Exam 10: Reporting and Interpreting Bond Securities

Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds, the market rate of interest was 8%. Which of the following statements is incorrect?

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?

If a company calls bonds with a $1,000,000 maturity value for $1,020,000 when the book value is $950,000, a loss of $20,000 will be reported.

When recording bond issuance costs for fees paid to underwriters:

The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.

Newton Company issued its $1,000,000, 7%, ten-year bonds to the public on January 1, 2016. The bonds pay interest annually, beginning on December 31, 2016. Newton Company received $1,154,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were issued was 5%. Newton Company has a December 31 year-end. Assume that no adjusting journal entries have been made during the year. Required: A.Compute the amount of the premium that Newton Company should amortize on December 31, 2016, assuming the effective-interest method is used. B.Compute the amount of the premium that Newton Company should amortize on December 31, 2016, assuming the straight-line method is used. C.Which method above is theoretically the better method to use for amortizing a bond premium?

If a bond is issued at 101, the coupon rate was

Skylar Company issued $50,000,000 of its 10% bonds at par on January 1, 2016. On December 31, 2016, the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened to the market rate of interest?

A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, the bond interest expense on the income statement is the amount of the interest cash payment when the bond initially sells at par value.

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. The book value of the bond liability on December 31, 2016 is closest to:

TreeTop Company had issued $5,000,000 of 10-year bonds with a 6% coupon rate and interest to be paid annually. They were issued on January 1, 2010 at 96 and have been amortized using the effective interest method through December 31, 2016 at which time the balance in the bond discount was $130,000. The effective interest rate was 7%. On June 30, 2017, TreeTop retired all the bonds by exercising the call feature. The call price was 101. Required: Prepare the journal entry for the call of the bonds on June 30, 2017. (Remember to amortize the discount and update the book value of the bonds for the half-year prior to retirement).

In a recent year, Tommy Toys reported the following amounts (in millions). Identify the activities section of the statement of cash flows where these items would be reported. Also, indicate whether each amount would be added (+) or subtracted (-) in those sections of the cash flow statement.

On January 1, 2017, Simmons Company issued $100,000 of its ten-year, 6% bonds payable at $108,000 to yield a market rate of 5%. The bonds were dated January 1, 2017, and interest is paid semi-annually on each June 30 and each December 31. The effective interest method is used for amortization and no adjusting journal entries were made during the year. Required: A.Prepare the journal entry for the sale of the bonds. B.Prepare the journal entry to record the first interest payment and include the appropriate date before the entry. C.Prepare the journal entry to record the second interest payment and include the appropriate date before the entry.

A company prepared the following journal entry: Which of the following statements correctly describes the effect of this journal entry on the financial statements?

Stone Company issued a $1,000,000, 5-year bond on January 1, 2016. The bond was dated January 1, 2016 with an 8% coupon rate, paying interest annually on December 31, and was issued for $1,084,250 at a time when the market rate of interest was 6%. Stone uses the effective-interest method to account for its bonds. Required: Prepare the necessary journal entry for each of the following dates (round your answers to the nearest whole dollar amount): (a) January 1, 2016 (b) December 31, 2016 (c) December 31, 2017

Fence Company reported the following information for 2017 (in millions). Identify the activities section where these items would be reported on the statement of cash flows (operating, investing, or financing). Also, indicate whether each amount would be added (+) or subtracted (-) in those sections of the statement of cash flows.

A company prepared the following journal entry: Which of the following statements incorrectly describes the effect of this journal entry on the financial statements?

Which of the following statements is correct?

Which of the following statements incorrectly describes the accounting for bonds that were issued at a premium?

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. Which of the following statements is incorrect?