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Straight Line Method and Bond Terminology

Straight-Line Method

E9. DNA Corporation issued $4,000,000 in 8 percent, 10-year bonds on February 1, 2010, at 115. Semiannual interest payment dates are January 31 and July 31. Use the straight-line method and ignore year-end accruals.

Bond Terminology
P2. Listed below are common terms associated with bonds:
a. Bond certificate
b. Bond issue
c. Bond indenture
d. Unsecured bonds
e. Debenture bonds
f. Secured bonds
g. Term bonds
h. Serial bonds
i. Registered bonds

Required
1. For each of the following statements, identify the category above with which it is associated. (If two statements apply, choose the category with which it is most closely associated.)

1. Occurs when bonds are sold at more than face value
2. Rate of interest that will vary depending on economic conditions
3. Bonds that may be exchanged for common stock
4. Bonds that are not registered
5. A bond issue in which all bonds are due on the same date
6. Occurs when bonds are sold at less than face value
7. Rate of interest that will be paid regardless of market conditions
8. Bonds that may be retired at management's option
9. A document that is evidence of a company's debt
10. Same as market rate of interest
11. Bonds for which the company knows who owns them
12. A bond issue for which bonds are due at different dates
13. The total value of bonds issued at one time
14. Bonds whose payment involves a pledge of certain assets
15. Same as debenture bonds
16. Contains the terms of the bond issue
17. Bonds issued on the general credit of the company

2. What effect will a decrease in interest rates below the face interest rate and before a bond is issued have on the cash received from the bond issue? What effect will the decrease have on interest expense? What effects will the decrease have on the amount of cash paid for interest?

Solution Preview

Needles, B., Powers, M., & Crosson, S. (2011). Principles of accounting (11th ed.). Mason, OH: South-Western Cengage Learning. ISBN: 9781439037746
Chapter 13: E9 and P2
Straight-Line Method

E9. DNA Corporation issued $4,000,000 in 8 percent, 10-year bonds on February 1, 2010, at 115. Semiannual interest payment dates are January 31 and July 31. Use the straight-line method and ignore year-end accruals.

1. With regard to the bond issue on February 1, 2010:
a. How much cash is received? $4,000,000*1.15 = $4,600,000
b. How much is Bonds Payable? $4,000,000
c. What is the difference between a and b called and how much is it? Premium on bonds payable; is $600,000
2. With regard to the bond interest payment on July 31, 2010:
a. How much cash is paid in interest? $4,000,000*8%*6/12 = $160,000
b. How much is the amortization? $600,000/20 interest payment periods = $30,000
c. How much is ...

Solution Summary

A straight line method and bond terminology are examined.

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