CH 10

_____________are backed by the issuer's general credit standing.

unsecured bonds

On January 1, 2019, Brooks, Inc., borrows $90,000 from a bank and signs a 5% installment note requiring four annual payments of $25,381. What is the interest expense at the end of the first year?

4500 explanation 90000*.05

A bond is the issuer's written promise to pay the _____________ of the bond with interest.

par value

A ____________ plan is an agreement to provide pension benefits (payments) to employees after they retire.

pension

On December 1, 2019, Derrick, Inc., pays $800 to lease a copier for use in its corporate offices during the month of December.

rental expense 800 cash 800

On January 2, 2019, Denny Corp. enters into five-year finance lease for machinery with annual year-end payments of $15,000. The present value of the six annual lease payments is $65,000.

right-of-use asset 65000 lease liability 65000

On January 1, 2019, Providence, Inc., issues $1,000,000 of 10 percent, 5-year bonds at par value.

cash 1000000 bonds payable 1000000

On December 1, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds for cash of $461,795. The bonds pay interest semiannually. The total cost of borrowing equals _____.

109705 explanation: 6(450000*.09*.5)=121500 121500+450000=571500 571500-461795=109705

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds for cash of $139,875. The total cost of borrowing equals _____.

115125 explanation: (150000*.07) x 10 payments= 105000 105000+150000=255000 255000-139875= 115125

ISSUING BONDS AT PAR: paid semiannual interest

bond interest expense cash

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds at a discount of $10,125. The bonds pay interest semiannually. Wintergreen uses the straight-line bond amortization method.The entry to record each interest payment includes a debit to Bond Interest Expense for $5,756, a credit to Discount on Bonds Payable for $506, and a credit to Cash for $5,250.At December 31, 2020, the carrying value of the bonds will equal _____.

140887 explanation: carrying value begins with the 139875. add the discount ammortization (discount bond payable): 506. the answer is 140381. That is how we have to pay June 2020 since we pay semiannually. now add another 506 to find the carrying value of the bonds on december 2020. answer is 140887

On January 1, 2019, Luring, Inc., issues $2,000,000 of 10 percent, 5-year bonds that pay interest of $100,000 semiannually. The market rate is 12 percent at the time of issuance. The present value of 1 at 6% for 10 periods is 0.5584. The present value of an annuity at 6% for 10 periods is 7.3601. The issue price of the bonds is _____.

1852810 explanation: 2000000*.5584=1116800 100000*7.3601=736010 111680+736010=1852810

On January 1, 2019, East Lansing, Inc., issues $2,000,000 of 10 percent, 5-year bonds that pay interest of $100,000 semiannually. The market rate is 8 percent at the time of issuance. The present value of 1 at 4% for 10 periods is 0.6756. The present value of an annuity at 4% for 10 periods is 8.1109. The issue price of the bonds is _____.

2162290 explanation: 2000000*.6756= 1351200 100000*8.1109=811090 1351200+811090=2162290

On December 31, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds at a premium of $11,795. The bonds pay interest semiannually. Spearmint uses the straight-line bond amortization method. The entry to record each interest payment includes a debit to Bond Interest Expense for $18,284, a debit to Premium on Bonds Payable for $1,966, and a credit to Cash for $20,250.At June 30, 2020, the carrying value of the bonds will equal _____.

459829 explanation: 461795-1966=459829

On December 31, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds for cash of $461,795. After recording the related entry, Bonds Payable had a balance of $450,000 and Premium on Bonds Payable had a balance of $11,795. Spearmint uses the straight-line bond amortization method. The first semiannual interest payment was made on June 30, 2020.

bond interest expense 18284 premium on bonds payable 1966 cash 20250

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds at a price of 93.25. Wintergreen received $139,875 when it issued the bonds (or $150,000 × .9325). After recording the related entry, Bonds Payable had a balance of $150,000 and Discounts on Bonds Payable had a balance of $10,125. Wintergreen uses the straight-line bond amortization method. The first semiannual interest payment was made on June 30, 2020.

bond interest expense 5756 discounts on bonds payable 506 cash 5250 explanation: bond interest expense= total bond interest expense/number of payments= 115125/20=5756 discounts on bonds payable=discounts on bonds payable/number of payments=10125/20=506 cash= 5756-506=5250

Each of the following are disadvantages of bonds except:

bonds do not affect owner control THESE ARE THE DISADVANTAGES OF BONDS: bonds require payment of periodic interest and par value at maturity bonds can decrease return on equity

Each of the following are advantages of bonds except:

bonds require payment of periodic interest and par value at maturity THESE ARE THE ADVANTAGES OF BONDS: interest on bonds is tax deductible bonds do not affect owner control bonds can increase return on equity

ISSUING BONDS AT PAR: sold bonds at par

cash bonds payable

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds at a price of 93.25.

cash 139875 discounts on bonds payable 10125 bonds payable 150000 explanation: 150000*.9325=139875 (this is cash) 150000-139875=10125 (this is discounts on bonds payable)

On December 31, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds for cash of $461,795.

cash 461795 premium bonds payable 11795 bonds payable 450000

On January 1, 2019, Brooks, Inc., borrows $90,000 from a bank to purchase machinery. Brooks signs a 5 percent installment note requiring four annual payments of principal plus interest.

cash 90000 notes payable 90000

____________offers holders the potential to participate in future increases in stock price.

convertible bonds

A mortgage is a legal agreement that

helps protect the lender if the required payments are not made.

On January 1, 2019, Brooks Inc. borrows $90,000 from a bank and signs a 5% installment note requiring four annual payments of $25,381.

interest expense 4500 notes payable 20881 cash 25381

If the contract rate is less than the market rate, the bond will sell at:

less than par (discount)