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Exam 12: Long-Term Liabilities: Bonds and Notes

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Question 31

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If $1,000,000 of 8% bonds are issued at 102 3/4,the amount of cash received from the sale is

A) $1,080,000
B) $972,500
C) $1,000,000
D) $1,027,500

E) B) and C)
F) A) and D)

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Question 32

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Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000.If the issuing corporation redeems the bonds at 101,what is the amount of gain or loss on redemption?

A) $3,000 loss
B) $3,000 gain
C) $7,000 loss
D) $7,000 gain

E) A) and C)
F) C) and D)

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Question 33

Multiple Choice

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

Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture.

A corporation issues for cash $9,000,000 of 8%,30-year bonds,interest payable semiannually.The amount received for the bonds will be

The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period.

On January 1,Gemstone Company obtained a $165,000,10-year,7% installment note from Guarantee Bank.The note requires annual payments of $23,492,with the first payment occurring on the last day of the fiscal year.The first payment consists of interest of $11,550 and principal repayment of $11,942.The journal entry to record the payment of the first annual amount due on the note would include a

If $500,000 of 10-year bonds,with interest payable semiannually are sold for $494,040 based on 1 the present value of $500,000 due in 20 periods at 5% plus 2 the present value of twenty $25,000 payments at 5%,the nominal or contract rate and the market rate of interest for the bonds are both 10%.

An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $22,315 beginning December 31,of the first year,for each of the next five years.After the final payment,the carrying amount on the note will be

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

The amortization of a premium on bonds payable decreases bond interest expense.

On January 1 of the current year,the Barton Corporation issued 10% bonds with a face value of $200,000.The bonds are sold for $191,000.The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31,five years from now.Barton records straight-line amortization of the bond discount.The bond interest expense for the year ended December 31 is

Debtors are interested in the number of times interest charges are earned because they want to

The balance in Premium on Bonds Payable

The Hayden Corporation issues 1,000,10-year,8%,$2,000 bonds dated January 1 at 92.The journal entry to record the issuance will show a

Balance sheet and income statement data indicate the following: $\begin{array}{l}\begin{array}{lll}\\\text {Bonds payable, 8 \% issued 2000, due 2024} \\\text {Preferred 5 \% stock, \$ 100 par} \\\text {no change during year} \\\text {Common stock, \$ 50 par} \\\text {no change during year} \\\text {Income before income tax for year} \\\text {Income tax for year} \\\text {Common dividends paid} \\\text {Preferred dividends paid} \\\end{array}\begin{array}{lll}\underline {\text { Company A }} & \underline { \text { Company B } } \\\$ 1,200,000 & \$ 900,000 \\\\300,000 & 400,000 \\\\1,000,000 & 1,000,000 \\495,000 & 130,000 \\75,000 & 12,000 \\50,000 &0 \\21,000 & 28,000\end{array}\end{array}$ a- For each company,what is the number of times bond interest charges were earned round to one decimal place? b- Which company gives potential creditors the most protection?

Sorenson Co.,is considering the following alternative plans for financing the company: $\begin{array}{lccc}& \text { Plan I } & \text { Plan II } \\\hline \text { Issue 10 \% bonds at face } & --& \$ 3,000,000 \\ \text { Issue \$ 10 par common stock } & \$4,000,000 & 1,000,000 \\\end{array}$ 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.

One potential advantage of financing corporations through the use of bonds rather than common stock is

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

If the market rate of interest is 7%,the price of 6% bonds paying interest semiannually with a face value of $500,000 will be