CHAPTER 15
QUESTIONS
1. A bond is a liability of the issuing company. A share of stock represents an ownership interest.
5. A bond indenture is a legal contract between the issuing company and the bondholders that states the obligations and rights of both parties. It specifies such items as the par value of the bonds, the contract interest rate, the due dates for interest payments, and the maturity date(s) of the bonds. It also may name a trustee, describe the bond issue in detail, and provide for a sinking fund.
11. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
Quick Study 15-1
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2. / Twenty semiannual interest payments of $10,000 / $200,000Plus bond discount ($250,000 - $218,750) / 31,250
Total bond interest expense / $231,250
3. Bond interest expense on first payment date:
$231,250 / 20 semiannual periods = $11,562.50
Quick Study 15-2
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2. / Thirty semiannual interest payments of $12,000 / $360,000Less premium ($281,400 - $240,000) / (41,400)
Total bond interest expense / $318,600
3. Bond interest expense on first payment date:
$281,400 x 4% = $11,256
Quick Study 15-3
2002
Jan. 1 / Cash / 218,750Discount on Bonds Payable / 31,250
Bonds Payable / 250,000
To record issuing bonds at a discount.
Jan. 1 / Cash / 281,400
Bonds Payable / 240,000
Premium on Bonds Payable / 41,400
To record issuing bonds at a premium.
Exercise 15-1
1. Semiannual interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries:
2002
(a)Jan. 1 / Cash / 3,400,000
Bonds Payable / 3,400,000
Sold bonds at par.
(b)
June 30 / Bond interest expense / 153,000
Cash / 153,000
Paid semiannual interest on bonds.
(c)
Dec. 31 / Bond interest expense / 153,000
Cash / 153,000
Paid semiannual interest on bonds.
3.
2002
(a)Jan. 1 /
Cash*
/ 3,332,000Discount on Bonds Payable / 68,000
Bonds Payable / 3,400,000
Sold bonds at 98. *($3,400,000 x 0.98)
(b)
Jan. 1 /
Cash*
/ 3,468,000Premium on Bonds Payable / 68,000
Bonds Payable / 3,400,000
Sold bonds at 102. *($3,400,000 x 1.02)
Exercise 15-2
1. Semiannual interest payment = $800,000 x 6% x ½ year = $24,000
2. Number of payments = 10 years x 2 per year = 20 semiannual payments
3. The 6% contract rate is less than the 8% market rate; therefore, the bonds are issued at a discount.
4. Estimation of the market price at the issue date:
Cash Flow / Table / Table Value* / Amount / Present ValuePar (maturity) value
/ B.1 / 0.4564 / $800,000 / $365,120Interest (annuity) / B.3 / 13.5903 / 24,000 / 326,167
Price of bonds / $691,287
*The table values are based on a discount rate of 4% (half the annual market rate) and 20 periods (semiannual payments).
5.
Cash / 691,287Discount on Bonds Payable / 108,713
Bonds Payable / 800,000
Sold bonds at a discount on the stated issue date.
Exercise 15-3
1. Semiannual interest payment = $150,000 x 10% x ½ year = $7,500
2. Number of payments = 5 years x 2 per year = 10 semiannual payments
3. The 10% contract rate is greater than the 8% market rate; therefore, the bonds are issued at a premium.
4. Estimation of the market price at the issue date:
Cash Flow / Table / Table Value* / Amount / Present ValuePar (maturity) value
/ B.1 / 0.6756 / $150,000 / $101,340Interest (annuity) / B.3 / 8.1109 / 7,500 / 60,832
Price of bonds / $162,172
*The table values are based on a discount rate of 4% (half the annual market rate)
and 10 periods (semiannual payments).
5.
Cash / 162,172Premium on Bonds Payable / 12,172
Bonds Payable / 150,000
Sold bonds at a premium on the stated issue date.
Problem 15-2A
Part 1
2002
Jan. 1 / Cash / 3,456,448Discount on Bonds Payable / 543,552
Bonds Payable / 4,000,000
Sold bonds on stated issue date.
Part 2
[Note: The semiannual amounts for (a), (b), and (c) below are the same throughout the bonds’ life because this company uses straight-line amortization.]
(a) Cash Payment = $4,000,000 x 6% x 6/12 year = $120,000
(b) Discount = $4,000,000 - $3,456,448 = $543,552
Straight-line discount amortization = $543,552 / 30 semiannual periods
= $18,118
(c) Bond interest expense = $120,000 + $18,118 = $138,118
Part 3
Thirty payments of $120,000 / $3,600,000Par value at maturity / 4,000,000
Total repaid / $7,600,000
Less amount borrowed / (3,456,448)
Total bond interest expense / $4,143,552
or:
Thirty payments of $120,000 / $3,600,000Plus discount / 543,552
Total bond interest expense / $4,143,552
Problem 15-2A
Part 4
SemiannualPeriod-End / Unamortized Discount / Carrying Value
1/01/2002 / $543,552 / $3,456,448
6/30/2002 / 525,434 / 3,474,566
12/31/2002 / 507,316 / 3,492,684
6/30/2003 / 489,198 / 3,510,802
12/31/2003 / 471,080 / 3,528,920
Part 5
2002
June 30 / Bond Interest Expense / 138,118Discount on Bonds Payable / 18,118
Cash / 120,000
To record six months’ interest and
discount amortization.
2002
Dec. 31 / Bond Interest Expense / 138,118
Discount on Bonds Payable / 18,118
Cash / 120,000
To record six months’ interest and
discount amortization.
Part 6
[Note: Parts 1 through 5 are repeated assuming a bond premium.]
Requirement 1
2002
Jan. 1 / Cash / 4,895,980Premium on Bonds Payable / 895,980
Bonds Payable / 4,000,000
Sold bonds on issue date at a premium.
Requirement 2
(a) Cash Payment = $4,000,000 x 6% x 6/12 = $120,000
(b) Premium = $4,895,980 - $4,000,000 = $895,980
Straight-line premium amortization = $895,980 / 30 semiannual periods
= $29,866
(c) Bond interest expense = $120,000 - $29,866 = $90,134
Requirement 3
Thirty payments of $120,000 / $3,600,000Par value at maturity / 4,000,000
Total repaid / $7,600,000
Less amount borrowed / (4,895,980)
Total bond interest expense / $2,704,020
or:
Thirty payments of $120,000 / $3,600,000Less premium / (895,980)
Total bond interest expense / $2,704,020
Requirement 4
SemiannualPeriod-End / Unamortized Premium / Carrying Value
1/01/2002 / $895,980 / $4,895,980
6/30/2002 / 866,114 / 4,866,114
12/31/2002 / 836,248 / 4,836,248
6/30/2003 / 806,382 / 4,806,382
12/31/2003 / 776,516 / 4,776,516
Requirement 5
2002
June 30 / Bond Interest Expense / 90,134Premium on Bonds Payable / 29,866
Cash / 120,000
To record six months’ interest and
premium amortization.
2002
Dec. 31 / Bond Interest Expense / 90,134
Premium on Bonds Payable / 29,866
Cash / 120,000
To record six months’ interest and
premium amortization.