Explain the nature of the discount and premium on bonds payable.

At the date of issuance, bonds are recorded at their current cash equivalent amount. Explain.

GMAC Corporation issued a $100,000 bond that matures in five years. The bond has a stated interest rate of 6 percent. On January 1, 2011, when the bond was issued, the market rate was 8 percent. The bond pays interest twice per year, on June 30 and December 31. At what price was the bond issued?

On January 1, 2011, Thomas Insurance Corporation issued $4,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 9 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 6 percent. The company uses the effective-interest amortization method.

Required:

1. What was the issue price on January 1, 2011?

2. What amount of interest expense should be recorded on ( a ) December 31, 2011? and ( b ) December 31, 2012?

3. What amount of cash interest should be paid on ( a ) December 31, 2011? and ( b ) December 31, 2012?

4. What is the book value of the bonds on ( a ) December 31, 2011? and ( b ) December 31, 2012?

A bond with a face value of $100,000 was issued for$93,500 on January 1, 2011. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2011?

a. $10,000

b.$8,000

c. $7,480

d.$9,350

As the tax rate increases, the net cost of borrowing money decreases. Explain.

On January 1, 2011, Antonio Company issued $700,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 10 percent. The company uses the straight-line amortization method.

Required:

1. What was the issue price on January 1, 2011?

2. What amount of interest expense should be recorded on ( a ) June 30, 2011? and ( b ) December 31, 2011?

3. What amount of cash interest should be paid on ( a ) June 30, 2011? and ( b ) December 31, 2011?

4. What is the book value of the bonds on ( a ) June 30, 2011? and ( b ) December 31, 2011?

Waterhouse Company plans to issue $500,000, 10-year, 10 percent bonds. Interest is paid semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds, assuming a market yield of 8 percent.

Wefald Company issued $600,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for$580,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on June 30, 2011, using straight-line amortization.

James Corporation is planning to issue $500,000 worth of bonds that mature in 10 years and pay 6 percent interest each June 30 and December 31. All of the bonds will be sold on January 1, 2011.

Required:

Compute the issue (sale) price on January 1, 2011, for each of the following independent cases (show computations):

a. Case A: Market (yield) rate, 4 percent.

b. Case B: Market (yield) rate, 6 percent.

c. Case C: Market (yield) rate, 8 percent.

Which of the following is false when a bond is issued at a premium?

a. The bond will issue for an amount above its par value.

b. Bonds payable will be credited for the par value of the bond.

c. Interest expense will exceed the cash interest payments.

d. All of the above are false.

From the perspective of the issuer, what are some advantages of issuing bonds instead of capital stock?

On January 1, 2011, Grand Isle Corporation issued $900,000 in bonds that mature in five years. The bonds have a stated interest rate of 10 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 percent. The company uses the straight-line amortization method.

Required:

1. What was the issue price on January 1, 2011?

2. What amount of interest expense should be recorded on ( a ) December 31, 2011? and ( b ) December 31,2012?

3. What amount of cash interest should be paid on ( a ) December 31, 2011? and ( b ) December 31, 2012?

4. What is the book value of the bonds on ( a ) December 31, 2011? and ( b ) December 31, 2012?

On January 1, 2011, Cunningham Corporation issued $200,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 6 percent and pay interest on December 31. When the bonds were sold, the market rate of interest was 8 percent. The company uses the effective-interest method. By December 31, 2011, the market rate of interest had increased to 10 percent.

Required:

1. What amount of bond liability is recorded on January 1, 2011?

2. What amount of interest expense is recorded on December 31, 2011?

3. As a manager of a company, would you prefer the straight-line or effective-interest method of amortization?

4. Determine the impact of these transactions at year-end on the debt-to-equity ratio and times interest earned ratio.