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    On July 1, 2002, Cucumber Communications Equipment Inc. issued $10,000,000 of ten year, 9% bonds at an effective interest rate of 10%. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

    1. Journalize the entry to record the amount of the cash proceeds from the sale of the bonds. Use the tables of present values in Appendix A to compute the cash proceeds, rounding to the nearest dollars.
    2. Journalize the entries to record the following:
    A. The first semiannual interest payment on December 31, 2002, and the amortization of the bond discount, using the straight-line method. (round to the nearest dollars)
    B. The interest payment on June 31, 2003, and the amortization of the bond discount, using the straight-line method.

    3. Determine the total interest expense for 2002
    4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest? Explain


    1. T F The financial loss that each stockholder in a corporation can incur is limited to the amount invested by the stockholder.

    2. T F The stockholders' equity section of the balance sheet is divided into three major subdivisions: common stock, paid-in capital, and retained earnings.

    3. T F Preferred stockholders have preferential rights over common stockholders and creditors.

    4. T F A premium received on the sale of common stock should be reported as part of paid-in capital on the balance sheet.

    5. T F If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported in the income statement.

    6. T F If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000.

    7. T F Deferred income tax is reported in the stockholders' equity section of the balance sheet.

    8. T F The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

    9. T F The price-earnings ratio is an assessment of a firm's growth potential and future earnings prospects.

    10. T F All industries must have the same price-earnings ratio to be listed on the New York Stock Exchange.

    11. T F The two methods of accounting for long-term investments in stock are the cost method and the retail method.

    12. T F When one corporation acquires the properties of another corporation and the latter then dissolves, the joining of the two corporations is called a merger.

    13. T F When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture.

    14. T F The concept of present value is that an amount of cash to be received at some date in the future is not the equivalent of the same amount of cash held at an earlier date.

    15. T F If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium.

    16. T F If the straight-line method of amortization is used, the amount of un-amortized discount on bonds payable will decrease as the bonds approach maturity.

    17. T F The cost of bonds purchased as an investment includes the amount paid to the seller for interest accrued from the last interest payment date to the date of purchase.

    18. T F The balance in Premium on Bonds Payable should be reported in the retained earnings section of the balance sheet.

    Multiple Choice

    1. Organization Costs are included on the balance sheet as a(n):
    a. a. Plant asset
    b. b. Intangible asset
    c. c. Investment
    d. d. Current asset

    2. The term deficit is used to refer to a debit balance in which of the following accounts of a corporation?
    a. a. Retained Earnings
    b. b. Treasury Stock
    c. c. Organization Costs
    d. d. Common Stock

    3. Preferred stock that provides for the payment of preferred dividends that have passed (are in arrears) before dividends may be paid on common stock is called:
    a. a. Par
    b. b. Cumulative
    c. c. No-par
    d. d. Participating
    4. The outstanding stock is composed of 10,000 shares of $50 par, non-cumulative preferred $5 stock, and 50,000 shares of $20 par common stock. Preferred dividends have been paid every year except for the preceding two years and the current year. If $240,000 is to be distributed as a dividend for the current year, what total amount will be distributed to the preferred stockholders?
    a. $50,000
    b. b. $100,000
    c. c. $150,000
    d. d. $40,000

    5. The entry to record the issuance of 100 shares of $20 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to:
    a. a. Organization Costs
    b. b. Legal Fees
    c. c. Common Stock
    d. d. Cash

    6. What is the total stockholders' equity based on the following data?
    Common Stock $900,000
    Excess of issue price over par 375,000
    Retained earnings (deficit) 50,000
    a. a. $1,225,000
    b. b. $1,275,000
    c. c. $1,325,000
    d. d. $1,200,000

    7. Deferred income tax may be reported on the balance sheet in the:
    a. a. Plant assets section
    b. b. Intangible assets section
    c. c. Current liabilities section
    d. d. Current assets section

    8. Which of the following would appear as an extraordinary item on the income statement?
    a. a. Loss resulting from the sale of plant assets
    b. b. Gain resulting from the disposal of a segment of the business
    c. c. Loss from land condemned for public use
    d. d. Liquidating dividend

    9. A cumulative effect of a change in accounting principle would be reported in the:
    a. a. Balance sheet
    b. b. Statement of stockholders' equity
    c. c. Statement of retained earnings
    d. d. Income statement

    10. Prior-period adjustments are reported on the:
    a. a. Income statement
    b. b. Balance sheet
    c. c. Statement of stockholders' equity
    d. d. Statement of retained earnings

    11. For 1997, net income is $125,000, shares outstanding are 50,000 and the market price is 20. What is the price-earnings ratio on common stock?
    a. a. 8.0
    b. b. 1.25
    c. c. 25
    d. d. 2.5

    12. Bonds issued on the general credit of the issuing corporation are called:
    a. a. Callable bonds
    b. b. Serial bonds
    c. c. Term bonds
    d. d. Debenture bonds

    13. The present value of $20,000 to be received in one year, at 5% compounded annually, is (rounded to nearest dollar):
    a. a. $10,000
    b. b. $19,048
    c. c. $20,000
    d. d. $1,000

    14. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at:
    a. a. A premium
    b. b. Their face value
    c. c. Their maturity value
    d. d. A discount

    15. If $4,000,000 of 12% bonds are issued at 101, the amount of cash received from the sale is:
    a. a. $4,000,000
    b. b. $4,040,000
    c. c. $4,080,000
    d. d. $3,520,000

    16. The cash and securities comprising a sinking fund established to redeem bonds at maturity in 2010 should be classified on the balance sheet as:
    a. a. Plant assets
    b. b. Current assets
    c. c. Intangible assets
    d. d. Investments

    Complete the Following Statements
    1. 1. Fully paid stock reacquired by the issuing corporation is called: _________________

    A corporation's outstanding stock is composed of 10,000 shares of $2 preferred, $50 par, and 200,000 shares of common, $100 par. Preferred dividends were not paid last year and no dividends have been paid thus far in the current year. A total of $35,000 in dividends is to be distributed. Determine the total amount of dividends to be paid on the preferred stock under each of the following assumptions: (2) and (3)
    2. Preferred is cumulative and nonparticipating $_____
    3. Preferred is non-cumulative and nonparticipating $_______

    A company purchases 800 shares of its $50 par common stock for $20,000 cash, recording it at cost. Will this purchase increase, decrease, or have no effect on the following? (4), (5), and (6)
    4. 4. Total assets ______________
    5. 5. Retained earnings _______________
    6. 6. Total stockholders' equity ________________

    7. 7. An item classified as a prior period adjustment should be reported in the period in which the adjustment is made to the beginning balance of _________________________

    Income before income tax reported on the income statement for the year is $800,000. Because of timing differences in accounting methods and tax methods, the taxable income for the same year is $500,000. If the income tax rate is 40%, determine the amount of each of the following: (8), (9), and (10)
    8. 8. Income tax to be reported on the income statement $____________
    9. 9. Actual income tax to be paid during the year $_______________
    10. 10. Deferred income tax liability at the end of the year if the balance, in that account, was a credit of $140,000 at the beginning of the year $ _________________

    11. 11. An Extraordinary Item for financial reporting purposes is unusual in nature and ____________________

    12. 12. When the contract rate of interest on bonds is lower than the market rate of interest, the bonds sell
    At a ______________________

    A firm redeemed bonds at 101. The bonds have a face value of $500,000, un-amortized discount of $15,000, and accrued interest of $10,000, (13) and (14)
    13. 13. Will the firm record a gain or loss on redemption? _______________
    14. 14. What is the amount of the gain or loss? ___________________

    15. 15. When cash is set aside in a special fund for the purpose of paying the face value of bonds payable at their maturity, the special fund is called a ______________________

    16. 16. If Bonds Payable has a balance of $5,000,000 and Premium on Bonds Payable has a balance of $45,000, what is the carrying amount of the bonds? __________________

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    Solution Preview

    See attached files for complete answers.

    Price of bond is calculated using excel functions. It gives the same results as tables

    Price of bond
    Coupon rate= 9.000%
    Face value= 1000
    Payment S Semi Annual
    No of years= 10
    No of Periods= 20
    Discount rate annually= 10.00% annual
    Discount rate per period= 5.00%
    n= 20
    r= 5.00%

    Interest payment= 45 Semi Annual
    Redemption value= 1000

    PVIF 20 periods, 5.% rate 0.376889483
    PVIFA 20 periods, 5.% rate 12.46221034

    Price of bond=PVIFA X Interest Payment+PVIF X Redemption value
    PVIFA X Interest Payment= 560.8
    PVIF X Redemption value= 376.89
    Total 937.69 =Price of bond

    Price of bond= 937.69
    10000 bonds are issued with face value of $1000 and coupon rate of 9%
    Discount per bond =1000 - 937.69 = $62.31
    Total discount= =10000 * 62.31 = $623,100

    Bonds Payable $10,000,000
    Less: Unamortized Bond Discount $623,100

    Straight-Line Amortization of Bond Discount

    Amortization of Bond Discount at Each Interest Period
    Bond Discount / Number of Total Interest Payments = $31,155
    = 623100/ 20

    The complete schedule is shown below for greater understanding. Only the first few rows are required for this question

    Amortization Schedule

    Interest Payment Periods Interest Paid in cash Amortization of Discount Total Interest expense Uamortized Discount Carrying value of bonds

    July1,2002 Issue date - - - $623,100 $9,376,900
    Dec 31,2002 1 $450,000 $31,155 $481,155 $591,945 $9,408,055
    June 30,2003 2 $450,000 $31,155 $481,155 $560,790 $9,439,210
    Dec 31,2003 3 $450,000 $31,155 $481,155 $529,635 $9,470,365
    June 30,2004 4 $450,000 $31,155 $481,155 $498,480 $9,501,520
    Dec 31,2004 5 $450,000 $31,155 $481,155 $467,325 $9,532,675
    June 30,2005 6 $450,000 $31,155 $481,155 $436,170 $9,563,830
    Dec 31,2005 7 $450,000 $31,155 $481,155 $405,015 $9,594,985
    June 30,2006 8 $450,000 $31,155 $481,155 $373,860 $9,626,140
    Dec 31,2006 9 $450,000 $31,155 $481,155 $342,705 $9,657,295
    June 30,2007 10 $450,000 $31,155 $481,155 $311,550 $9,688,450
    Dec 31,2007 11 $450,000 $31,155 $481,155 $280,395 $9,719,605
    June 30,2008 12 $450,000 $31,155 $481,155 $249,240 $9,750,760
    Dec 31,2008 13 $450,000 $31,155 $481,155 $218,085 $9,781,915
    June 30,2009 14 $450,000 $31,155 $481,155 $186,930 $9,813,070
    Dec 31,2009 15 $450,000 $31,155 $481,155 $155,775 $9,844,225
    June 30,2010 16 $450,000 $31,155 $481,155 $124,620 $9,875,380
    Dec 31,2010 17 $450,000 $31,155 $481,155 $93,465 $9,906,535
    June 30,2011 18 $450,000 $31,155 $481,155 $62,310 $9,937,690
    Dec 31,2011 19 $450,000 $31,155 $481,155 $31,155 $9,968,845
    June 30,2012 20 $450,000 $31,155 $481,155 $0 $10,000,000

    The answers to questions are given below. Figures have been picked from the above tables (highlighted in red)

    Journal Entries

    Issuer's Records

    1 Cash $9,376,900
    Discount on bonds payable $623,100
    Bonds payable $10,000,000
    To record proceeds upon issuance
    of 9% bonds maturing on
    June 30,2012

    a Interest expense $481,155
    Discount on bonds payable $31,155
    Cash $450,000
    To record payment of interest
    and amortization of discount on Dec 31,2002

    b Interest expense $481,155
    Discount on bonds payable $31,155
    Cash $450,000
    To record payment of interest
    and amortization of discount on June 30,2003

    3 Total interst expense for ...

    Solution Summary

    The solution provides answers to 60 multiple choice questions and journal entries for the issue of bonds.