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Exam 14: Bonds and Long-Term Notes

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Question 121

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In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness: In addition, the company disclosed the following: We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28, 2017, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively. The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands) -Required: Explain why the estimated fair value of the debentures exceeds their book amount at the end of fiscal year 2018.

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Question 122

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Most corporate bonds are:

A) Mortgage bonds.
B) Debenture bonds.
C) Secured bonds.
D) Collateral bonds.

E) None of the above
F) A) and C)

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Question 123

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The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

Magenta Company purchased a machine from Pink Corporation on October 31, 2018. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2018, is:

Listed below are several terms and phrases associated with long-term debt. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. -Call feature

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Warrants

Premium on bonds payable is a contra liability account.

When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:

Auerbach Inc. issued 4% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2019. The effective interest rate established by the market was 6%. -Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2018 income statement?

Ferris Wheeler Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the interest expense on the bonds for the year ended December 31, 2019?

On February 1, 2018, Fox Corporation issued 9% bonds dated February 1, 2018, with a face amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective interest rate for these bonds was 10%. Interest is paid semiannually on July 31 and January 31. Fox's fiscal year is the calendar year. Fox uses the straight-line method of amortization. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2018. 2. Prepare the entry to record interest on July 31, 2018. 3. Prepare the necessary journal entry on December 31, 2018. 4. Prepare the necessary journal entry on January 31, 2019.

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Convertible bonds

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Serial bonds

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 from the market rate of interest.

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

Willie Winn Track Shoes acquired a machine from Betty Will Corporation. Betty Will completed construction of the machine on January 1, 2018. In payment for the $12 million machine, Willie Winn issued a 5-year installment note to be paid in five equal payments at the end of each year. The payments include interest at the rate of 10%. Required: 1. Prepare the journal entry for Willie Winn's purchase of the machine on January 1, 2018. 2. Prepare the journal entry for the first installment payment on December 31, 2018. Show calculations.

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Straight-line method

Tru Fashions has bonds outstanding during a year in which the market rate of interest has declined. If Tru has elected the fair value option for the bonds, will it report a gain or a loss on the bonds for the year? Explain.

Roman Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using present value tables, calculate the issue price of the bonds.

For a bond issue that sells for more than the bond face amount, the effective interest rate is: