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Exam 11: Liabilities: Bonds Payable

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Question 71

Multiple Choice

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The journal entry a company records for the interest payment and amortization of bond discount is

A) debit Interest Expense, credit Cash and Discount on Bonds Payable
B) debit Interest Expense, credit Cash
C) debit Interest Expense and Discount on Bonds Payable, credit Cash
D) debit Interest Expense, credit Interest Payable and Discount on Bonds Payable

E) A) and D)
F) C) and D)

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Question 72

True/False

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There is a loss on redemption of bonds when bonds are redeemed above the carrying amount.

A) True
B) False

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Question 73

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On January 1 of the current year, the Barton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, five years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 is

When callable bonds are redeemed below the carrying amount

Marmalice Co. issued $4,000,000 of five-year, 10 percent bonds, with interest payable semiannually, at a market (effective) interest rate of 11 percent. Determine the present value of the bonds payable using the present value tables. Round to the nearest dollar. Present value of an annuity of $1 at compound interest: $\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\&0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1&54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\&1.886 & 1.872 & 1.859 & 1.846 & 1.833 & 1.820 & 1.808 & 1.735 & 1.712 & 1.690 & 1.668 \\2&09 & 67 & 41 & 32 & 39 & 63 & 02 & 54 & 52 & 05 & 10\\&2.775 & 2.748 & 2.723 & 2.697 & 2.673 & 2.648 & 2.624 & 2.486 & 2.443 & 2.401 & 2.361 \\3&09 & 96 & 25 & 93 & 01 & 48 & 32 & 85 & 71 & 83 & 15\\&3.629 & 3.587 & 3.545 & 3.505 & 3.465 & 3.425 & 3.387 & 3.169 & 3.102 & 3.037 & 2.974 \\4&90 & 53 & 95 & 15 & 11 & 80 & 21 & 87 & 45 & 35 & 47\\&4.451 & 4.389 & 4.329 & 4.270 & 4.212 & 4.155 & 4.100 & 3.790 & 3.695 & 3.604 & 3.517 \\5&82 & 98 & 48 & 28 & 36 & 68 & 20 & 79 & 90 & 78 & 23\\&5.242 & 5.157 & 5.075 & 4.995 & 4.917 & 4.841 & 4.766 & 4.355 & 4.230 & 4.111 & 3.997 \\6&14 & 87 & 69 & 53 & 32 & 01 & 54 & 26 & 54 & 41 & 55\\&6.002 & 5.892 & 5.786 & 5.682 & 5.582 & 5.484 & 5.389 & 4.868 & 4.712 & 4.563 & 4.422 \\7&05 & 70 & 37 & 97 & 38 & 52 & 29 & 42 & 20 & 76 & 61\\&6.732 & 6.595 & 6.463 & 6.334 & 6.209 & 6.088 & 5.971 & 5.334 & 5.146 & 4.967 & 4.798 \\8&74 & 89 & 21 & 57 & 79 & 75 & 30 & 93 & 12 & 64 & 77\\&7.435 & 7.268 & 7.107 & 6.952 & 6.801 & 6.656 & 6.515 & 5.759 & 5.537 & 5.328 & 5.131 \\9&33 & 79 & 82 & 20 & 69 & 10 & 23 & 02 & 05 & 25 & 66\\&8.110 & 7.912 & 7.721 & 7.537 & 7.360 & 7.188 & 7.023 & 6.144 & 5.889 & 5.650 & 5.426 \\10&90 & 72 & 73 & 63 & 09 & 83 & 58 & 57 & 23 & 22 & 24\end{array}$ Present value of a $1 at compound interest: $\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\& 0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1 & 54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\& 0.924 & 0.915 & 0.907 & 0.898 & 0.890 & 0.881 & 0.873 & 0.826 & 0.811 & 0.797 & 0.783 \\2 & 56 & 73 & 03 & 45 & 00 & 66 & 44 & 45 & 62 & 19 & 15\\& 0.889 & 0.876 & 0.863 & 0.851 & 0.839 & 0.827 & 0.816 & 0.751 & 0.731 & 0.711 & 0.693 \\3 & 00 & 30 & 84 & 61 & 62 & 85 & 30 & 31 & 19 & 78 & 05\\& 0.854 & 0.838 & 0.822 & 0.807 & 0.792 & 0.777 & 0.762 & 0.683 & 0.658 & 0.635 & 0.613 \\4 & 80 & 56 & 70 & 22 & 09 & 32 & 90 & 01 & 73 & 52 & 32\\& 0.821 & 0.802 & 0.783 & 0.765 & 0.747 & 0.729 & 0.712 & 0.620 & 0.593 & 0.567 & 0.542 \\5 & 93 & 45 & 53 & 13 & 26 & 88 & 99 & 92 & 45 & 43 & 76\\& 0.790 & 0.767 & 0.746 & 0.725 & 0.704 & 0.685 & 0.666 & 0.564 & 0.534 & 0.506 & 0.480 \\6 & 31 & 90 & 22 & 25 & 96 & 33 & 34 & 47 & 64 & 63 & 32\\& 0.759 & 0.734 & 0.710 & 0.687 & 0.665 & 0.643 & 0.622 & 0.513 & 0.481 & 0.452 & 0.425 \\7 & 92 & 83 & 68 & 44 & 06 & 51 & 75 & 16 & 66 & 35 & 06\\& 0.730 & 0.703 & 0.676 & 0.651 & 0.627 & 0.604 & 0.582 & 0.466 & 0.433 & 0.403 & 0.376 \\8 & 69 & 19 & 84 & 60 & 41 & 23 & 01 & 51 & 93 & 88 & 16\\& 0.702 & 0.672 & 0.644 & 0.617 & 0.591 & 0.567 & 0.543 & 0.424 & 0.390 & 0.360 & 0.332 \\9 & 59 & 90 & 61 & 63 & 90 & 35 & 93 & 10 & 92 & 61 & 88\\& 0.675 & 0.643 & 0.613 & 0.585 & 0.558 & 0.532 & 0.508 & 0.385 & 0.352 & 0.321 & 0.294 \\10 & 56 & 93 & 91 & 43 & 39 & 73 & 35 & 54 & 18 & 97 & 59\end{array}$

A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received for the bonds will be

A bond is simply a form of an interest-bearing note.

Balance sheet and income statement data indicate the following: $\begin{array}{lrr}&\text { Company A } & \text { Company B } \\\text { Bonds payable, } 8 \%, 24 \text {-year bonds } & \$ 1,200,000 & \$ 900,000 \\\text { Income before income tax for year } & 495,000 & 130,000 \\\text { Income tax for year } & 75,000 & 12,000 \\\text { Interest payable } & 50,000 & 0 \\\text { Interest receivable } & 21,000 & 28,000\end{array}$ ​ (a) For each company, what is the times interest earned ratio? (Round to one decimal place) (b) Which company gives potential creditors more protection?

If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity.

The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period.

Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1, at 97. Glover's year-end is December 31. ​ (a) Were the bonds issued at a premium, a discount, or at par? (b) Was the market rate of interest higher, lower, or the same as the contract rate of interest? (c) If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? (d) What is the carrying value of the bonds on December 31?

If bonds are issued at a premium, the stated interest rate is

The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount.

Assume you win a $1,000,000 contest, and the prize will be paid in equal 10 equal installments over 10 years. The payments will be made on June 30 of each year beginning with June 30 this year. If the current rate of interest is 7 percent, what is the present value of your winnings? Use the information in the table to determine your answer. Present value of an annuity of $1 at compound interest: $\begin{array}{ccccccc}\text { Periods}&\mathbf{4 . 0 \%} & \mathbf{4 . 5 \%} & \mathbf{5 . 0 \%} & \mathbf{5 . 5 \%} & \mathbf{6 . 0 \%} & \mathbf{6 . 5 \%} & \mathbf{7 . 0 \%}&10.\%&11.0\%&12.0\%&13.0\% \\&0.961 & 0.956 & 0.952 & 0.947 & 0.943 & 0.938 & 0.934 & 0.909 & 0.900 & 0.892 & 0.884 \\1&54 & 94 & 38 & 87 & 40 & 97 & 58 & 09 & 90 & 86 & 96\\&1.886 & 1.872 & 1.859 & 1.846 & 1.833 & 1.820 & 1.808 & 1.735 & 1.712 & 1.690 & 1.668 \\2&09 & 67 & 41 & 32 & 39 & 63 & 02 & 54 & 52 & 05 & 10\\&2.775 & 2.748 & 2.723 & 2.697 & 2.673 & 2.648 & 2.624 & 2.486 & 2.443 & 2.401 & 2.361 \\3&09 & 96 & 25 & 93 & 01 & 48 & 32 & 85 & 71 & 83 & 15\\&3.629 & 3.587 & 3.545 & 3.505 & 3.465 & 3.425 & 3.387 & 3.169 & 3.102 & 3.037 & 2.974 \\4&90 & 53 & 95 & 15 & 11 & 80 & 21 & 87 & 45 & 35 & 47\\&4.451 & 4.389 & 4.329 & 4.270 & 4.212 & 4.155 & 4.100 & 3.790 & 3.695 & 3.604 & 3.517 \\5&82 & 98 & 48 & 28 & 36 & 68 & 20 & 79 & 90 & 78 & 23\\&5.242 & 5.157 & 5.075 & 4.995 & 4.917 & 4.841 & 4.766 & 4.355 & 4.230 & 4.111 & 3.997 \\6&14 & 87 & 69 & 53 & 32 & 01 & 54 & 26 & 54 & 41 & 55\\&6.002 & 5.892 & 5.786 & 5.682 & 5.582 & 5.484 & 5.389 & 4.868 & 4.712 & 4.563 & 4.422 \\7&05 & 70 & 37 & 97 & 38 & 52 & 29 & 42 & 20 & 76 & 61\\&6.732 & 6.595 & 6.463 & 6.334 & 6.209 & 6.088 & 5.971 & 5.334 & 5.146 & 4.967 & 4.798 \\8&74 & 89 & 21 & 57 & 79 & 75 & 30 & 93 & 12 & 64 & 77\\&7.435 & 7.268 & 7.107 & 6.952 & 6.801 & 6.656 & 6.515 & 5.759 & 5.537 & 5.328 & 5.131 \\9&33 & 79 & 82 & 20 & 69 & 10 & 23 & 02 & 05 & 25 & 66\\&8.110 & 7.912 & 7.721 & 7.537 & 7.360 & 7.188 & 7.023 & 6.144 & 5.889 & 5.650 & 5.426 \\10&90 & 72 & 73 & 63 & 09 & 83 & 58 & 57 & 23 & 22 & 24\end{array}$

On January 1, $2,000,000, 5-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the semiannual amortization amount is

Allows the bond holder to exchange bond for shares of stock

The present value of $40,000 to be received in two years, at 12% compounded annually, is _____ (rounded to nearest dollar) . Use the following table, if needed. $\begin{array}{l}\text { Present value of } \$ 1 \text { at Compound Interest }\\\begin{array} { l l l l l l } \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% & 12 \% \\1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 & 0.89286 \\2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 & 0.79719 \\3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 & 0.71178 \\4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 & 0.63552 \\5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 & 0.56743 \\6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 & 0.50663 \\7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 & 0.45235 \\8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 & 0.40388 \\9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 & 0.36061 \\10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 & 0.32197\end{array}\end{array}$

The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period.

When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that pay interest annually. The selling price of this bond issue was _____. Use the following table, if needed. $\begin{array}{l}\text { Present value of } \$ 1 \text { at Compound Interest }\\\begin{array} { l c c c c c } \text { Periods } & 5 \% & 6 \% & 7 \% & 10 \% & 12 \% \\1 & 0.95238 & 0.94340 & 0.93458 & 0.90909 & 0.89286 \\2 & 0.90703 & 0.89000 & 0.87344 & 0.82645 & 0.79719 \\3 & 0.86384 & 0.83962 & 0.81630 & 0.75132 & 0.71178 \\4 & 0.82270 & 0.79209 & 0.76290 & 0.68301 & 0.63552 \\5 & 0.78353 & 0.74726 & 0.71299 & 0.62092 & 0.56743 \\6 & 0.74622 & 0.70496 & 0.66634 & 0.56447 & 0.50663 \\7 & 0.71068 & 0.66506 & 0.62275 & 0.51316 & 0.45235 \\8 & 0.67684 & 0.62741 & 0.58201 & 0.46651 & 0.40388 \\9 & 0.64461 & 0.59190 & 0.54393 & 0.42410 & 0.36061 \\10 & 0.61391 & 0.55840 & 0.50835 & 0.38554 & 0.32197\end{array}\end{array}$

A bond is usually divided into a number of individual bonds of $500 each.