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Chapter 12: Q16RQ (page 655)
What are the two categories of liabilities reported on the balance sheet? Provide
examples of each.
Liabilities are classified into current and long-term liabilities.
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Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 6%, Benson Realty issues
\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson
Realty received \)713,234 in cash at issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
When does a premium on bonds payable occur?
Determining future value
David is entering high school and is determined to save money for college. David feels
he can save $5,000 each year for the next four years from his part-time job. If David is
able to invest at 6%, how much will he have when he starts college?
On December 31, 2018, when the market interest rate is 8%, Arnold Corporation issues $200,000 of 6%, 10 year-bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance.
Bill and Edna had been married two years and had just reached the point where they
had enough savings to start investing. Bill鈥檚 uncle Dave told them that he had recently
inherited some very rare railroad bonds from his grandmother鈥檚 estate. He wanted
to help Bill and Edna get a start in the world and would sell them 50 of the bonds at
\(100 each. The bonds were dated 1873, beautifully engraved, showing a face value of
\)1,000 each. Uncle Dave pointed out that 鈥淯nited States of America鈥� was printed
prominently at the top and that the U.S. government had established a sinking fund to
retire the old railroad bonds. A sinking fund is a fund established for the purpose of
repaying the debt. It allows the organization (the U.S. government, in this example)
to set aside money over time to retire the bonds. All Bill and Edna needed to do was
hold on to them until the government contacted them, and they would eventually get
the full \(1,000 for each bond. Bill and Edna were overjoyed鈥攗ntil a year later when
they saw the exact same bonds for sale at a coin and stamp shop priced as 鈥渃ollectors鈥�
items鈥� for \)9.95 each!
Requirements
1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?
3. Is there a way to determine the relative risk of corporate bonds?
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