ectively from the textbook to calculate the price of the bonds at issuance. Prepare the journal entries to record the following: 1. 1/1/2018 issuance of the bonds for cash 2. 6/30/2018 semi-annual interest payment assu
Practice Quiz
Bonds Payable
On January 1, 2018, Thomas Company issued $100,000, 5-year, 12% bonds, with interest
payable semi-annually, at an effective (market rate) of 10%. Use the present value factors from
Exhibit 5 and 7 on pages 559 and 560, respectively from the textbook to calculate the price of
the bonds at issuance.
Prepare the
1. 1/1/2018 issuance of the bonds for cash
2. 6/30/2018 semi-annual interest payment assuming straight line amortization
3. 12/31/2018 semi-annual interest payment assuming straight line amortization
4. 1/1/2019 redemption of the bonds at a price of 115.
Please answer the following questions:
1. What was the total interest expense for the year 2018 reflected on the income
statement?
2. What was the total amount borrowed?
3. Calculate the effective rate of interest for the year (Interest Expense/Total Amount
Borrowed) and round to the nearest percent. Is this rate more indicative of the market
rate or contract rate? Do you think the financial statements reflect the true cost of
borrowing? Why?
4. Why would the company redeem the bonds prior to the maturity date if they were
going to recognize a loss? Can you think of an example of such a decision we might face
in our personal lives?
5. The 10-year German and Japanese government bonds have recently traded at a
negative yield (market rate of interest)! Why would an investor purchase a bond that,
in effect, pays a negative interest rate?!
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4. Why would the company redeem the bonds prior to the maturity date if they were
going to recognize a loss? Can you think of an example of such a decision we might face
in our personal lives?
5. The 10-year German and Japanese government bonds have recently traded at a
negative yield (market rate of interest)! Why would an investor purchase a bond that,
in effect, pays a negative interest rate?!