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Exam 14: Bonds and Long-Term Notes

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Question 41

True/False

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An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest.

A) True
B) False

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Question 42

Multiple Choice

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When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:

A) The invoice price.
B) The wholesale price.
C) The present value of cash outflows discounted at the stated rate.
D) The present value of the note payments discounted at the market rate.

E) A) and C)
F) All of the above

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Question 43

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Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:

Required: What was the annual effective interest rate in the market when the bonds were issued?

What is the interest expense on the bonds in 2014?

Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.

On March 1, 2013, Doll Co. issued 10-year convertible bonds at 106. During 2016, the bonds were converted into common stock when the market price of Doll's common stock was 500 percent above its par value. On March 1, 2013, cash proceeds from the issuance of the convertible bonds should be reported as:

The rate of return on shareholders' equity indicates:

On February 1, 2013, Wolf Inc. issued 10% bonds dated February 1, 2013, with a face amount of $200,000. The bonds sold for $239,588 and mature in 20 years. The effective interest rate for these bonds was 8%. Interest is paid semiannually on July 31 and January 31. Wolf's fiscal year is the calendar year. Wolf uses the effective interest method of amortization. Required: 1. Prepare the journal entry to record the bond issuance on February 1, 2013. 2. Prepare the entry to record interest on July 31, 2013. 3. Prepare the necessary journal entry on December 31, 2013. 4. Prepare the necessary journal entry on January 31, 2014.

On January 1, 2012, Slug Corporation issued $6 million of 8%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of $1 par common stock. Fuzz Company purchased 20% of the issue as an investment. On July 1, 2016, Fuzz converted all of its bonds into common stock of Slug. The market price per share for Slug was $32 at the time of the conversion. Both companies use the straight-line method for amortization. Required: 1. Prepare journal entries for the issuance of the bonds on the issuer and the investor books. 2. Prepare the journal entries for the conversion on the books of the issuer and the investor.

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

On January 1, 2013, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2018, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

A zero-coupon bond pays no interest. Explain.

On March 31, 2013, MDS, Inc.'s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

The rate of interest that actually is incurred on a bond payable is called the:

Assuming that Auerbach issued the bonds for $255,369,000, what interest expense would it recognize in its 2013 income statement?

How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to accounting for convertible debt?

Distinguish between: (a) Convertible and callable bonds. (b) Serial and term bonds.

The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.

What is the annual stated interest rate on the bonds?