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Exam 14: Bonds and Long-Term Notes

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Question 51

True/False

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Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

A) True
B) False

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Question 52

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In each succeeding payment on an installment note:

A) The amount of interest paid increases.
B) The amount of principal reduction increases.
C) The amount of interest paid is unchanged.
D) The amounts paid for both interest and principal increase proportionately.

E) All of the above
F) A) and B)

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Question 53

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Determine the price of a $500,000 bond issue under each of the following independent assumptions: $\begin{array} { l l c c } \text { Maturity } & \text { Interest Paid } & \text { Stated Rate } & \text { Effective Rate } \\\text { 1. 10 years } & \text { annually } & 10 \% & 12 \% \\\text { 2. 10 years } & \text { semiannually } & 10 \% & 12 \% \\\text { 3. 10 years } & \text { semiannually } & 12 \% & 10 \%\end{array}$

To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

Required: Explain why the estimated fair value of the debentures exceeds their carrying amount at the end of fiscal year 2009.

When bonds are retired prior to their maturity date:

The debt to equity ratio indicates

Auerbach issued the bonds:

On June 30, 2009, K Co. had outstanding 9%, $10,000,000 face value bonds maturing on June 30, 2014. Interest is payable semiannually every June 30 and December 31. On June 30, 2009, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $60,000 and $100,000, respectively. On that date, K acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2009, what amount should K recognize as gain before income taxes on redemption of bonds?

Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.

LPC calls the bonds at 103 immediately after the interest payment on 12/31/10 and retires them. What gain or loss, if any, would LPC record on this date?

MSG Corporation has $100,000 of 10-year, 6% bonds outstanding on December 31, 2008. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000. MSG uses straight-line amortization. On May 1, 2009, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?

Cramer Company sold 5-year, 8% bonds on October 1, 2009. The face amount of the bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of each year. The fiscal year of Cramer Company ends on December 31. How much interest expense will Cramer Company report in its December 31, 2009, income statement (assume straight-line amortization) ?

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

An implicit or imputed rate of interest must be used when long term notes are issued at a stated rate of interest that is materially different than the market rate of interest.

On January 1, 2009, Bishop Company issued 10% bonds dated January 1, 2009, with a face amount of $20 million. The bonds mature in 2018 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2009. 2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2009. 3. Prepare the journal entry to record interest on June 30, 2009, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2009, using the effective interest method.

In its 2009 annual report to shareholders, Bare Sturns Group Inc. disclosed the following: On October 28, 2009, the Company issued $475,000,000 aggregate principal amount of 9-1/4% Senior Notes Due 2014 ("Senior Notes") and $618,670,000 aggregate principal amount at maturity of 10-1/4% Senior Discount Notes Due 2014 ("Senior Discount Notes" and collectively the "Notes") in a transaction not registered under the Securities Act in reliance upon an exemption from the registration requirements of the Securities Act. Gross proceeds from the offering amounted to $850,000,000. The discount on the Senior Discount Notes is being accreted under the effective interest method. Explain the last sentence of the disclosure to clarify what accounting was necessary and why.

At January 1, 2009, ICN, Inc. was indebted to First Bank under a $480,000, 10% unsecured note. The note was signed January 1, 2005, and was due December 31, 2010. Annual interest was last paid on December 31, 2007. ICN was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First agreed to reduce last year's interest and the remaining two years' interest payments to $23,110 each and delay all payments until December 31, 2010, the maturity date. Required: Prepare the journal entries by ICN, Inc. necessitated by the restructuring of the debt at (a) January 1, 2009, (b) December 31, 2009, and (c) December 31, 2010.

What is meant by the "market rate" of interest, the "effective rate" of interest, and the "yield rate" of interest?

Required: What will Morton Sales Co. report on these bonds in its December 31, 2009, balance sheet?