Exam 14: Bonds and Long-Term Notes

An amortization schedule for bonds issued at a premium:

What is meant by the "market rate" of interest, the "effective rate" of interest, and the "yield rate" of interest?

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. -Induced conversion

On January 1, 2018, Solo Inc. 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, 2028. Solo paid $50,000 in bond issue costs. Solo uses straight-line amortization. The amount of interest expense for 2018 is:

On August 1, 2019, United Corporation issued $10 million of 8% convertible bonds at 105. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5 par common stock. World Company purchased 10% of the bond issue. On August 1, 2019, the market value per share for United stock was $56 and the market value of each warrant was $6. In March 2025, when United common stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held. Required: 1. Prepare the journal entries on August 1, 2019, to record (A) the issuance of the bonds by United and (B) the investment by World. 2. Prepare the journal entries for both companies in March 2025 to record the exercise of the warrants.

In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness: In addition, the company disclosed the following: We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28, 2017, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively. The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands) -Required: Suppose that half of the bondholders had converted them into Health Foods' stock at the end of the 2018 fiscal year when the stock price is $90 per share. What gain or loss from this conversion would Health Foods have recorded on the transaction using the book value method? The market value method?

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies U.S. GAAP. Upon issuance, Patrick Rach International should record:

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Premium on bonds

Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

During 2018 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank. Interest was last paid on December 31, 2017. On December 31, 2018, 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 2018 income statement?

A bond is issued with a face amount of $500,000 and a stated interest rate of 10%. The current market rate of interest is 8%. These bonds will sell at a price that is:

On May 1, 2018, Green Corporation issued $1,000,000 of 12% bonds, dated January 1, 2018, for $975,000 plus accrued interest. The bonds mature on December 31, 2032, and pay interest semiannually on June 30 and December 31. Green's fiscal year ends on December 31 each year. Required: 1. Determine the amount of accrued interest that was included in the proceeds received from the bond sale. Show calculations. 2. Prepare the journal entry for the issuance of the bonds.

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

In its 2018 annual report to shareholders, Bare Sturns Group Inc. disclosed the following: On October 28, 2018, the Company issued $475,000,000 aggregate principal amount of 9-1/4% Senior Notes Due 2023 ("Senior Notes") and $618,670,000 aggregate principal amount at maturity of 10-1/4% Senior Discount Notes Due 2023 ("Senior Discount Notes" and collectively the "Notes") in a transaction not registered under the Securities Act in reliance upon an exemption from the registration requirements of the Securities Act. Gross proceeds from the offering amounted to $850,000,000. The discount on the Senior Discount Notes is being accreted under the effective interest method. Explain the last sentence of the disclosure to clarify what accounting was necessary and why.

On January 1, 2018, Shirley Corporation purchased 10% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. 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 Shirley on January 1, 2018. 3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 4. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method.

On May 1, 2018, Joe purchased $200,000 in zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. Required: Calculate the price Joe paid for the bonds.

When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:

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?

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

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.