Chapter 10: Interactive Presentation

Each of the following are disadvantages of bonds except:

bonds do not affect owner control

Each of the following are advantages of bonds except:

bonds require payment of periodic interest and par value at maturity

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 _____.

$109,705

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 _____.

$115,125

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 _____.

$140,887

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?

$4,500

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 _____.

$459,829

Orrick Company reported total assets of $4,200,000, total liabilities of $700,000, and total equity of $3,500,000 at the end of the year and total sales of $15,000,000 during the year. The company's debt-to-equity ratio (stated in a percentage rounded to one decimal point) is _____.

20.0%

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. Complete the necessary journal entry for June 30, 2020 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bond interest expense - $18,284 (debit) Premium on bonds payable - $1,966 (debit) Cash - $20,250 (credit)

On January 1, 2019, Stronger Industries issued $480,000 of 9%, five-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $499,483 and their market rate is 8% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $480,000 and Premium on Bonds Payable had a balance of $19,483. Stroger uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30, 2019. Complete the necessary journal entry for the interest payment date of June 30, 2019 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bond interest expense - $19,979 (debit) Premium on bonds payable - $1,621 (debit) Cash - $21,600 (credit)

On January 1, 2019, Electro Inc. issued $740,000 of 7.5%, four-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $680,186 and their market rate is 10% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $740,000 and Discount on Bonds Payable had a balance of $59,814. Electro uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30, 2019. Complete the necessary journal entry for the interest payment date of June 30, 2019 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bond interest expense - $34,009 (debit) Discount on bonds payable - $6,259 (credit) Cash - $27,750 (credit)

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. Complete the necessary journal entry for June 30, 2020 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bond interest expense - $5,756 (debit) Discount on bonds payable - $506 (credit) Cash - $5,250 (credit)

Ajax, Inc., issued callable bonds with a par value of $1,000,000 that require the payment of a call premium of $10,000. The bonds have a carrying value of $990,000. We call these bonds prior to maturity on September 30. Complete the necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bonds payable - $1,000,000 (debit) Loss on bond retirement - $20,000 (debit) Discount on bonds payable - $10,000 Cash - $1,010,000

Ten years ago, Cary Company issued $1,500,000 of 7 percent, 10-year bonds at a price of 95. On the maturity date of January 2, after making the final interest payment and recording the related entry, Cary retired the bonds. Complete the necessary journal entry for January 2, 2019 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bonds payable - $1,500,000 (debit) Cash - $1,500,000 (credit)

On December 31, Lowland, Inc., converts its $900,000 par value bonds (carrying value also $900,000) into 90,000 shares of $6 par value common stock. Complete the necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Bonds payable - $900,000 (debit) Common Stock - $540,000 (credit) Paid in capital in excess of par value - $360,000 (credit)

On December 31, 2019, Spearmint, Inc., issued $450,000 of 9 percent, 3-year bonds for cash of $461,795. Complete the necessary journal entry for Spearmint, Inc., by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Cash - $ 461,795 (debit) Premium on bonds payable - $11,795 (credit) Bonds payable - $450,000 (credit)

On January 1, 2019, Providence, Inc., issues $1,000,000 of 10 percent, 5-year bonds at par value. Complete the necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Cash - $1,000,000 (debit) Bonds payable - $1,000,000 (credit)

On December 31, 2019, Wintergreen, Inc., issued $150,000 of 7 percent, 10-year bonds at a price of 93.25. Complete the necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Cash - $139,875 (debit) Discount on bonds payable - $10,125 (debit) Bonds payable - $150,000 (credit)

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. Complete the necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Cash - $90,000 (debit) Notes payable - $90,000 (credit)

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

Convertible 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 at the end of each year. Complete the necessary journal entry on 12/31 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Interest expense - $4,500 (debit) Notes payable - $20,881 (debit) Cash - $25,381 (credit)

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

Par value

_____________are backed by the issuer's general credit standing.

Unsecured bonds

A mortgage is a legal agreement that:

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

The debt-to-equity ratio for your small business was 1.40 at the end of last year and 1.25 at the end of this year. Your debt-to-equity ratio _____.

improved

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

less than par (discount)

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

more than par (premium)