sm_15 21e - CHAPTER 15 BONDS PAYABLE AND INVESTMENTS IN...

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CHAPTER 15 BONDS PAYABLE AND INVESTMENTS IN BONDS CLASS DISCUSSION QUESTIONS 1. (1) To pay the face (maturity) amount of the bonds at a specified date. (2) To pay periodic interest at a specified percentage of the face amount. 2. a. Bonds that may be exchanged for other securities under specified conditions. b. The issuing corporation reserves the right to redeem the bonds before the maturity date. c. Bonds issued on the basis of the gener- al credit of the corporation. 3. The phrase “time value of money” means that an amount of cash to be received today is worth more than the same amount of cash to be received in the future. This is because cash on hand today can be inves- ted to earn income. 4. (b) $5,000 to be received at the end of each of the next two years has the higher present value because cash is received earlier than can be invested to earn in- come. 5. Less than face amount. Because compar- able investments in bonds provide a market interest rate (8%) that is greater than the rate on the bond being purchased (7%), the bond will sell at a discount as the market’s means of equalizing the two interest rates. 6. a. Greater than $7,500,000 b. 1. $7,500,000 2. 7% 3. 8% 4. $7,500,000 7. Less than the contract rate 8. a. Premium b. $50,000 c. Premium on Bonds Payable 9. a. Debit Interest Expense Credit Discount on Bonds Payable b. Debit Premium on Bonds Payable Credit Interest Expense 10. No. Because zero-coupon bonds do not provide for interest payments, they will sell at a discount. 11. The purpose of a bond sinking fund is to accumulate over the life of a bond issue enough funds to pay the indebtedness at the maturity date. 12. The bond issue that is callable is more risky for investors, because the company may redeem (call) the bond issue if interest rates fall. In addition, since the bonds may be called at their face amount, they will sell for a lower value than the noncallable bond issue. 13. A loss of $8,500 [($800,000 × 0.97) – ($800,000 – $32,500)] 14. Under the caption “Investments” 15. At their cost less any amortized premium or plus any amortized discount 169
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EXERCISES Ex. 15–1 Bridger Co. a. Earnings before bond interest and income tax. ........... $ 1,600,000 Bond interest. ................................................................. 640,000 Balance. .......................................................................... $ 960,000 Income tax. ..................................................................... 384,000 Net income. .................................................................... $ 576,000 Dividends on preferred stock. ...................................... 480,000 Earnings available for common stock. ......................... $ 96,000 Earnings per share on common stock. ........................ $ 0.48 b. Earnings before bond interest and income tax. ........... $ 2,400,000 Bond interest. ................................................................. 640,000 Balance. ..........................................................................
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sm_15 21e - CHAPTER 15 BONDS PAYABLE AND INVESTMENTS IN...

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