Exam 12: Long-Term Liabilities: Bonds and Notes

Debtors are interested in the number of times interest charges are earned because they want to

If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a convertible bond.

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 year­end 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?

Bonds Payable has a balance of $900,000 and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption?

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal entry to record the amortization of the premium by the straight-line method) for the year by Lisbon Co. includes a debit to

When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.

A $300,000 bond was redeemed at 104 when the carrying value of the bond was $316,000. The entry to record the redemption would include a

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%.

Match each description below to the appropriate term a-g). -The face amount of each bond

Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue.

On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 $500,000 × 8% × 1/2), receiving cash of $520,000. Journalize the entry to record the first interest payment and amortization of premium using the straight-line method.

On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3 carrying amount in the amortization table for this installment note will be equal to

The balance in Discount on Bonds Payable

If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be

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

The Merchant Company issued 10-year bonds on January 1. 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 of the first year, Merchant should record interest expense round to the nearest dollar) of

If bonds are issued at a discount, it means that the

The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond.

On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that pays semiannual interest of $35,000 $1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answers to the nearest dollar.

Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds.