Chapter 14 additional review & practice

Ferone Company issued $10,000,000, 7.8% 20 year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Ferrone uses effective interest amortization. What amound of interest expense will Ferrone record for the June 20 payment?

= $9,802,072 * .04 = 392,083

Eckert company issues $10,000,000, 6%, 5-year bonds dated July 1, 2017 on July 1, 2017. The bonds pay interest semiannually on december 31 and June 30. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

$10,437,618 or (PV of single sum at 2.5% for 10periods) x $10M + (PV of annuity due at 2.5% for 10 periods)

Pontchartrain Company issues $20,000,000, 7.8% 20 year bonds to yield 8% on january 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. The company uses effective interest amortization. Interest expense reported on the 2017 income statement will total

First 6 Mo: (19,604,145 *

When a bond sells at a premium, interest expense will be

Less than the bond interest payment this is because of the amortized premium

The printing costs and legal fees associated with the issuance of bonds should

be accumulated in a deferred charge account and not affect effective interest amortization they should be recorded as part of the carrying value of the bonds amortized over the life of the bonds

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

bond indenture

a bond for which the user has the right to call and retire the bonds prior to maturity

callable bond

On January 1, Gasperon issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include

credit interest expense 2,000,000 credit Bonds Payable for $100,000,000 and premium on bonds payable for $2,000,000 this might be wrong

If bonds are initially sold at a discount and the straight line method of amortization is used, interest expense in the earlier years will

exceed what it would have been had the effective interest method of amortization been used.

If a bond sold at 97, the market rate was

greater than the stated rate (sold at a discount (97% of face value))

Under the effective interest method, interest expense

is the same amount as straight line interest expense over the term of the bonds

the selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the

market rate

a bond that matures in installments

serial bond