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Exam 14: Bonds and Long-Term Notes

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Question 1

Multiple Choice

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When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense:

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

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

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C

Question 2

Multiple Choice

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Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98. -Harrell applies International Financial Reporting Standards. Recording the issuance of the bonds would cause an increase in Harrell's:

A) shareholders' equity of $1,000,000.
B) shareholders' equity of $3,000,000.
C) assets of $98,000,000.
D) liabilities of $101,000,000.

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

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Question 3

Multiple Choice

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When bonds are retired prior to their maturity date:

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

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. -What is the stated annual rate of interest on the bonds?

Distinguish between: (a) Convertible and callable bonds. (b) Serial and term bonds.

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense:

The interest expense on an installment note decreases with each periodic payment.

Listed below are 4 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Fair value option

How should bond issue costs be accounted for on the books of the issuing corporation?

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. -Book value method

On January 1, 2018, Field Company purchased 12% bonds, dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (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, 2018. 2. Prepare the journal entry to record the bond purchase by Field on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the straight-line method. 4. Prepare the journal entry to record interest on December 31, 2018, using the straight-line method.

The interest rate that is printed on the bond certificate is referred to as any of the following except:

On January 1, 2018, Ozark Minerals issued $20 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ozark applies International Financial Reporting Standards (IFRS) . Upon issuance, Ozark should:

Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2018. Holly Springs paid for the lathe by issuing a $300,000 note due in three years. Interest, specified at 2%, was payable annually on December 31 of each year. The cash market price of the lathe was unknown. It was determined by comparison with similar transactions for which 6% was a reasonable rate of interest. Required: (1.) Prepare the journal entry on January 1, 2018, for Coldwater Corporation's sale of the lathe. (2.) Prepare an amortization schedule for the three-year term of the note. (3.) Prepare the journal entries to record (a) interest for each of the three years and (b) receipt of payment of the note at maturity.

Interest expense is:

On January 1, 2018, Ouachita Airlines issued $400,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Ouachita Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2018, the fair value of the bonds was $335,000 as determined by their fair value in the over-the-counter market. None of the change in fair value was due to a change in the general (risk-free) rate of interest. Required: 1. Determine the price of the bonds at January 1, 2018, and prepare the journal entry to record their issuance. Show calculations. 2. Prepare the journal entry to record interest on June 30, 2018 (the first interest payment). Show calculations. 3. Prepare the journal entry to record interest on December 31, 2018 (the second interest payment). Show calculations. 4. Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2018, balance sheet. Show calculations.

On March 1, 2018, Doll Co. issued 10-year convertible bonds at 106. During 2021, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2018, cash proceeds from the issuance of the convertible bonds should be reported as:

During the year, Hamlet Inc. paid $20,000 to have bond certificates printed and engraved, paid $100,000 in legal fees, paid $10,000 to a CPA for registration information, and paid $200,000 to an underwriter as a commission. What is the amount of bond issue costs?

Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. -What is the effective annual rate of interest on the bonds?