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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 21

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If the market rate of interest is greater than the contractual rate of interest, bonds will sell

A) at a premium.
B) at face value.
C) at a discount.
D) only after the stated rate of interest is increased.

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

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Question 22

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Calculate the total amount of interest expense over the life of the bonds for the following independent situations. a) $100,000 face value, 10%, 10-year bonds issued at 101. b) $240,000 face value, 5%, 5-year bonds issued at 100. c) $300,000 face value, 9%, 6-year bonds issued at 98.

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a) $100,000 x .01 = $1,000 premium
$100,...

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Question 23

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If $500,000 of 10-year bonds, with interest payable semiannually, are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty, $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%.

The Reagan Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 95. The journal entry to record the issuance will show a

The Merchant Company issued 10-year bonds on January 1, 2011. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2011, Merchant should record interest expense (round to the nearest dollar) of

On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 x 8% x 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds.

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

On January 1, 2011, Gemstone Company obtained a $280,000, 10-year, 11% installment note from Guarantee Bank. The note requires annual payments of $47,544, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $30,800 and principal repayment of $16,744. The journal entry to record the issuance of the installment note for cash on January 1, 2011 would include:

A secured bond is called a debenture bond and is backed only by the general creditworthiness of the corporation.

On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 x 8% x 1/2), receiving cash of $530,000. Journalize the entry to record the issuance of the bonds.

On January 1, 2010, Yeargan Company obtained an $88,000, seven year 5% installment note from Farmers Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of $4,400 interest and principal repayment of $10,808. Requirement:

Zero-coupon bonds do provide for interest payments.

Using the following table, what is the present value of $5,000 to be received 5 years, if the market rate is 7% compounded annually?

To determine the six month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond.

When the maturities of a bond issue are spread over several dates, the bonds are called

Bonds are sold at face value when the contract rate is equal to the market rate of interest.

A corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

On January 1, 2011, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31, 2011. The December 31, 2011 carrying amount in the amortization table for this installment note will be equal to:

Ulmer Company is considering the following alternative financing plans: Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Required: Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000.

An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note.