This is “End-of-Chapter Exercises”, section 14.7 from the book Business Accounting (v. 2.0).
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (20 MB) or just this chapter (1 MB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
A company needs to raise $9 million and issues bonds for that amount rather than additional capital stock. Which of the following is not a likely reason the company chose debt financing?
A company issues bonds with a face value of $12 million on June 1, Year One, for the face value plus accrued interest. The bonds pay an annual cash interest rate of 10 percent with payments made on April 1 and October 1 of each year. On financial statements as of December 31, Year One, and the year then ended, which of the following balances will appear?
The Akimbo Company issues bonds with a face value of $12 million on June 1, Year One, for 93 percent of face value plus accrued interest. The bonds pay an annual cash interest rate of 10 percent with payments made on April 1 and October 1 of each year. The bonds were sold at a discount to create an effective interest rate of 12 percent per year. What amount of cash interest will Akimbo actually pay during Year One?
Kitten Inc. issued $105,000 in bonds on September 1 for face value plus any accrued interest. The annual interest rate is 6 percent, and interest is paid on the bonds every June 30 and December 31. When the bonds are issued on September 1, how much cash will the company collect?
The Alexander Company issues a fifteen-year, zero-coupon bond with a face value of $500,000. The effective interest negotiated by the parties to the exchange was an annual rate of 7 percent. The present value of $1 in 15 periods at an annual interest rate of 7 percent is $0.36245. The present value of an ordinary annuity of $1 for 15 periods at an annual interest rate of 7 percent is $9.10791. The present value of an annuity due of $1 for 15 periods at an annual interest rate of 7 percent is $9.74547. What was the exchange price for the bond (rounded)?
A zero coupon bond with a face value of $900,000 is issued on January 1, Year One. It will mature in ten years and was issued for $502,550 to earn an annual effective rate of 6 percent. If the effective rate method is used, what interest expense does the company recognize for Year Two (rounded)?
A zero coupon bond with a face value of $600,000 is issued on January 1, Year One. It will mature in five years and was issued for $408,350 to earn an annual effective rate of 8 percent. If the effective rate method is used, what liability balance does the company report at the end of Year Two (rounded)?
A zero coupon bond with a face value of $800,000 is issued on January 1, Year One. It will mature in eight years and was issued for $541,470 to earn an annual effective rate of 5 percent. If the straight-line method is used, what liability balance does the company report at the end of Year Two (rounded)?
On January 1, Krystal Corporation issued bonds with a face value of $100,000 and a 4 percent annual stated interest rate. The effective annual rate of interest negotiated by the parties was 6 percent. Interest is paid semiannually on June 30 and December 31. The bonds mature in ten years. The present value of $1 in 10 periods at a 4 percent interest rate is $0.67556, in 10 periods at 6 percent interest is $0.55839, in 20 periods at a 2 percent interest rate is $0.67297, and in 20 periods at a 3 percent interest rate is $0.55368. The present value of an ordinary annuity of $1 for 10 periods at a 4 percent interest rate is $8.11090, for 10 periods at 6 percent interest is $7.36009, for 20 periods at a 2 percent interest rate is $16.35143, and in 20 periods at a 3 percent interest rate is $14.87747. What will be the price of the bonds on January 1 (rounded)?
On January 1, Year One, Giant Company decides to issue term bonds with a total face value of $1 million. The bonds come due in ten years and pay cash interest of 4 percent each year on December 31. An investor is found for these bonds, but that person wants to earn an annual effective rate of 8 percent. After some serious negotiations, Giant agrees to a 7 percent annual rate, and the bonds are issued for a total of $789,292. The effective rate method is applied to recognize interest. What amount of interest expense should be recognized by Giant on its Year Two income statement (rounded)?
On January 1, Year One, Super Company decides to issue term bonds with a total face value of $600,000. The bonds come due in six years and pay cash interest of 3 percent each year on December 31. An investor is found and an effective annual interest rate of 8 percent is agreed to by all parties. As a result, the bond is issued for $461,315. The effective rate method is applied. What was the reported balance of this liability at the end of Year One (rounded)?
On January 1, Year One, the Elizabeth Corporation issues a $1 million serial bond. Beginning on December 31, Year One, the company will pay $100,000 per year plus interest at an 8 percent rate on the unpaid balance during that year. The bond will be issued at an effective rate of 9 percent per year. How much cash will the company pay on December 31, Year Two?
On January 1, Year One, the Benson Company issues a $400,000 serial bond. Beginning on December 31, Year One, the company will pay $100,000 per year plus interest at a 4 percent rate on the unpaid balance during that year. The bond is issued for $373,740 to earn an effective annual interest rate of 7 percent. What is the liability balance reported on this company’s balance sheet as of December 31, Year One (rounded)?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops located throughout Florida. One day, while warming up to go jogging, your roommate poses this question: “My parents plan to build four new shops in the next year or so. They will need several million dollars to construct these facilities and add the necessary equipment and furniture. I thought they were going to obtain this money by adding one or two new owners. Instead, they borrowed the money by issuing bonds to a number of investors throughout the state. I don’t like debt; it scares me. I don’t understand why they would have taken on so much debt when they could simply have gotten new ownership involved. Why would they have made this decision? How will this affect their financial statements in the future?” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has grown and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question: “We are beginning a major expansion project that will cost us about $10 million. We plan to raise the needed money by issuing bonds. One of my partners wants to issue zero-coupon bonds. Our lawyer tells us that we really should issue serial bonds. Our financial advisor suggests term bonds. I am not even sure I know the difference. Can you explain how these three types of bonds differ? How do those differences impact the financial reporting?” How would you respond?
Joni Corporation borrows $500,000 from Friendly Bank on February 1, Year One. The principal will not be repaid until the end of six years, but interest payments are due every February 1 and August 1 beginning on August 1, Year One. The interest rate is 4 percent annually. Record the journal entry or adjusting entry necessary for each of the following.
Colson Corporation produces women’s clothing. Company officials decide to issue $50,000 in long-term bonds to finance an expansion of its swimwear line. These bonds are issued for face value on April 1, Year One and pay interest in the amount of 5 percent annually. Interest payments are made semiannually, every April 1 and October 1. Record the journal entry or the adjusting necessary for each of the following.
Assume the same facts as in problem 2, but instead of April 1, Year One, the bonds are issued on July 1, Year One. The bonds are issued for face value plus accrued interest. Record the journal entry or adjusting entry necessary for each of the following.
Keller Corporation offers to issue zero-coupon bonds of $80,000 on January 1, Year One. The bonds will come due on December 31, Year Three. Keller and several potential creditors negotiate an annual interest rate of 7 percent on the bonds. The present value of $1 in 3 periods at an annual interest rate of 7 percent is $0.81630. The present value of an ordinary annuity of $1 for 3 periods at an annual interest rate of 7 percent is $2.62432. The present value of an annuity due of $1 for 3 periods at an annual interest rate of 7 percent is $2.80802.
A company issues $600,000 in zero-coupon bonds on January 1, Year One. They come due in exactly six years and are sold to yield an effective interest rate of 4 percent per year. They are issued for $474,186. The effective rate method is applied.
On January 1, Year One, Gijulka Corporation offers to issue a $100,000 bond coming due in exactly ten years. This bond pays a stated cash interest rate of 6 percent per year on December 31. A buyer is found. After some negotiations, the parties agree on an effective annual yield rate of 7 percent. Consequently, the bond is issued for $92,974. The effective rate method is applied.
Jaguar Corporation issues term bonds with a face value of $300,000 on January 1, Year One. The bonds have a stated rate of interest of 7 percent per year and a life of four years. They pay this interest annually on December 31. Because the market rate of interest at that time was 9 percent, the bonds were issued at a discount to create an effective annual rate of 9 percent. The present value of $1 in 4 periods at an annual interest rate of 9 percent is $0.70843. The present value of an ordinary annuity of $1 for 4 periods at an annual interest rate of 9 percent is $3.23972.
Arizona Corporation issues term bonds with a face value of $800,000 on January 1, Year One. The bonds have a stated rate of interest of 7 percent per year and a life of six years. They pay interest annually on December 31. These bonds were issued at $695,470 to create an effective annual rate of 10 percent.
Collins Company issues term bonds with a face value of $100,000 on January 1, Year One. The bonds have an annual stated rate of interest of 4 percent and a life of ten years. They pay interest semiannually on June 30 and December 31. The bonds were issued to yield an effective annual interest rate of 6 percent.
The present value of $1 in 10 periods at a 4 percent interest rate is $0.67556, in 10 periods at 6 percent interest is $0.55839, in 20 periods at a 2 percent interest rate is $0.67297, and in 20 periods at a 3 percent interest rate is $0.55368.
The present value of an ordinary annuity of $1 for 10 periods at a 4 percent interest rate is $8.11090, for 10 periods at 6 percent interest is $7.36009, for 20 periods at a 2 percent interest rate is $16.35143, and in 20 periods at a 3 percent interest rate is $14.87747.
Chyrsalys Corporation issues $4,000,000 in serial bonds on January 1, Year One, with a stated cash interest rate of 4 percent. The bonds are issued at face value. The bond terms specify that interest and $2,000,000 in principal will be paid on December 31, Year One and December 31, Year Two.
The Empire Company issues $3 million in bonds on January 1, Year One. The bonds are for three years with $1 million paid at the end of each year plus interest of 6 percent on the unpaid balance for that period. These bonds are sold to yield an effective rate of 8 percent per year. The present value of $1 at an 8 percent interest rate in one year is $0.92593, in two years is $0.85734, and in three years is $0.79383. The present value of an ordinary annuity of $1 at an 8 percent interest rate over three years is $2.57710.
The Althenon Corporation issues bonds with a $1 million face value on January 1, Year One. The bonds pay a stated interest rate of 5 percent each year on December 31. They come due in eight years. The Zephyr Corporation also issues bonds with a $1 million face value on January 1, Year One. These bonds pay a stated interest rate of 8 percent each year on December 31. They come due in eight years. Both companies actually issue their bonds to yield an effective annual interest rate of 10 percent. Both companies use the effective rate method. The present value of $1 at a 10 percent interest rate in eight years is $0.46651. The present value of an ordinary annuity of $1 at a 10 percent interest rate over eight years is $5.33493.
On January 1, Year One, the Pulaski Corporation issues bonds with a face value of $1 million. These bonds come due in twenty years and pay an annual stated interest rate (each December 31) of 5 percent. An investor offers to buy the entire group of bonds for an amount that will yield an effective interest rate of 10 percent per year. Company officials negotiate and are able to reduce the effective rate by 2 percent to 8 percent per year. The present value of $1 at a 10 percent interest rate in twenty years is $0.14864. The present value of an ordinary annuity of $1 at a 10 percent interest rate over twenty years is $8.51356. The present value of $1 at an 8 percent interest rate in twenty years is $0.21455. The present value of an ordinary annuity of $1 at an 8 percent interest rate over twenty years is $9.81815.
This problem will carry through several chapters, building in difficulty. It allows students to continually practice skills and knowledge learned in previous chapters.
In Chapter 13 "In a Set of Financial Statements, What Information Is Conveyed about Current and Contingent Liabilities?", financial statements for January were prepared for Webworks. They are included here as a starting point for the required recording for February.
Figure 14.29 Webworks Financial Statements
Figure 14.30
Figure 14.31
The following events occur during February:
Webworks pays taxes of $1,558 in cash.
Required:
Record cost of goods sold.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in Marriott International. The partner is aware that Marriott builds a lot of hotels and, therefore, probably has to borrow a significant amount of money. The partner is curious as to the cost of the interest on the money that Marriott borrows. The partner asks you to look at the 2010 financial statements for Marriott by following this path: