CHP 10 - Chapter 10 Reporting and Interpreting Bonds...

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Chapter 10 Reporting and Interpreting Bonds ANSWERS TO QUESTIONS 3. Secured bonds are supported by a mortgage or pledge of specific assets as a guarantee of payment. Secured bonds are designated on the basis of the type of asset pledged, such as real estate mortgage bonds and equipment trust bonds. Unsecured bonds are not supported by a mortgage or pledge of specific assets as a guarantee of payment at maturity date. Unsecured bonds usually are called debentures. 4. Callable bonds—bonds that may be called for early retirement at the option of the issuer. Convertible bonds—bonds that may be converted to other securities of the issuer (usually common stock) after a specified future date at the option of the bondholder.
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5. Several important advantages of bonds compared with capital stock benefit the issuer. The issuance of bonds establishes a fixed amount of liability and a fixed rate of interest on the bond, and interest payments to the bondholders are deductible on the income tax return of the issuer. This deduction for tax purposes reduces the net cost of borrowing. For example, a corporation with a 40% average tax rate and bonds payable with a 10% interest rate would incur a net interest rate of 10% x 60% = 6%. 9. The stated rate of interest is the rate specified on a bond, whereas the effective rate of interest is the market rate at which the bonds are selling currently. 10. When a bond is sold at par, the stated interest rate and the effective or market interest rate are identical. When a bond is sold at a discount, the stated rate of interest is lower than the effective rate of interest on the bond. In contrast, when a bond is sold at a premium, the stated rate of interest is higher than the effective rate of interest.
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ANSWERS TO MULTIPLE CHOICE 1. c) 2. c) 3. 4. 5. c) 6. b) 7. c) 8. c) 9. 10. c)
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MINI-EXERCISES M10–1. 1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows 4. May be in notes 5. Not at all 6. May be in notes M10–3 . Principal $900,000 × 0.4350 = $391,500 Interest $ 27,000 × 13.2944 = 358,949 Issue Price = $750,449 M10–4. January 1, 2009: Cash (+A). .............................................................................. 940,000 Discount on Bonds Payable (+XL, -L). ................................... 60,000 Bonds Payable (+L). .......................................................... 1,000,000 June 30, 2009: Bond Interest Expense (+E, -SE) ($940,000 × 11% × 1/2) . 51,700 Discount on Bonds Payable (-XL, +L). ............................... 1,700 Cash (-A) ($1,000,000 × 10% × 1/2) . .............................. 50,000
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M10–6. Principal $500,000 × 0.4564 = $228,200 Interest $ 25,000 × 13.5903 = 339,758 Issue Price = $567,958 M10–8 January 1, 2009: Cash (+A). .............................................................................. 900,000 Premium on Bonds Payable (+L). ...................................... 50,000 Bonds Payable (+L). .......................................................... 850,000
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This note was uploaded on 11/04/2009 for the course ACCT 229 taught by Professor Strawser during the Spring '06 term at Texas A&M.

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CHP 10 - Chapter 10 Reporting and Interpreting Bonds...

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