Chapter 4 : Bond and other long term note

Exercise for chapter 4 ( Bond and other long term note )

I.Bond Valuation :
Your investment department has researched possible investments in corporate debt securities. Among the available
investments are the following $100 million bond issues, each dated January 1, 2007. Prices were
determined by underwriters at different times during the last few weeks.
Company Bond Price Stated rate
1. BB Corp. $109 million 11%
2. DD Corp. $100 million 10%
3. GG Corp. $ 91 million 9%
Each of the bond issues matures on December 31, 2026, and pays interest semiannually on June 30 and December 31.
For bonds of similar risk and maturity, the market yield at January 1, 2007, is 10%.
Required:
Other things being equal, which of the bond issues offers the most attractive investment opportunity at the
prices stated? the least attractive? Why?

II. Determine the price of bond at various situation:

Determine the price of a $1 million bond issue under each of the following independent assumptions:
Maturity Interest paid Stated rate Effective (market) rate
1. 10 years annually 10% 12%
2. 10 years semiannually 10% 12%
3. 10 years semiannually 12% 10%
4. 20 years semiannually 12% 10%
5. 20 years semiannually 12% 12%

III. Determine the price of bond , effective interest method , no amortize schedule:
The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January
1, 2007. The bonds mature in 2017 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest
is paid semiannually on June 30 and December 31.
Required:
1. Determine the price of the bonds at January 1, 2007.
2. Prepare the journal entry to record their issuance by The Bradford Company on January 1, 2007.
3. Prepare the journal entry to record interest on June 30, 2007 (at the effective rate). (Do not prepare an amortization
schedule.)
4. Prepare the journal entry to record interest on December 31, 2007 (at the effective rate). (Do not prepare an
amortization schedule.)

IV. Determining the price of bonds; issuance; straight line method :

Universal Foods issued 10% bonds, dated January 1, with a face amount of $150 million on January 1,2007. The
bonds mature on December 31, 2021 (15 years). The market rate of interest for similar issues was 12%. Interest is paid
semiannually on June 30 and December 31. Universal uses the straight-line method.
Required:
1. Determine the price of the bonds at January 1, 2007.
2. Prepare the journal entry to record their issuance by Universal Foods on January 1, 2007.
3. Prepare the journal entry to record interest on June 30, 2007.
4. Prepare the journal entry to record interest on December 31, 2014.

V. Issuance of bond ; effective interest method ; amortize schedule :

National Orthopedics, Co., issued 9% bonds, dated January 1, with a face amount of $500,000 on January
1, 2007. The bonds mature in 2011 (4 years). For bonds of similar risk and maturity the market yield was
10%. Interest is paid annually.
Required:
1. Determine the price of the bonds at January 1, 2007.
2. Prepare the journal entry to record their issuance by National on January 1, 2007.
3. Prepare an amortization schedule that determines interest at the effective rate each period.
4. Prepare the journal entry to record interest on June 30, 2007.
5. Prepare the appropriate journal sentries at maturity on December 31, 2010.
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Chapter 4 : Bond and other long term note

VI. Bond, effective interest , no amortize schedule , adjusting entry :

On February 1, 2010, Strauss-Lombardi issued 9% bonds, dated February 1, with a face amount of $800,000. The
bonds sold for $731,364 and mature on January 31, 2030 (20 years). The market yield for bonds of similar risk and
maturity was 10%. Interest is paid semiannually on July 31 and January 31. Strauss-Lombardi’s fiscal year ends
December 31.
Required:
1. Prepare the journal entry to record their issuance by Strauss-Lombardi on February 1, 2010.
2. Prepare the journal entry to record interest on July 31, 2010 (at the effective rate). (Do not prepare
an amortization schedule.)
3. Prepare the adjusting entry to accrue interest on December 31, 2010.
4. Prepare the journal entry to record interest on January 31, 2011.

VII. Bonds; straight line method; adjusting entry:

On March 1, 2010, Stratford Lighting issued 14% bonds, dated March 1, with a face amount of $300,000.
The bonds sold for $294,000 and mature on February 28, 2030 (20 years). Interest is paid semiannually on August 31
and February 28. Stratford uses the straight-line method and its fiscal year ends December 31.
Required:
1. Prepare the journal entry to record the issuance of the bonds by Stratford Lighting on March 1, 2010.
2. Prepare the journal entry to record interest on August 31, 2010.
3. Prepare the adjusting entry to accrue interest on December 31, 2010.
4. Prepare the journal entry to record interest on February 28, 2011.

VIII. Convertible bond:

On January 1, 2011, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest
on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s $1 par common stock.
Century Services purchased 10% of the issue as an investment.
Required:
1. Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond investment
by Century.
2. Prepare the journal entries for the June 30, 2015, interest payment by both Gless and Century assuming both use the
straight-line method.
3. On July 1, 2016, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it
held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method).

IX. Installment note :

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton
and Barton completed construction of the machine on January 1, 2010. In payment for the $4 million machine,
American Food Services issued a four-year installment note to be paid in four equal payments at
the end of each year. The payments include interest at the rate of 10%.
Required:
1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2010.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2010.
4. Prepare the journal entry for the third installment payment on December 31, 2012.

X. Early extinguishment
The balance sheet of Indian River Electronics Corporation as of December 31, 2010, included 12.25% bonds
having a face amount of $90 million. The bonds had been issued in 2003 and had a remaining discount of $3
million at December 31, 2010. On January 1, 2011, Indian River Electronics called the bonds before their scheduled
maturity at the call price of 102.
Required:
Prepare the journal entry by Indian River Electronics to record the redemption of the bonds at January 1,
2011.

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Chapter 4 : Bond and other long term note

XI. Noninterest bearing note

At the beginning of 2007, VHF Industries acquired a machine with a fair market value of $6,074,700 by
issuing a four-year, noninterest-bearing note in the face amount of $8 million. The note is payable in four annual
installments of $2 million at the end of each year.
Required:
1. What is the effective rate of interest implicit in the agreement?
2. Prepare the journal entry to record the purchase of the machine.
3. Prepare the journal entry to record the first installment payment at December 31, 2007.
4. Prepare the journal entry to record the second installment payment at December 31, 2008.
5. Suppose the market value of the machine was unknown at the time of purchase, but the market rate
of interest for notes of similar risk was 11%. Prepare the journal entry to record the purchase of the machinery .