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Chapter 10: 5DQ (page 473)

Question: What are the duties of a trustee for bondholders?

Short Answer

Expert verified

Answer

The duties of a trustee for bondholders are:

  1. Monitorsthe issuer
  2. Trustees arelarge banks or trust companies
  3. Writes and accepts the terms

Step by step solution

01

Meaning of Bondholder

A person in the contract who owns the company's bonds is a bondholder

02

Duties of a trustee for bondholder

There is a procedure in which a company generally sells bonds to underwriters, i.e., an investment firm that further sells the bonds to the public. And there is a need for a trustee arises to protect the interest of bondholders if the underwriter sells the bonds.

  1. The trustee monitors the issuer to ensure that they follow and accept all the obligations in the bond indenture.
  2. Most trustees are generally large banks or trust companies.
  3. The trustee writes and accepts the terms of a bond indenture before it is issued.

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Most popular questions from this chapter

On July 1, 2017, Advocate Company exercises an \(8,000 call option (plus par value) on its outstanding bonds that have a carrying value of \)416,000 and par value of $400,000. The company exercises the call option after the semiannual interest is paid on June 30, 2017. Record the entry to retire the bonds

Sylvestor Company issues 10%, five-year bonds, on December 31, 2016, with a par value of \(100,000 and semiannual interest payments. Use the following bond amortization table and prepare journal entries to record (a) the issuance of bonds on December 31, 2016; (b) the first interest payment on June 30, 2017; and (c) the second interest payment on December 31, 2017

Semiannual Period-End

Unamortized Discount

Carrying Value

12/31/2016

\) 7,360

\( 92,640

6/30/2017

\) 6,624

\( 93,376

12/31/2017

\) 5,888

$ 94,112

Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $40,000 par value and an annual contract rate of 10%, and they mature in 10 years.

Required

For each of the following three separate situations, (a) determine the bonds’ issue price on January 1, 2017, and (b) prepare the journal entry to record their issuance.

1. The market rate at the date of issuance is 8%.

2. The market rate at the date of issuance is 10%.

3. The market rate at the date of issuance is 12%.

Rogers Company signs a five-year capital lease with Packer Company for office equipment. The annual year-end lease payment is \(10,000, and the interest rate is 8%.

Required

  1. Compute the present value of Rogers’s five-year lease payments.
  2. Prepare the journal entry to record Rogers’s capital lease at its inception.
  3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is \)39,927. (Hint: To find the amount allocated to interest in year 1, multiply the interest rate by the beginning-of-year lease liability. The amount of the annual lease payment not allocated to interest is allocated to principal. Reduce the lease liability by the amount allocated to principal to update the lease liability at each year-end.)

Period ending date

Beginning balance of lease liability

Interest on lease liability

Reduction on lease liability

Cash lease payment

Ending balance of lease liability

4.Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.

Question: What are the contract rate and the market rate for bonds?
See all solutions

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