Exam 14: Long-Term Liabilities: Bonds and Notes

The effective-interest method of amortizing a bond discount or premium is the preferred method.

On January 1, 2011, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, 2011. The December 31, 2013 carrying amount in the amortization table for this installment note will be equal to:

The face value of a term bond is payable at a single specific date in the future.

Two companies are financed as follows: Income tax is estimated at 40% of income. Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each.

On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year:

If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount.

There is a loss on redemption of bonds when bonds are redeemed above carrying value.

When the bonds are sold for more than their face value, the carrying value of the bonds is equal to

The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded annually is $3,636.30.

When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off.

If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

On January 1, 2014, the Horton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $192,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2018. Horton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2014, is

Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?

The Victor Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 96. The journal entry to record the issuance will show a

The Designer Company issued 10-year bonds on January 1, 2011. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective-interest method to amortize bond discounts and premiums. On July 1, 2011, Designer should record interest expense (round to the nearest dollar) of

Jenson Co., is considering the following alternative plans for financing their company: Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

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.

The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet.

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

Both callable and non-callable bonds can be purchased by the issuing corporation in the open market.