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Exam 10: Reporting and Interpreting Bond Securities

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Question 1

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On November 1, 2015, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2015, and interest is payable each November 1 and May 1. Davis uses the straight-line method of amortization. Which of the following is incorrect with regard to the Davis bonds when the straight-line method of amortization is utilized?

A) The market rate of interest exceeded the coupon rate of interest when the bonds were issued.
B) The semi-annual interest expense is $1,095.
C) The book value of the bonds increases $45 every six months.
D) The semi-annual interest expense is less than the semi-annual cash interest payment.

E) A) and D)
F) A) and C)

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Question 2

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Which of the following statements is incorrect?

A) It is common for companies to retire bonds and also issue new bonds in the same year as a way to replace higher interest rate debt with lower interest rate issuances.
B) The cash payment of interest is reported as a cash flow from operating activities.
C) Retiring bonds by paying cash creates a cash flow from investing activities when the issuing company buys the bonds back from investors.
D) The cash payment to call an outstanding bond issue is reported as a cash flow from financing activities.

E) A) and B)
F) All of the above

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Question 3

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Which of the following is not a reason that a company would want to issue bonds instead of stock?

When a company purchases and retires its outstanding bonds payable for an amount less than their book value, a decrease in stockholders' equity results.

During 2016, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. During 2015, Patty's reported net income of $3,568 million, interest expense of $163 million and income tax expense of $1,424 million. The times interest earned ratios for 2016 and 2015, respectively, are closest to:

Consider the following statement: "Issuing bonds at a discount is bad for the issuing company." Discuss the statement and comment on its validity.

On March 31, 2017 Topper Corp. retired bonds early by repurchasing them in the market for $9,700,000. The total face value of the bonds retired at March 31, 2017 was $10 million for which there remained a balance of $450,000 of unamortized discount. Required: Prepare the journal entry to retire the bonds.

The following information is available for Sell-for-Less for the years 2015 through 2017 (in millions): Required: A.Compute the Sell-for-Less times interest earned ratio for 2017, 2016, and 2015.Round your answers to two decimal places. B.Briefly interpret the times interest earned ratio for the three years.

Ridgetop Company issued the following ten-year bonds on January 1, 2016: $100,000 maturity value, 5% interest payable annually on each December 31. The bonds were dated January 1, 2016 and the accounting period ends December 31. The bonds were issued for $93,000. Ridgetop uses the effective-interest method for amortization. The amortization for 2016 was $580. Required: A.

The issuance price of a bond is the present value of both the principal, plus the cash interest to be received over the life of the bond, discounted at the coupon rate.

The cash payment for interest on a bond payable is reported as a cash flow from financing activities on the statement of cash flows.

Assuming no adjusting journal entries have been made, the journal entry to record the cash interest payment on the due date for bonds issued at their par value results in which of the following?

If a bond is issued at 98, the coupon rate was

The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus stockholders' equity.

On January 1, 2016, a company issued $400,000 of 10-year, 12% bonds. The interest is payable semi-annually on June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate. The effective-interest method of amortization is used. What is the book value of the bond liability as of June 30, 2016 (to the nearest dollar) ?

The payment of bond interest on the interest payment date, for bonds issued at par value, reduces both the bond liability and assets, assuming that interest expense is recorded at the time of the cash payment.

On March 1, 2016, Halbur Company, issued $500,000 of 6%, five-year bonds at par. The bonds were dated March 1, 2016, and the first annual interest payment will be on February 28, 2017. The accounting period ends December 31. Assume no adjusting entries have been made during the year. Required: Complete the journal entry grid for each of the following dates:

Which of the following is the title of a regulatory document with regard to a bond offering?

The annual interest rate specified within a bond indenture is called which of the following?

Which of the following statements regarding the debt-to-equity ratio is correct?