(b) Issuance of $2 million, 8% bonds at face value. Complete the following table, and indicate which alternative is preferable. Issue Bond $700,000 Issue Stock $700,000 Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (30%%) Net income Outstanding shares Earnings per share 24 500,000

(b) Issuance of $2 million, 8% bonds at face value. Complete the following table, and indicate which alternative is preferable. Issue Bond $700,000 Issue Stock $700,000 Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (30%%) Net income Outstanding shares Earnings per share 24 500,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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If $1,000,000 of 8% bonds are issued at 102 3/4, the amount of cash received from the sale is
If $307,000 of 7% bonds are issued at 94, the amount of cash received from the sale is Oa. $307,000 Ob. $285,510 O c. $288,580 Od. $328,490
If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is a. $2,100,000 b. $1,940,000 c. $2,060,000 d. $2,000,000
I. Metro Company purchased $500,000, 10%, 5-year bonds on January 1, 20x1, with interest payable on July 1 and January 1. The market interest rate (yield) was 8% for bonds of similar risk and maturity. The market value on December 31, 20x1 was $555,000 and all bonds were sold for $507,500 on January 1, 20x2 after the second payment. Required: compute the bond price on January 1, 20x1, prepare the amortization schedule and record journal entries on January 1, 20x1, July 1, 20x1, December 31, 20x1 and January 1, 20x2 assuming the bond investment is classified as available-for-sale security.
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8. A corporation issues for cash $1,000,000 of 8%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? A. The carrying amount increases from its amount at issuance date to $1,000,000 at maturity. B. The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. C. The amount of annual interest paid to bondholders increases over the 20-year life of the bonds. D. The amount of annual interest expense decreases as the bonds approach maturity.
Present entries to record the selected transactions described below: a. Issued $2,750,000 of 10-year, 8% bonds at 97. If an amount box does not require an entry, leave it blank. b. Amortized bond discount for a full year, using the straight-line method. If an amount box does not require an entry, leave it blank. c. Called bonds at 98. Assume the bonds were carried at $2,692,250 at the time of the redemption. If an amount box does not require an entry, leave it blank.
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PRACTICE QUESTIONS 1-3 1.A company issued 5%, 20-year bonds with a face amount of $80 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? 2.A company issued 6%, 15-year bonds with a face amount of $75 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? 3. A company issued 5%, 20-year bonds with a face amount of $100 million. The market yield for bonds of similar risk and maturity is 4%. Interest is paid semiannually. At what price did the bonds sell?
Marketable Debt Securities Use the financial statement effects template to record the accounts and amounts for the following four transactions involving investments in marketable debt securities classified as available-for-sale securities. a. Loudder Inc. purchases 10,000 bonds with a face value of $1,000 per bond. The bonds are purchased at par for cash and pay interest at a semi-annual rate of 4%. b. Loudder receives semi-annual cash interest of $200,000. c. Year-end fair value of the bonds is $978 per bond. d. Shortly after year-end, Loudder sells all 10,000 bonds for $970 per bond. Use negative signs with answers, if appropriate. Transaction Loudder purchases bonds. Loudder receives cash interest. Bonds year-end fair value is determined. Loudder sells all bonds Cash Asset + Noncash Assets Balance Sheet = Liabilities + Contrib. Captial + Earned Capital Revenues Income Statement Expenses = Net income
3. What is the equity component arising from the issuance of bonds payable? A. 450,000 B. 500,000 C. 620,000 D. 0 E. None of the above
The following information was drawn from the year-end balance sheets of Solomon River, Inc. Account Title Year 2 Year 1 Bonds $750,000 $1,005,000 payable Common stock 213,000 121,000 Treasury 27,500 5,500 stock Retained 62,200 88,900 earnings Additional information regarding transactions occurring during Year 2: 1. Solomon River, Inc. issued $42,300 of bonds during Year 2. The bonds were issued at face value. All bonds retired were retired at face value. 2. Common stock did not have a par value. 3. Solomon River, Inc. uses the cost method to account for treasury stock 4. The amount of net income shown on the Year 2 income statement was $32,700. Required a. Determine the amount of cash flow for the retirement of bonds that should appear on the Year 2 statement of cash flows. b. Determine the amount of cash flow from the issue of common stock that should appear on the Year 2 statement of cash flows. c. Determine the amount of cash flow for the purchase of treasury stock that should…