Chapter 14: Q9BE. (page 754)
On January 1, 2017, Henderson Corporation redeemed \(500,00 of bonds at 99. At the time of redemption, the unamortized premium was \)15,000. Prepare the corporation’s journal entry to record the reacquisition of the bonds.
The amount of gain on redemption of bonds is $20,000.
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(Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?
(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.
Instructions
Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.
When is the stated interest rate of a debt instrument presumed to be fair?
On January 1, 2017, Nichols Company issued for \(1,085,800 its 20-year, 11% bonds that have a maturity value of \)1,000,000 and pay interest semiannually on January 1 and July 1. The following are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.
1 | Bonds payable (maturing January 1, 2037) | \(1,000,000 |
Unamortized premium on bonds payable | 85,800 | |
Total bond liability | \)1,085,800 | |
2 | Bonds payable—principal (face value \(1,000,000 maturing January 1, 2037) | \) 142,050a |
Bonds payable—interest (semiannual payment \(55,000) | 943,750b | |
Total bond liability | \)1,085,800 | |
3 | Bonds payable—principal (maturing January 1, 2037) | \(1,000,000 |
Bonds payable—interest (\)55,000 per period for 40 periods) | 2,200,000 | |
Total bond liability | \(3,200,000 |
aThe present value of \)1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period
bThe present value of \(55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.
Instructions
(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.
(b) Explain why investors would pay \)1,085,800 for bonds that have a maturity value of only $1,000,000.
(c)Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue.
(d)If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of the issue be affected by an increase or a decrease in the market rate of interest?
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