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Exam 14: Bonds and Long-Term Notes

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Question 41

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On January 1, 2009, 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, 2019. 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, 2009, balance sheet?

A) $1,045,000.
B) $1,040,000.
C) $987,000.
D) $982,000.$980,000 + [($1,000,000 $980,000) 1/10] = $982,000 Bond issue costs are reported and amortized separately.

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

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Question 42

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On June 30, 2009, Blair Industries had outstanding $80 million of 8%, convertible bonds that mature on June 30, 2010. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2009, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2009, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital-excess of par:

A) $6 million
B) $8 million
C) $10 million
D) $12 million

E) A) and D)
F) B) and D)

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Question 43

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On September 1, 2009, Sam's Shoe Co. issued $350,000 of 8% bonds. The bonds pay interest semiannually on January 1 and July 1 of each year. The bonds were sold at the face amount. How much cash did Sam's receive upon sale of the bonds?

Interest expense is:

Which of the following indicates the margin of safety provided to creditors?

On January 1, 2009, an investor paid $291,000 for bonds with a face amount of $300,000. The contract rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2010 (assume annual interest payments and amortization) ?

Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

On March 1, 2009, E Corp. issued $1,000,000 of 10% nonconvertible bonds at 103, due on February 28, 2019. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan's $25 par common stock. On March 1, 2009, the market price of each warrant was $4. By what amount should the bond issue proceeds increase shareholders' equity?

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

A zero-coupon bond pays no interest. Explain.

If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement.

Crawford Inc. has bonds outstanding during a year in which the market rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?

Liberty Company issued ten-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:

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

On January 1, 2009, Rare Bird Ltd. purchased 12% 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 10%. 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 purchase by Rare Birds 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.

On March 1, 2009, Doll Co. issued 10-year convertible bonds at 106. During 2012, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. Doll prepares its financial statements according to International Accounting Standards (IFRS) . On March 1, 2009, cash proceeds from the issuance of the convertible bonds should be reported as

On February 1, 2008, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2009, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement?

On February 1, 2009, Wolf Inc. issued 10% bonds dated February 1, 2009, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's fiscal year is the calendar year. Wolf uses the effective interest method of amortization. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2009. 2. Prepare the entry to record interest on July 31, 2009. 3. Prepare the necessary journal entry on December 31, 2009. 4. Prepare the necessary journal entry on January 31, 2010.

LPC issued the bonds:

Premium on bonds payable is a contra liability account.