Accounting 2301- Chapter 10

A company issues 9%, 5-year bonds with a par value of $100,000 on January 1 at a price of $106,160, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

$100,000 × .09 × 6/12 year = $4,500

Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):

$15,000,000/$12,000,000 = 1.25

A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value of 1 (single sum) at 8% for 3 years is 0.7938. The present value of an annuity (series of payments) at 8% for 3 years is 2.5771. The present value of the loan (rounded) is:

$20,000 × 0.7938 = $15,876

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?

$200,000 × 8% × ½ = $8,000 each interest payment

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment?

$250,000 principal × 8% = $20,000 interest

A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

$40,000 × .08 × 1/2 year = $1,600

A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value for an annuity (series of payments) at 8% for 5 years is 3.9927. The present value of 1 (single sum) at 8% for 5 years is .6806. Each annual payment equals $75,000. The present value of the note is:

$75,000 × 3.9927 = $299,452.50

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value for an annuity (series of payments) at 9% for 7 years is 5.0330. The present value of 1 (single sum) for 7 years at 9% is 0.5470. The present value of the loan is:

$9,000 × 5.0330 = $45,297

The effective interest amortization method:

Allocates bond interest expense over the bond's life using a constant interest rate.

Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:

Carrying value of bonds$203,000 Retirement price 201,000 Gain on retirement$2,000

A bond sells at a discount when the:

Contract rate is below the market rate.

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What is the appropriate journal entry to record the issuance of the note?

Debit Cash $250,000; credit Notes Payable $250,000.

All of the following statements regarding leases are true except:

Finance leases do not transfer ownership of the asset under the lease, but operating leases often do.

All of the following statements regarding convertible bonds are true except:

Holders of convertible bonds can choose how many shares of stock to receive at conversion.

A pension plan:

Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

The debt-to-equity ratio:

Is a means of assessing the risk of a company's financing structure.

On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity (series of payments) for 10 periods at 3% 8.5302 Present value of an annuity (series of payments) for 10 periods at 4%8.1109 Present value of 1 (single sum) due in 10 periods at 3% 0.7441 Present value of 1 (single sum) due in 10 periods at 4% 0.6756 What is the issue (selling) price of the bond?

Market interest rate is used to determine issue price. The 6% annual rate/2 = 3%, so PV factors at 3% should be used. Par value $300,000 × PV of $1 factor 0.7441 = $223,230 Interest payment (300,000 × .08 × 1/2) × PV of an Annuity factor 8.5302 = $102,362 Bond Issue Price = 223,230 + 102,362 = 325,592

A discount on bonds payable:

Occurs when a company issues bonds with a contract rate less than the market rate.

All of the following are true regarding long-term notes payable except:

The market rate of interest at the time of issuance determines the periodic cash payment amount.

A bond is issued at par value when:

The market rate of interest is the same as the contract rate of interest.