Chapter 12: Q9RQ (page 654)
Why would a company choose to issue bonds instead of issuing stock?
The common stock is a type of stock in which the company transfers some part of ownership to the stockholder.
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Determining bond amounts
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payableat 99.5. Interest is paid semiannually.
Requirements
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
Determining the present value of bonds payable and journalizing using the effective-interest amortization method
Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest rate at the date of issuance was 10%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.
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?
Analyzing and journalizing bondtransactions
On January1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bondspayable with face value of $200,000. The bonds pay interest on June 30 andDecember 31.
Requirements
1. If the market interest rate is 5% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 8% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 93. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.
Analyzing, journalizing, and reporting bond transactions
Johnny’s Hamburgers issued 8%, 10-year bonds payable at 85 on December 31, 2018.
At December 31, 2020, Johnny reported the bonds payable as follows:
Long-term Liabilities:
Bonds Payable \( 300,000
Less: Discount on Bonds Payable (36,000) \) 264,000
Johnny pays semiannual interest each June 30 and December 31.
Requirements
1.Answer the following questions about Johnny’s bonds payable:
a.What is the maturity value of the bonds?
b.What is the carrying amount of the bonds at December 31, 2020?
c.What is the semiannual cash interest payment on the bonds?
d.How much interest expense should the company record each year?
2. Record the June 30, 2020, semiannual interest payment and amortization of discount.
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