chapter 22 - CHAPTER 22 CORPORATIONS: BONDS REVIEW...

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CHAPTER 22 CORPORATIONS: BONDS REVIEW QUESTIONS 1. A bond is an obligation of the corporation—a promise to pay a certain amount of money. Stock represents corporate ownership or equity; there is no promise to pay any definite amount of money. Bondholders are creditors of a corporation; stockholders are owners. 2. If the stated rate of the bond is greater than the market rate, the bond will sell at a premium. If the stated rate of the bond is less than the market rate, the bond will sell at a discount. 3. Bond prices are quoted as a percentage of the face value of the bond issue. A $100,000 bond issue sold at 95 has a market price of $95,000. A $100,000 bond issue sold at 102 has a market price of $102,000. 4. When bonds are issued at face value, the cash and bonds payable accounts are affected. 5. Premium on Bonds Payable is an adjunct-liability account. It is added to bonds payable on the corporate balance sheet. Discount on Bonds Payable is a contra-liability account. It is subtracted from bonds payable on the balance sheet. 6. The amount of bond premium or discount to be amortized in a period using the straight-line method is the total premium or discount divided by the life of the bonds and multiplied by 1/2 (assuming semiannual interest payments). 7. The bond interest expense account must be adjusted to recognize the effect of the original premium. The premium received when the bonds are issued effectively reduces the cost of borrowing. 8. The discount given when the bonds are issued effectively increases the cost of borrowing. 9. The gain or loss on bond redemption is determined by comparing the redemption price (the amount paid to redeem the bonds) with the carrying value of the bonds. The calculation differs for bonds issued at face value, a premium, and a discount because the carrying values differ. 10. The bond sinking fund is usually administered by a trustee for the bond issue. 11. Sinking fund earnings are reported as other revenue on the corporation income statement. 12. The bond sinking fund is reported under Investments on the corporation balance sheet.
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Exercise 22-1A GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 20-1 Apr. 1 Cash 500 0 0 0 00 1 2 Bonds Payable 500 0 0 0 00 2 3 3 4 Sept. 30 Bond Interest Expense 20 0 0 0 00 4 5 Cash 20 0 0 0 00 5 6 6 7 Adjusting Entry 7 8 Dec. 31 Bond Interest Expense 10 0 0 0 00 8 9 Bond Interest Payable 10 0 0 0 00 9 10 10 11 11 12 12 13 13 14 14 Exercise 22-2A GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF.
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chapter 22 - CHAPTER 22 CORPORATIONS: BONDS REVIEW...

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