Chapter 12: Q15RQ (page 655)
What does it mean when a company calls a bond?
A company called bond when there are chances that the interest rate will fall in the future.
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Determining bond prices
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Determine whether the following bonds payable will be issued at face value, at a
premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate
of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At
issuance, the market interest rate was 10.25%.
Preparing an amortization schedule and recording mortgages payable
entries
Kellerman Company purchased a building and land with a fair market value of
\(550,000 (building, \)425,000, and land, \(125,000) on January 1, 2018. Kellerman
signed a 20-year, 6% mortgage payable. Kellerman will make monthly payments of
\)3,940.37. Round to two decimal places. Explanations are not required for journal
entries.
Requirements
1. Journalize the mortgage payable issuance on January 1, 2018.
2. Prepare an amortization schedule for the first two payments.
3. Journalize the first payment on January 31, 2018.
4. Journalize the second payment on February 28, 2018.
Journalizing bond issuance and interest payments
On June 30, Parker Company issued 11%, five-year bonds payable with a face value
of $120,000. The bonds are issued at face value and pay interest on June 30 and
December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment on December 31
Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence,low-income families, and special-needs children, has a 30-year, 5% mortgageon the existing building. The mortgage requires monthly payments of \(3,000. Raffie’sbookkeeper is preparing financial statements for the board and, in doing so, lists themortgage balance of \)287,000 under current liabilities because the board hopes to beable to pay the mortgage off in full next year. Of the mortgage principal, $20,000 willbe paid next year if Raffie’s pays according to the mortgage agreement. The boardmembers call you, their trusted CPA, to advise them on how Raffie’s Kids shouldreport the mortgage on its balance sheet. What is the ethical issue? Provide and discussthe reason for your recommendation.
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
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