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Chapter 12: Q9RQ (page 654)
Why would a company choose to issue bonds instead of issuing stock?
The common stock is a type of stock in which the company transfers some part of ownership to the stockholder.
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What is a mortgage payable?
Analyzing, journalizing, and reporting bond transactions
Danny’s Hamburgers issued 6%, 10-year bonds payable at 90 on December 31, 2018.
At December 31, 2020, Danny reported the bonds payable as follows:
Long-term Liabilities:
Bonds Payable \( 600,000
Less: Discount on Bonds Payable (48,000) \) 552,000
Danny’s pays semiannual interest each June 30 and December 31.
Requirements
1. Answer the following questions about Danny’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2020?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2020, semiannual interest payment and amortization of
discount.
Retiring bonds payable before maturity
CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annualinterest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payableat July 31, 2021.
2. Assume all amortization has been recorded properly. Journalize the retirement ofthe bonds on July 31, 2021. No explanation is required.
Retiring bonds payable before maturity
CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July
31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annual
interest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payable
at July 31, 2021.
2. Assume all amortization has been recorded properly. Journalize the retirement of
the bonds on July 31, 2021. No explanation is required.
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
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