Chapter 10: 3DQ (page 473)
Question: What is the advantage of issuing bonds instead of obtaining financing from the company’s owners?
Answer
Bonds are a debt of the company, and it is beneficial to issue bonds instead of issuing stock because issuing stocks alters the company's ownership.
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Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5%, which implies a selling price of 1233⁄8. The straight-line method is used to allocate interest expense.
1. What are the issuer’s cash proceeds from issuance of these bonds?
2. What total amount of bond interest expense will be recognized over the life of these bonds?
3. What is the amount of bond interest expense recorded on the first interest payment date?
Paulson Company issues 6%, four-year bonds, on December 31, 2017, with a par value of \(200,000 and semiannual interest payments. Use the following bond amortization table and prepare journal entries to record
(a) the issuance of bonds on December 31, 2017;
(b) the first interest payment on June 30, 2018; and
(c) the second interest payment on December 31, 2018
Semiannual Period-End | Unamortized Discount | Carrying Value |
12/31/2017 | \) 13,466 | \( 186,534 |
6/30/2018 | \) 11,782 | \( 188,218 |
12/31/2018 | \) 10,098 | $ 189,902 |
Refer to the bond details in Problem 10-5B.
Required
Prepare the journal entries to record the first two interest payments
Question: What obligation does an entrepreneur (owner) have to investors that purchase bonds to finance the business
Question: Identify the following as either an advantage (A) or a disadvantage (D) of bond financing.
a. Bonds do not affect owner control.
b. A company earns a lower return with borrowed funds than it pays in interest.
c. A company earns a higher return with borrowed funds than it pays in interest.
d. Bonds require payment of periodic interest.
e. Interest on bonds is tax deductible.
f. Bonds require payment of par value at maturity.
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