Exam 14: Bonds and Long-Term Notes

On April 1,2016,Austere Corporation issued $300,000 of 10% bonds at 105.Each $1,000 bond was sold with 25 detachable stock warrants,each permitting the investor to purchase one share of common stock for $17.On that date,the market value of the common stock was $15 per share and the market value of each warrant was $2.Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

Heidi Baby Products issued 8% bonds with a face amount of $320 million on January 1,2016.The bonds sold for $300 million.For bonds of similar risk and maturity the market yield was 9%.Upon issuance,Heidi elected the option to report these bonds at their fair value.On June 30,2016,the fair value of the bonds was $310 million as determined by their market value on the NASDAQ.Will Heidi report a gain or will it report a loss when adjusting the bonds to fair value? If the change in fair value is attributable to a change in the general (risk-free)interest rate,did the rate increase or decrease? If the change in fair value is attributable to a change in the general (risk-free)interest rate,is the gain or loss reported as part of net income? Explain.

TMC issued $50 million of its 12% bonds on April 1,2016,at 98 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did TMC receive from the bond issuance?

The method used to pay interest depends on whether the bonds are:

Bonds will sell for a premium when the market rate of interest exceeds their stated rate.

What is the book value of the bonds as of December 31,2017?

When outstanding bonds are converted into common stock,under either the book value method or the market value method,the same amount would be debited to:

When the interest payment dates are March 1 and September 1,and the bonds are issued on July 1,the amount of interest expense reported in the December 31 income statement for the year of issue would be for:

When a company issues bonds between interest dates,the entry to record the issuance of the bonds will:

Brown Co.issued $100 million of its 10% bonds on April 1,2016,at 99 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did Brown receive from the bond issuance?

On January 1,2016,Legion Company sold $200,000 of 10% ten-year bonds.Interest is payable semiannually on June 30 and December 31.The bonds were sold for $177,000,priced to yield 12%.Legion records interest at the effective rate.Legion should report bond interest expense for the six months ended June 30,2016,in the amount of:

Zero-coupon bonds:

List at least three ways that bonds may be taken off the market prior to maturity.

Tru Fashions has bonds outstanding during a year in which the market rate of interest has declined.If Tru has elected the fair value option for the bonds,will it report a gain or a loss on the bonds for the year? Explain.

Listed below are several terms and phrases associated with long-term debt.Pair each item from List A (by letter)with the item from List B that is most appropriately associated with it.

On January 1,2016,an investor paid $291,000 for bonds with a face amount of $300,000.The stated 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 2016 (assume annual interest payments and amortization)?

What is the interest expense on the bonds in 2017?

On January 1,2016,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 1,2026.Solo paid $50,000 in bond issue costs.Solo uses straight-line amortization.The amount of interest expense for the year is:

Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.

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