the company's income and cash flow, it should pay the interest on bonds. Hence, the company is not advised to go for debt financing.
Preferred Stock Financing:
W hen the income and cash flows are volatile it is always better to go for preferred stock option. The company should issue preferred stock to the public. The cumulative preferred stock will assure the stockholders, and at the same time it is not a legal obligation on the part of the company to pay dividend every year. It can postpone the dividend and can declare when it generates income and receives cash flows.

Question 3

Bond premium, entries for bonds payable transactions, interest method of amortizing bond premium
Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued $62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2016.

Answer 3

Interest method of amortisation of bond premium
Present value of bonds at effective market rate of interest of 8% 66,747,178
Face value of 9%, 10 years bonds interest compounded semi-annually 62,500,000
---------------
Premium on bonds payable 4,247,178 ========
Amortisation of premium on Bonds Payable
1.
2a.
Working Notes
For Interest expense amortisation of discount on bonds payable refer column B C respectively of table above
2b.
Working Notes:
For Interest expense amortisation of discount on bonds payable refer column B C respectively of table above
b.
Interest expense for 2016 is $ 2,669,887

Question 4

Times interest earned
The following data were taken from recent annual reports of Southwest Airlines, which operates a low-fare airline service to more than 50 cities in the United States:

a. Determine the times interest earned ratio for the current and preceding years. Round to one decimal place.
b. What conclusions can you draw

Question 5

A Alternative financing plans
Owen Co. is considering the following alternative financing plans:

Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming income before bond interest and income tax is $750,000.
B Alternative financing plans
Brower Co. is considering the following alternative financing plans:

Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming income before bond interest and income tax is $2,000,000.

Question 6

A corporation issues $26,000,000 of 9% bonds to yield interest at the rate of 7%. (a) Was the amount of cash received from the sale of the bonds greater or less than $26,000,000 (b) Identify the following amounts as they relate to the bond issue: (1) face amount, (2) market or effective rate of interest, (3) contract rate of interest, and (4) maturity amount.

Question 7

Bond premium, entries for bonds payable transactions, interest method of amortizing bond premium
Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers Corporation issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the interest method. Round to the nearest dollar.
b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the interest method. Round to the nearest dollar.
3. Determine the total interest expense for Year 1.

Question 8

Number of times interest charges are earned
Loomis, Inc. reported the following on the company's income statement in 2016 and 2015:

a. Determine the number of times interest charges were earned for 2016 and 2015. Round to one decimal place.
b. Is the number of times interest charges are earned improving or declining

Question 9

Effect of financing on earnings per share
Three different plans for financing an $18,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income:

Instructions
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $2,100,000.
2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $1,050,000.
3. Discuss the advantages and disadvantages of each plan.

Question 10

Bond price
United States Steel's 7.375% bonds due in 2020 were reported as selling for 103.00.
Were the bonds selling at a premium or at a discount Why is United States Steel able to sell its bonds at this price

Question 11

Bonds Payable has a balance of $5,000,000, and Discount on Bonds Payable has a balance of $150,000. If the issuing corporation redeems the bonds at 98, is there a gain or loss on the bond redemption

Question 12

Times interest earned
Iacouva Company reported the following on the company's income statement for two recent years:

a. Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.
b. What conclusions can you draw

Question 13

Effect of financing on earnings per share
Three different plans for financing an $80,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income:

Instructions
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,000,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $6,000,000.
3. Discuss the advantages and disadvantages of each plan.

Question 14

A Discount amortization
Using the bond from Practice Exercise 14-3A, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar.
B Discount amortization
Using the bond from Practice Exercise 14-3B, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar.

Question 15

Entries for issuing bonds and amortizing premium by straight-line method
Lerner Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Lerner Corporation issued $12,000,000 of five-year, 8% bonds at a market (effective) interest rate of 6%, receiving cash of $13,023,576. Interest is payable semiannually on April 1 and October 1. Journalize the entries to record the following:
a. Issuance of bonds on April 1, 2016.
b. First interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.)
c. Explain why the company was able to issue the bonds for $13,023,576 rather than for the face amount of $12,000,000.

Question 16

Present value of amounts due
Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.
a. Using the present value of $1 table in Exhibit 8, determine the present value of this amount compounded annually.
b. Why is the present value less than the $1,000,000 to be received in the future

Question 17

Ethics and professional conduct in business
Solar Industries develops and produces high-efficiency solar panels. The company has an outstanding $10,000,000, 30-year, 10% bond issue dated July 1, 2011. The bond issue is due June 30, 2040. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date.
The bond indenture requires a bond sinking fund, which has a balance of $1,200,000 as of July 1, 2016. The company is currently experiencing a shortage of funds due to a recent acquisition. Bob Lachgar, the company's treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Bob's brother-in-law, a trustee of Solar's sinking fund, has indicated a willingness to allow Bob to use the funds from the sinking fund to temporarily meet the company's cash needs.
Discuss whether Bob's proposal is appropriate.

Question 18

Entries for bonds payable and installment note transactions
The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:


Instructions
1. Journalize the entries to record the foregoing transactions. Round all amounts to the nearest dollar.
2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3. Determine the carrying amount of the bonds as of December 31, Year 2.

Question 19

A Redemption of bonds payable
A $1,500,000 bond issue on which there is an unamortized discount of $70,100 is redeemed for $1,455,000. Journalize the redemption of the bonds.
B Redemption of bonds payable
A $500,000 bond issue on which there is an unamortized premium of $67,000 is redeemed for $490,000. Journalize the redemption of the bonds.

Question 20

Present value of an annuity
Determine the present value of $200,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows:
a. By successive computations, using the present value table in Exhibit 8.
b. By using the present value table in Exhibit 10.
c. Why is the present value of the four $200,000 cash receipts less than the $800,000 to be received in the future

Question 21

Explain the meaning of each of the following terms as they relate to a bond issue: (a) convertible and (b) callable.

Question 22

Entries for bonds payable and installment note transactions
The following transactions were completed by Montague Inc., whose fiscal year is the calendar year:

Instructions
1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
3. Determine the carrying amount of the bonds as of December 31, Year 2.

Question 23

What is a mortgage note

Question 24

Present value of an annuity
On January 1, 2016, you win $50,000,000 in the state lottery. The $50,000,000 prize will be paid in equal installments of $6,250,000 over eight years. The payments will be made on December 31 of each year, beginning on December 31, 2016. If the current interest rate is 5%, determine the present value of your winnings. Use the present value tables in Appendix A.

Question 25

Evaluate alternative financing plans
Based on the data in Exercise 14-1, what factors other than earnings per share should be considered in evaluating these alternative financing plans

Question 26

Financing business expansion
You hold a 25% common stock interest in YouOwnIt, a family-owned construction equipment company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of $26,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows:

The balance sheet as of the end of the previous fiscal year is as follows:

Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from $2,667,000 in the previous year to $5,000,000 for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan.
1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of 40%. Round to the nearest cent.
2. a. Discuss the factors that should be considered in evaluating the two plans.
b. Which plan offers the greater benefit to the present stockholders Give reasons for your opinion.

Question 27

Entries for issuing and calling bonds; loss
Adele Corp., a wholesaler of music equipment, issued $22,000,000 of 20-year, 7% callable bonds on March 1, 2016 at their face amount, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

Question 28

Present value of an annuity
Assume the same data as in Exercise 14-19, except that the current interest rate is 12%.
Will the present value of your winnings using an interest rate of 12% be more than the present value of your winnings using an interest rate of 5% Why or why not

Question 29

A Issuing bonds at face amount
On January 1, the first day of the fiscal year, a company issues a $500,000, 5%, 10-year bond that pays semiannual interest of $12,500 ($500,000 × 5% × ½ year), receiving cash of $500,000. Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment on June 30, and (c) the payment of the principal on the maturity date.
B Issuing bonds at face amount
On January 1, the first day of the fiscal year, a company issues a $800,000, 4%, 10-year bond that pays semiannual interest of $16,000 ($800,000 × 4% × ½ year), receiving cash of $800,000. Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment on June 30, and (c) the payment of the principal on the maturity date.

Question 30

If bonds issued by a corporation are sold at a discount, is the market rate of interest greater or less than the contract rate

Question 31

Journalizing installment notes
On the first day of the fiscal year, a company issues $65,000, 6%, five-year installment notes that have annual payments of $15,431. The first note payment consists of $3,900 of interest and $11,531 of principal repayment.
a. Journalize the entry to record the issuance of the installment notes.
b. Journalize the first annual note payment.

Question 32

Present value of bonds payable; discount
Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co. issued $25,000,000 of five-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable, using the present value tables in Exhibits 8 and 10. Round to the nearest dollar.

Question 33

Bond discount, entries for bonds payable transactions
On July 1, 2016, Merideth Industries Inc. issued $28,500,000 of 10-year, 8% bonds at a market (effective) interest rate of 9%, receiving cash of $26,646,292. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2017, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2016.
4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest
5. (Appendix 1) Compute the price of $26,646,292 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)

Question 34

Entries for issuing bonds
Gabriel Co. produces and distributes semiconductors for use by computer manufacturers. Gabriel Co. issued $600,000 of 10-year, 8% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year:

Question 35

Fleeson Company needs additional funds to purchase equipment for a new production facility and is considering either issuing bonds payable or borrowing the money from a local bank in the form of an installment note. How does an installment note differ from a bond payable

Question 36

Present value of bonds payable; premium
Moss Co. issued $42,000,000 of five-year, 11% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable using the present value tables in Exhibits 8 and 10. Round to the nearest dollar.

Question 37

Bond discount, entries for bonds payable transactions
On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.
b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.
3. Determine the total interest expense for Year 1.
4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest
5. (Appendix 1) Compute the price of $42,309,236 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.

Question 38

A Issuing bonds at a premium
On the first day of the fiscal year, a company issues a $2,000,000, 8%, five-year bond that pays semiannual interest of $80,000 ($2,000,000 × 8% × ½), receiving cash of $2,170,604. Journalize the bond issuance.
B Issuing bonds at a premium
On the first day of the fiscal year, a company issues an $8,000,000, 11%, five-year bond that pays semiannual interest of $440,000 ($8,000,000 × 11% × ½), receiving cash of $8,308,869. Journalize the bond issuance.

Question 39

Entries for issuing and calling bonds; gain
Emil Corp. produces and sells wind-energy-driven engines. To finance its operations, Emil Corp. issued $15,000,000 of 20-year, 9% callable bonds on May 1, 2016 at their face amount, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

Question 40

Amortize discount by interest method
On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert Company receiving cash of $43,495,895. The company uses the interest method.
a. Journalize the entries to record the following:
1. Sale of the bonds.
2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar.
3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar.
b. Compute the amount of the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for only $43,495,895 rather than for the face amount of $50,000,0

Question 41

Present values
Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:
a. Receive $100,000,000 in cash today.
b. Receive $25,000,000 today and $9,000,000 per year for eight years, with the first payment being received one year from today.
c. Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.
Assuming that the effective rate of interest is 7%, which payout option should Alex select Use the present value tables in Appendix A. Explain your answer and provide any necessary supporting calculations.

Question 42

Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount
On July 1, 2016, Merideth Industries Inc. issued $28,500,000 of 10-year, 8% bonds at a market (effective) interest rate of 9%, receiving cash of $26,646,292. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2017, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2016.

Question 43

Times interest earned
Berry Company reported the following on the company's income statement in two recent years:

a. Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.
b. Is the number of times interest charges are earned improving or declining

Question 44

Amortize premium by interest method
Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Year 1, Shunda Corporation issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda Corporation's fiscal year begins on January 1. The company uses the interest method.
a. Journalize the entries to record the following:
1. Sale of the bonds.
2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar.
3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar.
b. Determine the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000.

Question 45

If you asked your broker to buy you a 12% bond when the market interest rate for such bonds was 11%, would you expect to pay more or less than the face amount for the bond Explain.

Question 46

Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount
On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the interest method. Round to the nearest dollar.
b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method. Round to the nearest dollar.
3. Determine the total interest expense for Year 1.

Question 47

In what section of the balance sheet would a bond payable be reported if (a) it is payable within one year and (b) it is payable beyond one year

Question 48

Compute bond proceeds, amortizing premium by interest method, and interest expense
Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued $35,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. Compute the following, presenting figures used in your computations:
a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 8 and 10. Round to the nearest dollar.
b. The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.
c. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.
d. The amount of the bond interest expense for the first year.

Question 49

Corporate financing
The financial statements for Nike, Inc., are presented in Appendix D at the end of the text. What is the major source of financing for Nike

Question 50

Times interest earned
The following financial data (in thousands) were taken from recent financial statements of Staples, Inc.:

1. Determine the times interest earned ratio for Staples in Year 3, Year 2, and Year 1 Round your answers to one decimal place.
2. Evaluate this ratio for Staples.

Question 51

Entries for installment note transactions
On the first day of the fiscal year, Shiller Company borrowed $85,000 by giving a seven-year, 7% installment note to Soros Bank. The note requires annual payments of $15,772, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $5,950 and principal repayment of $9,822.
a. Journalize the entries to record the following:
1. Issued the installment note for cash on the first day of the fiscal year.
2. Paid the first annual payment on the note.
b. Explain how the notes payable would be reported on the balance sheet at the end of the first year.

Question 52

Compute bond proceeds, amortizing discount by interest method, and interest expense
Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued $80,000,000 of five-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following, presenting figures used in your computations:
a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 8 and 10. Round to the nearest dollar.
b. The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.
c. The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.
d. The amount of the bond interest expense for the first year.

Question 53

A Issuing bonds at a discount
On the first day of the fiscal year, a company issues a $1,200,000, 9%, five-year bond that pays semiannual interest of $54,000 ($1,200,000 × 9% × ½), receiving cash of $1,153,670. Journalize the bond issuance.
B Issuing bonds at a discount
On the first day of the fiscal year, a company issues a $3,000,000, 11%, five-year bond that pays semiannual interest of $165,000 ($3,000,000 × 11% × ½), receiving cash of $2,889,599. Journalize the bond issuance.

Question 54

The following data relate to a $2,000,000, 8% bond issued for a selected semiannual interest period:

(a) Were the bonds issued at a discount or at a premium (b) What is the unamortized amount of the discount or premium account at the beginning of the period (c) What account was debited to amortize the discount or premium

Question 55

Entries for installment note transactions
On January 1, 2016, Hebron Company issued a $175,000, five-year, 8% installment note to Ventsam Bank. The note requires annual payments of $43,380, beginning on December 31, 2016. Journalize the entries to record the following:

Question 56

General Electric bond issuance
General Electric Capital, a division of General Electric, uses long-term debt extensively. In a recent year, GE Capital issued $11 billion in long-term debt to investors, then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).
Bill Gross, a manager of a bond investment fund, "denounced a 'lack in candor' related to GE's recent debt deal. 'It was the most recent and most egregious example of how bondholders are mistreated.' Gross argued that GE was not forthright when GE Capital recently issued $ 11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date."
In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering
Source: Jennifer Ablan, "Gross Shakes the Bond Market; GE Calms It, a Bit," Barron's, March 25, 2002.

Question 57

Bond premium, entries for bonds payable transactions
Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2016.
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest
5. (Appendix 1) Compute the price of 66,747,178 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)

Question 58

Entries for issuing bonds and amortizing discount by straight-line method
On the first day of its fiscal year, Pretender Company issued $18,500,000 of five-year, 10% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 12%, resulting in Pretender Company receiving cash of $17,138,298.
a. Journalize the entries to record the following:
1. Issuance of the bonds.
2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
b. Determine the amount of the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for only $17,138,298 rather than for the face amount of $18,500,000.

Question 59

Entries for installment note transactions
On January 1, 2016, Bryson Company obtained a $147,750, four-year, 7% installment note from Campbell Bank. The note requires annual payments of $43,620, beginning on December 31, 2016.
a. Prepare an amortization table for this installment note, similar to the one presented in Exhibit 4.
b. Journalize the entries for the issuance of the note and the four annual note payments.
c. Describe how the annual note payment would be reported in the 2016 income statement.

Question 60

Describe the two distinct obligations incurred by a corporation when issuing bonds.

Question 61

Bond premium, entries for bonds payable transactions
Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers Corporation issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.
b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.
3. Determine the total interest expense for Year 1.
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest
5. (Appendix 1) Compute the price of $73,100,469 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.

Question 62

A Premium amortization
Using the bond from Practice Exercise 14-5A, journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar.
B Premium amortization
Using the bond from Practice Exercise 14-5B, journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar.

Question 63

Reporting bonds
At the beginning of the current year, two bond issues (Simmons Industries 7%, 20-year bonds and Hunter Corporation 8%, 10-year bonds) were outstanding. During the year, the Simmons Industries bonds were redeemed and a significant loss on the redemption of bonds was reported as cost of merchandise sold on the income statement. At the end of the year, the Hunter Corporation bonds were reported as a noncurrent liability. The maturity date on the Hunter Corporation bonds was early in the following year.
Identify the flaws in the reporting practices related to the two bond issues.