Exam 11: Liabilities: Bonds Payable

Allows the issuer to redeem bonds before maturity date

The Levi Company issued $200,000 of 12% bonds on January 1 of the current year at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1, and mature in five years, on January 1. The total interest expense related to these bonds for the current year ending on December 31 is

The times interest earned ratio is computed as

The book value of bonds payable

If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416.

The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest.

Snickett Corp. issued $5,000,000, five-year bonds on the first day of its fiscal year. The bonds have a stated rate of 11% and an effective (market) rate of 9%. Interest payments are made semiannually. Compute the following: (a) The amount of cash proceeds from the sale of the bonds. Use the present value table and round to the nearest dollar. (b) The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. (c) The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar. (d) The amount of the bond interest expense for the first year. Present value of an annuity of $1 at compound interest: Periods 10.\% 11.0\% 12.0\% 13.0\% 0.961 0.956 0.952 0.947 0.943 0.938 0.934 0.909 0.900 0.892 0.884 1 54 94 38 87 40 97 58 09 90 86 96 1.886 1.872 1.859 1.846 1.833 1.820 1.808 1.735 1.712 1.690 1.668 2 09 67 41 32 39 63 02 54 52 05 10 2.775 2.748 2.723 2.697 2.673 2.648 2.624 2.486 2.443 2.401 2.361 3 09 96 25 93 01 48 32 85 71 83 15 3.629 3.587 3.545 3.505 3.465 3.425 3.387 3.169 3.102 3.037 2.974 4 90 53 95 15 11 80 21 87 45 35 47 4.451 4.389 4.329 4.270 4.212 4.155 4.100 3.790 3.695 3.604 3.517 5 82 98 48 28 36 68 20 79 90 78 23 5.242 5.157 5.075 4.995 4.917 4.841 4.766 4.355 4.230 4.111 3.997 6 14 87 69 53 32 01 54 26 54 41 55 6.002 5.892 5.786 5.682 5.582 5.484 5.389 4.868 4.712 4.563 4.422 7 05 70 37 97 38 52 29 42 20 76 61 6.732 6.595 6.463 6.334 6.209 6.088 5.971 5.334 5.146 4.967 4.798 8 74 89 21 57 79 75 30 93 12 64 77 7.435 7.268 7.107 6.952 6.801 6.656 6.515 5.759 5.537 5.328 5.131 9 33 79 82 20 69 10 23 02 05 25 66 8.110 7.912 7.721 7.537 7.360 7.188 7.023 6.144 5.889 5.650 5.426 10 90 72 73 63 09 83 58 57 23 22 24 Present value of a $1 at compound interest: Periods 10.\% 11.0\% 12.0\% 13.0\% 0.961 0.956 0.952 0.947 0.943 0.938 0.934 0.909 0.900 0.892 0.884 1 54 94 38 87 40 97 58 09 90 86 96 0.924 0.915 0.907 0.898 0.890 0.881 0.873 0.826 0.811 0.797 0.783 2 56 73 03 45 00 66 44 45 62 19 15 0.889 0.876 0.863 0.851 0.839 0.827 0.816 0.751 0.731 0.711 0.693 3 00 30 84 61 62 85 30 31 19 78 05 0.854 0.838 0.822 0.807 0.792 0.777 0.762 0.683 0.658 0.635 0.613 4 80 56 70 22 09 32 90 01 73 52 32 0.821 0.802 0.783 0.765 0.747 0.729 0.712 0.620 0.593 0.567 0.542 5 93 45 53 13 26 88 99 92 45 43 76 0.790 0.767 0.746 0.725 0.704 0.685 0.666 0.564 0.534 0.506 0.480 6 31 90 22 25 96 33 34 47 64 63 32 0.759 0.734 0.710 0.687 0.665 0.643 0.622 0.513 0.481 0.452 0.425 7 92 83 68 44 06 51 75 16 66 35 06 0.730 0.703 0.676 0.651 0.627 0.604 0.582 0.466 0.433 0.403 0.376 8 69 19 84 60 41 23 01 51 93 88 16 0.702 0.672 0.644 0.617 0.591 0.567 0.543 0.424 0.390 0.360 0.332 9 59 90 61 63 90 35 93 10 92 61 88 0.675 0.643 0.613 0.585 0.558 0.532 0.508 0.385 0.352 0.321 0.294 10 56 93 91 43 39 73 35 54 18 97 59

Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000. Present entries to record the following transactions. ​ (a) Issuance of bonds. (b) Payment of first semiannual interest on December 31 (record separate entry from premium amortization). (c) Amortization by straight-line method of bond premium on December 31.

Match each description below to the appropriate term (a-g). -If the contract rate exceeds the effective rate

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.

Any unamortized premium should be reported on the balance sheet of the issuing corporation as

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

The journal entry a company records for the issuance of bonds when the contract rate is less than the market rate would be

Match each description below to the appropriate term (a-g). -If the contract rate is less than the effective rate

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

A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for $475,000. Journalize the redemption of the bonds.

Discount on Bonds Payable is a contra liability account.

Brubeck Co. issued $10,000,000 of 30-year, 8% callable bonds on May 1 of Year 1, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: (a) Issued the bonds for cash at their face amount. (b) Paid the interest on the bonds on November 1 of Year 3. (c) Called one-fourth of the bonds at 104, the rate provided in the bond indenture, on May 1 of Year 10. (Omit entry for payment of interest.)

The balance in a bond discount account should be reported on the balance sheet as a deduction from the related bonds payable.