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Exam 14: Bonds and Long-Term Notes

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Question 71

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On January 1, 2013, Boomer Universal issued 12% bonds dated January 1, 2013, with a face amount of $200 million. The bonds mature in 2022 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2013. 2. Prepare the journal entry to record the bond issuance by Boomer on January 1, 2013. 3. Prepare the journal entry to record interest on June 30, 2013, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2013, using the straight-line method.

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Question 72

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When bonds are sold at a premium and the effective interest method is used, at each interest payment date, the interest expense:

A) Remains constant.
B) Is equal to the change in book value.
C) Increases.
D) Decreases.

E) None of the above
F) All of the above

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Question 73

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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.

On January 1, 2013, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2023. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2013, balance sheet?

Comet Products prepares its financial statements according to International Financial Reporting Standards (IFRS). On January 1, 2013, Comet Products issued $40 million of 6%, 10-year convertible bonds at a net price of $40.8 million. Comet recently issued similar, but nonconvertible, bonds at 99 (that is, 99% of face amount). The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Comet's no par common stock. Comet records interest by the straight-line method. On June 1, 2015, Comet notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2015. By June 30 all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Comet paid the semiannual interest and issued the requisite number of shares for the bonds being converted. Required: 1. Prepare the journal entry for the issuance of the bonds by Comet. 2. Prepare the journal entry for the June 30, 2013, interest payment. 3. Prepare the journal entries for the June 30, 2015, interest payment by Comet and the conversion of the bonds (book value method).

The method used to pay interest depends on whether the bonds are:

A disclosure note in the annual financial statements of Macy's Inc. for the fiscal year ended January 31, 2013, included the following: "Future maturities of long-term debt, other than capitalized leases and premium on acquired debt, are shown below:" For how many years subsequent to the current year must Macy's report these amounts? Name at least two other items that must be disclosed for a company's long-term debt.

During 2013 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2011, payable to Third Bank. Interest was last paid on December 31, 2012. On December 31, 2013, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2013 income statement?

On February 1, 2012, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2013, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

Interest expense is:

Statement of cash flows for year ended October 31, 2013 Pujols would report the cash inflow of $42,000,000*** from the sale of the bonds as a cash flow from financing activities in its statement of cash flows. The accrued interest portion of the cash receipt was paid on June 30 and is part of the cash outflow from operating activities (below). The $2,400,000 cash interest paid* is cash outflow from operating activities because interest is an income statement (operating) item. Calculations:

The debt to equity ratio indicates:

The interest rate that is printed on the bond certificate is not referred to as the:

AMC issues a note in exchange for a machine with no stated interest rate. In accounting for the transaction:

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

On February 28, 2013, Pujols Industries issued 10% bonds, dated January 1, with a face amount of $48 million. The bonds were priced at $42 million (plus accrued interest) to yield 12%. Interest is paid semiannually on June 30 and December 31. Pujols' fiscal year ends October 31. Required: 1. What would be the amount(s) related to the bonds Pujols would report in its balance sheet at October 31, 2013? 2. What would be the amount(s) related to the bonds that Pujols would report in its income statement for the year ended October 31, 2013? 3. What would be the amount(s) related to the bonds that Pujols would report in its statement of cash flows for the year ended October 31, 2013?

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

What would be the total interest cost of the bonds over their full term?

TMC issued $50 million of its 12% bonds on April 1, 2013, at 98 plus accrued interest. The bonds are dated January 1, 2013, and mature on December 31, 2032. Interest is payable semiannually on June 30 and December 31. What amount did TMC receive from the bond issuance?

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